Does sec.40(a)3 attract to this case

This query is : Resolved

S.Malleswara Rao (Querist)
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10 December 2011 Sir please clarify whether disallowance under Sec.40(A)3 is attracted to the following case.

FACTS:
1)We have to pay commission Rs.50,000/- to a commission agent.
2)The agent requested us to sell goods worth of Rs.50,000/- to him by issuing invoice in his name.
3)The agent further, requested us to set
off the commission payable to him against
the invoice.
4) We agreed to the above and the following entry was passed in our books.

Commission payable A/c Dr 50000/-
To Sales Account 50000/-

5) Goods sold are exempted from VAT.

In the context of above facts, please clarify vividly whether disallowance under Sec.40(A)3 of the Income Tax Act attracts or not.

CA Siddhartha Bhardwaj

CA Siddhartha Bhardwaj (Expert)
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10 December 2011 Section 40A(3) is not attracted in this case.

This is because book adjustments setting off receivable & payable are not covered under Section 40A(3).

S.Malleswara Rao

S.Malleswara Rao (Querist)
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13 December 2011 Thank You Sir. May I know if there is any case law for the above statement.

CA Siddhartha Bhardwaj

CA Siddhartha Bhardwaj (Expert)
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13 December 2011 Rule 6DD of the Income Tax Rules provides Cases and circumstances in which payment in a sum exceeding twenty thousand rupees may be made otherwise than by an account payee cheque drawn on a bank or account payee bank draft

One of the case is quoted as under:

"where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee"

Your case gets covered under this clause.

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