Section 40A(3) disallowance of expense made in cash & its exceptions

Section 40A(3) of the Income tax Act, The payment made more than 20,000 in cash and its result.

Section 40a(3) of the Income tax Act provides that any expenditure incurred in relation to business is made in a sum exceeding Rs.20,000/- in a single day otherwise than by account payee cheque or draft shall not be allowed as deduction.

For transporter this limit is Rs.35000/-.

 This section is applicable for expenses only. Capital expenditures are not covered by this section.

Let us check this provision with fact of the case.

If the expense is done in previous year and payment is made in current year

If the expense is booked in previous year but the payment is made in current year by mode of cash than the whole expense is disallowed in the year of payment.

Exceptions of this provision

As per rule 6DD there are following exceptions to this provision

1. Payment made to bank and financial institutions
2. Payment made to Government
3. Payment made by bank
4. Payment made by ledger entry I.e. JV
5. Payment made to cultivator grower or producer of the following:

• Agriculture or forest produce
• Produce of Animal husbandry
• Fish or Fish product
• Product of horticulture of apiculture
• Where the payment made to the cottage industry and such cottage industry is running without ad of power
• When the payment is made on the day and that day there is a bank holiday or bank is closed
• Payment made to the employees in the case of retirement but not exceeding Rs.50,000/-
• Payment made to employees as salary after deducting TDS but when employee is posted for more than 15 days to outside the normal place of duty and not holding the bank account
• Payment made to agent and it is necessary to pay to the agent
• Where payment is made by authorized dealer or money changer against purchase of foreign currency or travelers cheque in  the normal course of business