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Section 40A(3)

22 September 2009

Dear frnds,

I m facing a prob in tax audit of one of our client. My query is

" A ltd made a payment in cash on 12th oct. 2008 of Rs. 120000 in respct of various bills of same creditor, and each bill contained amount less than Rs. 20000. whether disallowance u/s 40A(3) would b attrected?"

In this regard 2 authors have different opinion. pls suggest me.

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13 Replies

Manmohan ACA, CS (Chartered Accountant ) (14243 Points)
Replied 22 September 2009

It is allowed

All eminent author say section 40A(3) is attracted when payment for any

allowed expenditure
exceeding 20000 is made to a person
fora single bill
in a day

as per section 40A(3) Where the assessee incurs any expenditure in respect of which……………………………..”. It means Sec40A (3) is applicable in respect of an “expenditure” which is in excess of Rs.20000/-. Expenditure is said to be incurred when a bill to that effect is accounted for. Hence when both the amount of bill and the amount of payment in respect thereof exceeds Rs.20000/-, provisions of Sec 40A(3) are applicable, otherwise not. Aggregate of payments made to a person in a day refers to payment of the same bill which exceeds Rs.20000/-. Because of the amendment, from Asstt Year 2009-10, you can not make the payment in cash more than one time in a day for the same bill if it exceeds Rs.20000/- in aggregate in a day.

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CA Vichitra Trivedi (Job) (40 Points)
Replied 22 September 2009

thank u so much manmohan

Kshitij Saxena (CA Final) (256 Points)
Replied 22 September 2009

MEASURES TO PLUG REVENUE LEAKAGES

Amendment to the provisions of section 40A(3) of the Income-tax Act,

Section 40A(3)(a) of the Income-tax Act, 1961 provides that any expenditure incurred in respect of which payment ismade in a sum exceeding Rs.20,000/- otherwise than by an account payee cheque drawn on a bank or by an accountpayee bank draft, shall not be allowed as a deduction.
Section 40A(3)(b) also provides for deeming a payment as profits and gains of business or profession if the expenditure is incurred in a particular year but the payment is made in any subsequent year in a sum exceeding Rs. 20,000/- otherwise than by an account payee cheque or by an account payee bank draft.
The provisions of this section are subject to exceptions as provided in Rule 6DD of the Income-tax Rules, 1962.
Section 40A(3) is an anti tax-evasion measure. By requiring payments to be made by an account payee instrument, it is possible to verify the genuineness of the transaction thereby mitigating the risk of evasion.
Person are splitting a particular high value payment to a person into several cash payments, each below Rs.20,000/-. This splitting is also resorted to for payments made in the course of a single day.
Courts have also held that the statutory limit in section 40A(3) applies to payment made to a party at one time and not to the aggregate of the payments made to a party in the course of the day as recorded in the cash book.
According to the judicial opinion, the words used are ‘in a sum’, i.e., single sum.Therefore, irrespective of any number of transactions, where the amount does not exceed the prescribed amount in each transaction,the rigours ofsection 40A(3) will not apply.

To overcome the splitting of payments to the same person made during a day as referred above and to increase the efficacy of the provision, the amendment seeks to substitute the present provision to provide that where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank oraccount payee bank draft, exceeds twenty thousand rupees, the disallowance of such expenditure shall be made under the proposed sub-section (3) of section 40A or the payment shall be deemed to be the profits and gains of business or profession under the proposed sub-section (3A) of section 40A,as the case may be.

To illustrate with an example, let us assume a taxpayer has incurred an expenditure of Rs 40,000/-. The taxpayer makes separate payments of Rs 15,000/-, Rs 16,000/- and Rs 9,000/- all by cash, to the person concerned in a single day. The aggregate amount of payment made to a person in a day, in this case, is Rs 40,000/-. Since, the aggregate payment by cash exceeds Rs 20,000/-,Rs. 40,000/- will not be allowed as a deduction in computing the total income of the taxpayer in accordance with the proposed amendment.

The proviso to the proposed sub-section (3A) provides that in certain prescribed cases and circumstances the provisions of proposed sub-sections (3) and (3A) shall not apply.

This amendment will take effect from 1st April, 2009 and will accordingly apply in relation to assessment year 2009-10 and subsequent assessment years.

Kshitij Saxena (CA Final) (256 Points)
Replied 22 September 2009

Plz specify the kind of payment for better answer to your query

VIPUL (ARTICLE ASSITANT) (68 Points)
Replied 22 September 2009

as per provision of section 40(A)(3) both bill amount & payment exceeds 20000/-if either of exceeds 20000/- but not the other one than provision not attract ,refer singania direct taxes for ca final.

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Dharmesh k. Dubey (Student) (188 Points)
Replied 22 September 2009

sec 40 (A) (3) is applicable for aggregate cash payments more than Rs.20000/-in a day , so in ur case it should be reported in 3CD.

varsha naik (CA Final Student) (107 Points)
Replied 22 September 2009

As per Section 40(A)(3) when aggregate payment exceeds Rs. 20000 in cash to the same party or if single payment exceeds Rs. 20000 than it gets disallowed and disclosure of it in 3CD is required.

ca tarun sharma (SERVICE) (277 Points)
Replied 22 September 2009

hello dharmesh sec 40A(3) is applicable if payment for a single bill or exp exceeds rs 20000 in a day but it will not be applicable if payment is made for various bill though to a single person hence it will not required to be reported in 3 CD

Ashwani Narnoli (.) (1843 Points)
Replied 22 September 2009

Originally posted by :vichitra trivedi
"	I agree with Dharmesh. He is right.	"

santhosh (Student) (1174 Points)
Replied 22 September 2009

Manmohan is right... not only to report... it should also be disallowed...

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Mayank kharbanda (Risk Advisory Services) (409 Points)
Replied 22 September 2009

amount of bill and payment, both should exceed 20,000 rupees...

so in your case it is not required to be reported in 3CD as the same will be allowed.

Dintakurthi Tirumala (CA FINAL) (15994 Points)
Replied 23 September 2009

Originally posted by :vichitra trivedi
"	Yes,sec 40A(3) attracts from 1-4-2008	"

Rajeev (www.rkmco.com) (985 Points)
Replied 26 September 2009

12 Oct 2008 was a sunday , so Sec 40A(3) read with rule 6DD is not applicable .Dont worry , nothing will be disallowed u/s 40A(3), since payment was made on a day when the banks were closed , 40A(3) cant be applied . the intention of 40A(3) is to curb cash payments to bring everyone under the ambit of taxation , its not to cause inconvience to assesse's business