Section 40a(3) - income tax act - cases

Others 6604 views 6 replies

sssvkSridharan R.

CA (Final) Salem. Tamilnadu. sssvksridh

218 Points Joined May 2011

Section 40A(3) of Income tax Act, 1961 read as follows

Section 40A(3) Where an assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure.

Case 1

Mr. A purchases Material X from Mr. Sridhar for Rs. 19000 for his ABC business on 01.04.2011 and also purchases Material Y from Mr. Sridhar for Rs. 18000 for his DEF business on the same date. Mr. A is keeping separate books of account for ABC business and DEF business. Now Mr. A wants to pay Mr. Sridhar Rs. 37000 (Rs. 18000 + Rs. 19000) on 01.04.2011 by cash. Can Mr. A claim the Rs. 37000 as expenditure?

Case 2

Mr. A purchases Material X from Mr. Sridhar for Rs. 19000 for his ABC business on 01.04.2011 (Credit purchase) and also purchases Material Y from Mr. Sridhar for Rs. 18000 for the same business on the next day ie., 02.04.2011. Now Mr. A wants to pay Mr. Sridhar Rs. 37000 (Rs. 18000 + Rs. 19000) on 02.04.2011 by cash. Can Mr. A claim the Rs. 37000 as expenditure?

Case 3

Mr. A purchases Material X from Mr. Sridhar for Rs. 30000 for his ABC business on 01.04.2011 (Credit purchase). Mr. A gives Mr. Sridhar Rs. 20000 on 01.04.2011 by cash and gives Rs. 10000 on the next day. Can Mr. A claim the Rs. 30000 as expenditure?

Case 4

Mr. A purchases Material X for Rs. 45000 (Credit purchase) on 01.04.2011 from Mr. Sridhar. Mr. A pays the consideration of Rs. 45000 by cash of Rs. 25000 on 05.04.2011 and by account payee DD of Rs. 20000 on 05.04.2011. Now can Mr. A claim Rs. 20000 (DD value)?

In my opinion – for the Case 4

NO DEDUCITON shall be allowed in respect of any expenditure in respect of which a payment or aggregate of payments made to a person in single day exceeds Rs. 20000 by cash.

Expenditure in respect of which Mr. A seeks deduction – Cost of Material of R.s 45000.

Expenditure in respect of which Mr. A had paid Rs. 25000 by cash – Cost of Material of Rs. 45000.

Expenditure in respect of which NO DEDUCTION shall be allowed as per the provision – Cost of Material of Rs. 45000.

NO DEDUCTION means Re. 0 Deduction.

Since Mr. A. has paid Rs. 25000 by cash in respect of the above expenditure, Mr. A can claim Rs. 0 as deduction in respect of the above expenditure, notwithstanding he might having paid Rs. 20000 by account payee bank draft. Do you agree with me? If not, tell me the correct answer with your explanation.

By,

Sridharan R.

Salem.

Replies (6)

Dintakurthi Tirumala

CA FINAL

15994 Points Joined September 2009

CASE 1: Yes he can claim

CASE 2: No he can't claim

CASE 3: Yes he can claim

CASE 4: Yes he can claim DD Value of Rs. 20000 but cash paid Rs.25000 would be disallow(he can't claim). Section 40A(3) clear about it. It says the amount which is made other than account payee cheque or dd for more than Rs.20000 is disallowed. I clearly understand the section for my live case faced at my articles for that purpose i revised more books and examples on it then i decided. Is i wrong please correct me with proper explanation also provide is any case studies or judgments on it?

OM SAI SRI SAI JAI JAI SAI

deepak kumar srivastava

281 Points Joined January 2010

LANGUAGE OF SEC-40A(3) Expenses or payments not deductible in certain circumstances:--

Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure.

IT IS QUITE CLEAR THAT IF U INCURRS EXPENDITURE OF45000 AND PAYS THE AMOUNT IN TWO PARTS ONE IS 25000 IN CASH AND OTHER PART OF20000 BY ACCOUNT PAYEE DD ON A SINGLE DAY ,DISALLOWED ONLY IF THE FOLLOWING CONDITION SATISFIED :--

aggregate PAYMENT IF EXCEEDS 20000 ON A SINGLE DAY OTHERWISE THAN ACCOUNT PAYEE CHEQUE OR DD-----

IN CASE 4 AGGREGATE PAYMENT IS 45000 ON A SINGLE DAY BUT OUT OF WHICH 25000 BY CASH AND 20000 BY ACCOUNT PAYEE DD

NOW 25000 PAID IN CASH COVERED UNDER THIS SECTION BECAUSE IT IS STATED IN PROVISION THAT :-
IF A PAYMENTS IS MADE EXCEEDING 20000 OTHERWISE THAN CASH ,DISALLOWED

WHAREAS PAYMENT OF. 20000 IS NOT COVERED BY THIS SEC BECAUSE PAYMENT IS BY ACCOUNT PAYEE DD , HENCE ALLOWED

if any mistake in answer please correct

deepak kumar srivastava

281 Points Joined January 2010

REPLY ME WHETHER I AM RIGHT OR WRONG

parag_0302

Asstt. Commercial Officer

124 Points Joined September 2009

Originally posted by : deepak kumar srivastava
	REPLY ME WHETHER I AM RIGHT OR WRONG

u are right....

NEHA MITTAL

NONE

22 Points Joined January 2009

In case 4, whole expenditure i.e. Rs. 45,000 will be disallowed bcoz as per sec 40A(3), if a payment or aggregate of payments in respect of an any expenditure exceeds Rs. 20,000 in cash, then the particular(whole) expenditure will be disallowed.

deepak kumar srivastava

281 Points Joined January 2010

MY ABOVE OBSERVATION IS WRONG BECAUSE OF THE FOLLWING :-

The last line of the subsection is ‘no deduction shall be allowed in respect of such expenditure

Such expenditure here denotes the expenditure in respect of which aggregate payments (otherwise than by an account payee cheque drawn on a bank or account payee bank draft ) on A day to A person exceeds Rs 20000

Because aggregate payments (otherwise than by an account payee cheque drawn on a bank or account payee bank draft ) on A DAY (5-4-2011) to A PERSON (Mr. Sridhar) in respect of expenditure incurred Rs. 45000 (Credit purchase) on 01.04.2011= Rs 25000 >Rs20000

Hence such (entire) expenditure of Rs 45000 shall be disallowed