sec. 40A(3)
This query is : Resolved
04 September 2009
Thanks a lot for your kind reply. but I hv still some doubt so now I m writing a detailed situation.
A is purchasing goods from a party X. B is appointed to pay octroi for wheneve goods come. A is paying octroi to B. Who (B) is not a transporter. whenever B pays octroi on behalf of A, he gives his own bill (not octroi receipts) to A and mention octroi charges along with his service charges than A pays him all amount in cash. Most of Amount belongs to octroi duty. some time it exceed 20000/- in a day.noe tell me the proviso of Sec 40A(3).
A is purchasing goods from a party X. B is appointed to pay octroi for wheneve goods come. A is paying octroi to B. Who (B) is not a transporter. whenever B pays octroi on behalf of A, he gives his own bill (not octroi receipts) to A and mention octroi charges along with his service charges than A pays him all amount in cash. Most of Amount belongs to octroi duty. some time it exceed 20000/- in a day.noe tell me the proviso of Sec 40A(3).
05 September 2009
sorry.....but I m still not gettig ur view. Wud u plz clarfy it................
23 July 2025
**Section 40A(3) – Disallowance of Expenses on Cash Payments Over ₹20,000**
### **Background:**
Section **40A(3)** of the **Income Tax Act, 1961** deals with the **disallowance of expenses** if a **cash payment** exceeding **₹20,000** is made in a day for **business-related expenses**. The key provision of this section is that **cash payments exceeding ₹20,000** are not eligible for deduction under the **Profits and Gains of Business or Profession** unless such payments satisfy the exceptions provided under **Section 40A(3)**.
### **Situation Provided by You:**
In your case, **A** is purchasing goods from **X** and **B** is paying **octroi charges** on behalf of **A**. **B** issues a **bill** for **octroi charges** and **service charges**, and **A** pays the full amount in **cash**. Sometimes, the total cash payment to **B** exceeds **₹20,000** in a single day.
### **Proviso to Section 40A(3)**:
Section **40A(3)** does not disallow cash payments exceeding ₹20,000 if the transaction falls under the **exceptions provided in the proviso** to this section.
#### **Relevant Proviso to Section 40A(3):**
The **proviso** allows certain payments to **not be disallowed** even if they exceed ₹20,000 in cash. Specifically, the exceptions apply to:
1. **Payment made to Government:**
* If the cash payment is made to the **Government**, for example, **octroi charges**, it **may be exempt** from the limit of ₹20,000.
2. **Payment made to certain specified entities:**
* Cash payments to **persons** who are **exempt from maintaining books of accounts**, such as **agriculturists** or **certain small traders**, may also be exempt.
3. **Exception for payments exceeding ₹20,000 but made by cheque or draft:**
* If payments are made by **cheque**, **draft**, or **electronic transfer**, even if the payment exceeds ₹20,000, they will **not** be disallowed.
### **Application to Your Case:**
In your case, **A** is paying **octroi charges** to **B**. The **octroi duty** is a **statutory charge** collected by the government. The **payment made by B to the government on behalf of A** could potentially be **exempt** from the restrictions of **Section 40A(3)** because:
* **Octroi** is a **government levy** and typically, payments made to the **government (such as octroi)** do **not fall under the cash limit of ₹20,000**.
* However, since **B** is issuing his own bill and charging for both the octroi duty and his **service charges**, the service charge part of the payment could still be subject to **Section 40A(3)**, especially if the total cash payment exceeds ₹20,000 in a day. The disallowance would apply to the **service charge portion** (if cash exceeds ₹20,000), as the **octroi duty** paid to the government would typically be exempt from this rule.
### **Important Points:**
1. **Octroi Payment:**
* The **octroi charges** paid to the government by **B** on behalf of **A** may not be subject to the **₹20,000 cash limit**. However, the **service charge** element of **B's bill** (which is over and above the octroi charges) may be disallowed if paid in cash over ₹20,000 in a day.
2. **Disallowance Applicability:**
* The **disallowance** under Section **40A(3)** will apply only to the **service charge** portion of the payment to **B** if that part exceeds ₹20,000 in cash.
3. **Supporting Documents:**
* Ensure that the **payment to B** is adequately documented to reflect the **octroi charges** separately from the **service charges**. This helps in ensuring that the correct part of the payment is considered for **disallowance**.
