Regarding Cash payments to sundry creditors

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Jaswinder singh (Querist)
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03 October 2025 Respected Colleagues,
One of my client (Pvt Ltd) in previous years paid sundry creditors in cash all above 10k, and but in actual no creditors has been o/s in books, but due to cash payments made, auditor disallowes the same and treated that no payment has been made, now my ques is, there any wayout to disclose actual value of creditors in balance sheet of FY 2024-25 or may be next year balance sheet?

please guide

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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03 October 2025 If a Private Limited Company made cash payments exceeding ₹10,000 to sundry creditors, such payments are disallowed as a business expense under Section 40A(3) of the Income Tax Act, unless certain exceptions are met. Additionally, Section 40A(3A) provides that if expenses were booked earlier but paid this year in cash above the limit, the disallowed amount is added to the current year’s taxable business income.
The company cannot reopen and revise already adopted financial statements for prior years according to ICAI guidance. Once the accounts for a year are adopted at the AGM, revision is only permissible in rare circumstances—not for typical audit disallowances.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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03 October 2025 The actual position of creditors should reflect the genuine outstanding amount as of March 31, 2025, based on current records, not retrospectively to disclose old transactions.

If there were no real sundry creditors outstanding as per physical records, then the balance sheet should show nil sundry creditors as of the current year-end. Artificially inflating the sundry creditors figure to match cash outflows already disallowed would not be correct accounting or compliant with disclosure requirements.

The amounts disallowed under audit will remain added back to taxable profit as per income tax compliance, but this does not mandate or justify a corresponding creditor liability in the books once the liability is actually settled and does not exist at year-end.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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03 October 2025 For FY 2024-25 or subsequent years, only actual creditors outstanding as per books on the last day of the financial year should be disclosed in the balance sheet.

For transparency, auditor’s notes can explain the nature of past cash payments and the resulting audit disallowance, but the closing balance sheet value must represent the true and fair position of outstanding creditors.

If the situation resulted from factually incorrect prior year reporting, a note can be included regarding the auditor’s qualification and management explanation, but past creditors cannot be artificially shown as payable in future balance sheets.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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03 October 2025 Rectify by Non-Cash Repayment:
Issue an account payee cheque/bank transfer to the party in place of the earlier cash payment within the permissible period. Submit revised documentation to the Assessing Officer at the time of assessment.

Appeal by Demonstrating Genuine Circumstance:
If payment mode cannot be changed, provide all supporting evidence to claim eligibility under Rule 6DD/other judicially recognized exceptions, and raise the matter during assessment or appeal. Courts may accept the deduction where business necessity and genuineness are established.

Jaswinder singh

Jaswinder singh (Querist)
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03 October 2025 Thanks a lot sir for your valuable reply....................really appreciate

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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03 October 2025 You are welcome.

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