Section 40A (3) : Dis allowance of Cash Payments

Sub Section 3 and 3A of Section 40 A are :-

(3) 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.

(3A) Where an allowance has been made in the assessment for any year in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year (hereinafter referred to as subsequent year) the assessee makes payment in respect thereof, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, the payment so made shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as income of the subsequent year if the payment or aggregate of payments made to a person in a day, exceeds twenty thousand rupees:

Provided that no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3) and this sub-section 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 or account payee bank draft, exceeds twenty thousand rupees, in such cases and under such circumstances as may be prescribed⁵⁴, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors :]

 [Provided further that in the case of payment made for plying, hiring or leasing goods carriages, the provisions of sub-sections (3) and (3A) shall have effect as if for the words “twenty thousand rupees”, the words “thirty-five thousand rupees” had been substituted.]

With the object of relaxing the rigour of section 40A(3) in genuine and bona fide cases, Income-tax (Amendment) Rules, 1969 inserted rule 6DD with effect from 1st April, 1969 which prescribes such cases and circumstances as are envisaged in the aforesaid proviso. Various clauses of rule 6DD specify specific payments which are taken out of the sweep of section 40A(3)/(3A) of the Act.

Question : If the  Assessee deposit the Cash directly into the bank account of the Payee should the amount be disallowed under section 40A(3) ?

Answer .

judgement in Favor of the Assessee

Section 40A(3) of the Income-tax Act, 1961, read with rule 6DD of the Income-tax Rules, 1962 – Business disallowance – Cash payment exceeding prescribed limits – Assessment year 1975-76 – Whether where assessee had satisfied Assessing Officer as to genuineness of payment and identity of payee, mere fact that there was time-gap between dates of bills and dates of payment would not take out assessee’s case out of ambit of exceptional or unavoidable circumstances referred to in rule 6DD(j) and deduction of expenditure which was otherwise allowable to him could not be denied – Held, yes

[1986] 179 ITR 122 (CAL.) HIGH COURT OF CALCUTTA, Giridharilal Goenka v. Commissioner of Income-tax

Section 40A(3) of the Income-tax Act, 1961, read with rule 6DD of the Income-tax Rules, 1962 - Business disallowance - Cash payment exceeding prescribed limits - Assessment years 1987-88 and 1988-89 - Assessee had made payments in cash in excess of Rs. 2,500 in various transactions - Commissioner (Appeals) accepted assessee’s plea that its position was stringent compelling it to make payment in cash, which according to assessee constituted one of mitigating circumstances within meaning of rule 6DD - He also found that each voucher submitted by assessee disclosed name of payee - Whether Tribunal was right in observing that a mere proof of identity of payee as disclosed in voucher and genuineness of transactions was not enough - Held, no - Whether where authorities are satisfied about genuineness of transactions and identity of payee, a liberal view of compelling and mitigating circumstances should be taken - Held, yes - Whether, therefore, in instant case, no disallowance of expenditure made by assessee in cash over and above Rs. 2,500 was to be made - Held, yes 2002] 124 TAXMAN 538 (GAU.) HIGH COURT OF GAUHATI Walford Transport (Eastern India) Ltd. v. Commissioner of Income-tax

  

Judgement against the Assessee:-

"Rule 6DD of the Income-tax Rules specifies the circumstances under which the payment for a sum exceeding Rs. 10,000 may be made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft. Thus, except on those circumstances narrated under rule 6DD and as given under section 40A(3), unless there are exceptional and unavoidable circumstances, the payment made in excess of Rs. 10,000 by cash would not escape the rigour of section 40A(3). Madras High Court in the case of CIT v.Venkatadhri Constructions [2013] 213 Taxman 180 (Mag.)

Question : When the Agent deposit cash into the Bank Account of the Principal does it attract the Disallowance u/s 40A(3)?

Answer  The Appellate Tribunal in the case of Koottummal Groups v. ITO [2011] 15 taxmann.com 117/ 133 ITD 335 (Cochin-Trib.) has held that when the agent deposits cash in the bank account of the principal, such remittance is not hit by the provisions of section 40A(3). It held that regardless of the nature of payment, if the relationship between the parties is that of both de facto and de jure of principal and agent, the payments made cannot be disallowed by invoking section 40A(3) of the Act.

In Sri Renukeswara Rice Mills v. ITO [2005] 93 ITD 263 (Bang.) payment of cash directly to the bank account of the agent who had to make payment for purchase of agricultural produce was held as not a breach of section 40A(3) to attract disallowance.

Question When the assessee made payment in cash on insistence of seller and there was no doubt about genuineness of payment can the disallowance be made under Section 40A(3) ?

Answer : No , Section 40A(3) of the Income-tax Act, 1961, read with Rule 6DD of the Income-tax Rules, 1962 - Business disallowance - Cash payment exceeding prescribed limit (Rule 6DD) - Assessee made certain payment for purchase of ground nut in cash exceeding prescribed limit - Assessee submitted that he made payment in cash because seller insisted on that and also gave incentives and discounts - Further, seller also issued certificate in support of this - Whether since assessee had placed proof of payment of consideration for its transaction to seller, and later admitted payment and there was no doubt about genuineness of payment, no disallowance could be made under section 40A(3) - Held, yes [2014] 49 taxmann.com 363 (Andhra Pradesh) HIGH COURT OF ANDHRA PRADESH Sri Laxmi Satyanarayana Oil Mill v. Commissioner of Income-tax, A.P. Hyderabad

Question : When the Income of the Assessee is Assesed on estimation basis can the disallowance be made under Section 40A(3) ?

Answer No,Section 40A(3), read with section 158BC of the Income-tax Act, 1961 - Business disallowance - Cash payment exceeding prescribed limits (In case of estimation of income) - Block period 1-4-1988 to 22-9-1998 - Whether where income of assessee is computed by applying gross profitrate, section 40A(3) need not be invoked - Held, yes [2014] 48 taxmann.com 14 (Punjab & Haryana) HIGH COURT OF PUNJAB AND HARYANA ,Commissioner of Income-tax (Central) Ludhiana v.Gobind Ram

Question : Whether the Payment made to the Government in cash in excess of Limit described u/s 40A (3) be allowed ?

Answer , yes, Section 40A(3) of the Income-tax Act, 1961 - Business disallowance - Cash payment exceeding prescribed limits [Payment to Government concern] - Assessment year 2008-09 - Assessee a scrap dealer, purchased scrap from Railway by making payment in cash in excess of Rs. 20,000 - Whether since Railway is concern of Union of India, such payment in cash had to be considered as a legal tender, and, therefore, same could not be disallowed - Held, yes [2013] 39 taxmann.com 16 (Karnataka) HIGH COURT OF KARNATAKA ,Commissioner of Income-tax v. Devendrappa M. Kalal

Question : When the Assessee Paid the salay in Cash Exceeding Rs 20000 , will it be disallowed u/s 40A(3) ?

Answer yes, Section 40A(3), read with section 147, of the Income-tax Act, 1961 - Business disallowance - Cash payment exceeding prescribed limits - Salary - Assessment year 2002-03 - Return of assessee-company was processed under section 143(1) - Subsequently, Assessing Officer having found that assessee had paid salary to its managing director in cash exceeding Rs. 20,000 and also claimed non-business expenses initiated reassessment proceedings and thereafter disallowed said expenses - Tribunal upheld finding of Assessing Officer - Whether no substantial question of law arose out of order of Tribunal - Held, yes [2013] 30 taxmann.com 248 (Rajasthan) HIGH COURT OF RAJASTHAN Rajasthan Telematics Ltd. v. Assistant Commissioner of Income-tax, Circle-1, Kota