### **Conclusion:**
* **Octroi charges** paid to **B** on behalf of **A** may not attract the **cash limit** under **Section 40A(3)** as they are paid to the government.
* The **service charges** paid to **B** could be subject to the disallowance under **Section 40A(3)** if they are paid in **cash** and exceed **₹20,000** in a day.
* If the total payment to **B** (octroi + service charges) exceeds ₹20,000, **A** needs to ensure that it is well documented to separate the **octroi portion** (which might be exempt) from the **service charge** portion (which might be disallowed).
### **Background:**
Section **40A(3)** of the **Income Tax Act, 1961** deals with the **disallowance of expenses** if a **cash payment** exceeding **₹20,000** is made in a day for **business-related expenses**. The key provision of this section is that **cash payments exceeding ₹20,000** are not eligible for deduction under the **Profits and Gains of Business or Profession** unless such payments satisfy the exceptions provided under **Section 40A(3)**.
### **Situation Provided by You:**
In your case, **A** is purchasing goods from **X** and **B** is paying **octroi charges** on behalf of **A**. **B** issues a **bill** for **octroi charges** and **service charges**, and **A** pays the full amount in **cash**. Sometimes, the total cash payment to **B** exceeds **₹20,000** in a single day.
### **Proviso to Section 40A(3)**:
Section **40A(3)** does not disallow cash payments exceeding ₹20,000 if the transaction falls under the **exceptions provided in the proviso** to this section.
#### **Relevant Proviso to Section 40A(3):**
The **proviso** allows certain payments to **not be disallowed** even if they exceed ₹20,000 in cash. Specifically, the exceptions apply to:
1. **Payment made to Government:**
* If the cash payment is made to the **Government**, for example, **octroi charges**, it **may be exempt** from the limit of ₹20,000.
2. **Payment made to certain specified entities:**
* Cash payments to **persons** who are **exempt from maintaining books of accounts**, such as **agriculturists** or **certain small traders**, may also be exempt.
3. **Exception for payments exceeding ₹20,000 but made by cheque or draft:**
* If payments are made by **cheque**, **draft**, or **electronic transfer**, even if the payment exceeds ₹20,000, they will **not** be disallowed.
### **Application to Your Case:**
In your case, **A** is paying **octroi charges** to **B**. The **octroi duty** is a **statutory charge** collected by the government. The **payment made by B to the government on behalf of A** could potentially be **exempt** from the restrictions of **Section 40A(3)** because:
* **Octroi** is a **government levy** and typically, payments made to the **government (such as octroi)** do **not fall under the cash limit of ₹20,000**.
* However, since **B** is issuing his own bill and charging for both the octroi duty and his **service charges**, the service charge part of the payment could still be subject to **Section 40A(3)**, especially if the total cash payment exceeds ₹20,000 in a day. The disallowance would apply to the **service charge portion** (if cash exceeds ₹20,000), as the **octroi duty** paid to the government would typically be exempt from this rule.
### **Important Points:**
1. **Octroi Payment:**
* The **octroi charges** paid to the government by **B** on behalf of **A** may not be subject to the **₹20,000 cash limit**. However, the **service charge** element of **B's bill** (which is over and above the octroi charges) may be disallowed if paid in cash over ₹20,000 in a day.
2. **Disallowance Applicability:**
* The **disallowance** under Section **40A(3)** will apply only to the **service charge** portion of the payment to **B** if that part exceeds ₹20,000 in cash.
3. **Supporting Documents:**
* Ensure that the **payment to B** is adequately documented to reflect the **octroi charges** separately from the **service charges**. This helps in ensuring that the correct part of the payment is considered for **disallowance**.
### **Conclusion:**
* **Octroi charges** paid to **B** on behalf of **A** may not attract the **cash limit** under **Section 40A(3)** as they are paid to the government.
* The **service charges** paid to **B** could be subject to the disallowance under **Section 40A(3)** if they are paid in **cash** and exceed **₹20,000** in a day.
* If the total payment to **B** (octroi + service charges) exceeds ₹20,000, **A** needs to ensure that it is well documented to separate the **octroi portion** (which might be exempt) from the **service charge** portion (which might be disallowed).
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