CA RAMESH KUMAR AHUJA
( Expert )
25 December 2008
The aggregate of all the payments exceeding Rs 20000 and made in cash will be disallowed for deductions
The Central Board of Direct Taxes (CBDT) has amended rule 6DD of the Income Tax Rules. Section 40(A(3)(a) stated that payments above Rs 20000 made other than by an account payee cheque or account payee bank draft would not be allowed as deduction.
Section 40A(3)(b) also provides for deeming a payment exceeding Rs 20000 other than by an account payee cheque or by an account payee bank draft as profit and gain of business or profession if the expenditure is incurred in a particular year but the payment is made in any subsequent year. However, the provisions of Section 40A(3) 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 payment to be made by an account payee instrument, it is possible to verify the genuineness of the transaction, thereby mitigating the risk of evasion. But the provisions of Section 40A (3) were being circumvented by splitting high-value payments to a person into several cash payments, each below Rs 20000. This splitting was also resorted to for payments made in the course of a single day. Courts had held that the statutory limit in Section 40A(3) was applicable to payments 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. Therefore, irrespective of any number of transactions, where the amount did not exceed the prescribed amount in each transaction, the rigours of Section 40A (3) were not applicable.
To overcome the splitting of payments to the same person made during a day and to increase the efficacy of the provision, the amendment has substituted the present provision with effect from assessment year 2009-10. Neither will the sum of all payments made to a person in a day other than by an account payee cheque or account payee bank draft exceeding Rs 20000 will be allowed as expenditure under the proposed sub-Section (3) of Section 40A nor will such payment deemed to be profit or gain of business/profession under the proposed Section 40A(3A).
Assume a taxpayer has incurred an expenditure of Rs 40000. The taxpayer makes separate payments of Rs 15000, Rs 16000 and Rs 9000 by cash to the person concerned in a single day. The aggregate amount of payments made to a person in a day, in this case, is Rs 40000. Since the aggregate payment by cash exceeds Rs 20000, the entire sum (Rs 40000) will not be allowed as a deduction in computing the total income of the taxpayer in accordance with the proposed amendment.
Business disallowance - Cash payments exceeding Prescribed limits
Provision is constitutionally valid - Section 40A(3) cannot be said to be invalid on the ground that it places a restriction on the right to carry on business and is arbitrary - Attar Singh Gurmukh Singh v. ITO  191 ITR 667 (SC).
Even after the deletion of sub-clauses (1) and (2) of rule 6DD(j), section 40A(3) cannot be considered as constitutionally invalid. On the contrary, the objects of curbing the circulation of black money and regulating the business transactions become more strengthened and it avoids any undue advantage being taken by unscrupulous assessees or litigation being multiplied. One cannot plead ignorance of law and make cash payments contrary to law. It is too late in the day to accept any such proposition. In the present day banking scenario the mode of payment by way of crossed cheques or demand drafts cannot be said to be onerous duty cast on an assessee, which can be made a foundation for attacking the validity of the provision - Smt. Ch. Mangayamma v. Union of India  106 Taxman 339/239 ITR 687 (AP).
‘Expenditure’ - meaning of
All outgoings, including purchase of stock-in-trade are covered - Section 40A(3) refers to the expenditure incurred by the assessee in respect of which payment is made. It means all outgoings are brought under the word ‘expenditure’ for the purpose of the sub-section. The expenditure for purchasing the stock-in-trade is one of such outgoings. - Attar Singh Gurmukh Singh v. ITO  191 ITR 667 (SC).
Advance payments are also covered - Even if the payments were made by way of advances and were ultimately treated as discharging the liability to pay the price of the goods purchased, the payments so made must be considered to fall within the expression ‘expenditure’ incurred for payment of the price of the goods - Kejriwal Iron Stores v. CIT  169 ITR 12 (Raj.).
Applying monetary limit
Limit applies to payment to a party at one time - The statutory limit of Rs. 10,000 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. The word ‘sum’ in section 40A(3) is used only to indicate an amount of money and does not refer to the totality of the expenditure. - CIT v. Aloo Supply Co.  121 ITR 680 (Ori.).
Limit applies to cash portion of payment - Where the payment was made partly in cash and partly by way of post-dated cheques, section 40A(3) will apply only if the cash payment exceeded the prescribed limit - H.A. Nek Mohd. & Sons v. CIT  135 ITR 501 (All.).
Limit applies to all items in a bill, and not to individual items - Section 40A(3) concentrates on the size of the payment and the manner of the payment. If different items are included in a single bill, it would not be right to dissect the bill and find out whether each item of expenditure is above Rs. 10,000; the proper way is to read the entries in a wholesome fashion - Addl. CIT v. Shree Shanmuga Gunny Stores  146 ITR 600 (Mad.).
Limit applies to each transaction - 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 above amount in each transaction, the rigours of section 40A(3) will not apply - CIT v. Triveniprasad Pannalal  94 Taxman 381 (MP).
When income is estimated on gross profit rate, no disallowance can be made - When the income of the assessee was computed by applying a particular gross profit rate and when no deduction was allowed in regard to the purchases of the assessee, there would be no need to look into the provisions of section 40A(3) and rule 6DD(j) - CIT v. Banwari Lal Banshidhar  229 ITR 229 (All.).
ITO should adopt practical and not a technical approach - The ITO should take a practical approach to problems and strike a balance between the direction of law and hardship to the assessee. He should not enmesh himself in technicalities. After all, the object is not to deprive the assessee of the deduction which he is otherwise entitled to claim - Girdharilal Goenka v. CIT (supra).
Cash payment due to non-availability of bank facility is not disallowable - The object of the provisions of section 40A is to curb flow of black money and not to put an impediment over the trade and business. Where the assessee did not have any bank account at the place where purchases were made, and the actual payment to be made was to be become known only at the time of actual purchase, with the result that it was not possible to obtain bank drafts to make the purchase, and the identity of the payee has been successfully established, cash payment made for the purchase could not be disallowed under section 40A(3) - CIT v. Brij Mohan Singh & Co.  209 ITR 753 (Punj. & Har.).