Section 40a(3)

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Querist : Anonymous

Querist : Anonymous (Querist)

02 January 2014 Is Section 40A(3) of the Income Tax Act is applicable for cash payment to creditors which is found in a search u/s 132 of the Income Tax Act?

CS,CA F,Numrologi TusharSampat

CS,CA F,Numrologi TusharSampat (Expert)
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02 January 2014 No it will not apply as no exp is debited to P& L.

Nikhil Kaushik

Nikhil Kaushik (Expert)
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02 January 2014 if I am not wrong, 40A(3) applies to cash expenditure which is already in the books of the assessee.

So 40A(3) should not apply here.

but 40A(3) should be the least of your worries. Section 69C, penalties for undisclosed transactions, should worry you more.

Nikhil Kaushik

Nikhil Kaushik (Expert)
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02 January 2014 let me clarify, my answer is on presumption that normally 40A(3) comes into picture only where expense in the books.

What is found under 132 is normally not covered in the books. And anyways no expense is allowed once section 69c comes into picture.

Querist : Anonymous

Querist : Anonymous (Querist)

02 January 2014 Can you please explian more....

CS,CA F,Numrologi TusharSampat

CS,CA F,Numrologi TusharSampat (Expert)
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02 January 2014 40A(3) applies only for those exp which are debited to Profit and loss a/c and payment to sundry creditors is never debited to profit and loss a/c.

Nikhil Kaushik

Nikhil Kaushik (Expert)
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02 January 2014 Tushar, payments to creditors is always covered under profit & loss a/c through the expenses charged to P&L.

40A(3) is to cover the payment part of the expense incurred.

However in this case, it appears that payments made were not reflected in the books, so that wont entail any 40A(3) disallowance during the normal assessment. However, 69C should be triggered once details of cash paid are found in during the search.

CS,CA F,Numrologi TusharSampat

CS,CA F,Numrologi TusharSampat (Expert)
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02 January 2014 if i pay to creditors then its debited to creditors a/c how it is debited to profit and loss a/c?

Nikhil Kaushik

Nikhil Kaushik (Expert)
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02 January 2014 if that is the case, then 40A(3) will have no operational power.

When you book the expense, you debit the expense head and credit the individual party. In the year end you will transfer the debit balance in expense to to P&L. If any payment with respect to these expenses is made vide cash in excess of Rs 20 thousand, 40A(3) would get triggered.

In this case however, I believe the payment made itself was not booked in the accounts. So 40A(3) wouldnt have come into picture.

CS,CA F,Numrologi TusharSampat

CS,CA F,Numrologi TusharSampat (Expert)
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02 January 2014 But here you mixing the issue , the querist have asked that cash payment is made to creditors so no question of cash exp to be booked in profit or loss a/c as the entry will be

Creditors a/c ...dr
to cash/bank a/c

how profit and loss a/c is affected?

Nikhil Kaushik

Nikhil Kaushik (Expert)
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02 January 2014 so if that argument is accepted, then no payment would attract 40A(3). as no payment ever gets a hit in the p&l account!!! tell which entry do you ever pass where cash is involved and Profit & Loss A/c is debited??

Read the section again:

"Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure"

So, if any payment is made in respect to any expenditure to a person (creditor or seller), by cash, it would not allowed!

if we go by your logic, only outright purchases would attract 40A(3)!!

CS,CA F,Numrologi TusharSampat

CS,CA F,Numrologi TusharSampat (Expert)
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02 January 2014 tell me whether payment made to creditor is an " EXPENDITURE" ??????

Please read again sec 40A(3) mandates that there should be an exp and as per accounting principles all exp goes to p & l account only>
M I right?

CS,CA F,Numrologi TusharSampat

CS,CA F,Numrologi TusharSampat (Expert)
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02 January 2014 those exp which are not debited to profit or loss are shown as liabilities unpaid in balance sheet.

Nikhil Kaushik

Nikhil Kaushik (Expert)
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02 January 2014 Tushar,

are you seriously saying this???? so what you make payment to a creditor for? an income? or an expense??

You are absolutely and patently wrong here.

expenses which are not paid are shown as liabilities. If an expense is booked but no charged to P&L then - if the expense is paid then it goes as prepaid expense, otherwise no need to book any liability if no service/good is received.

According to your logic if I don't pay any expenditure, all of it should go to unpaid liabilities and not to P&l!! Surprising.

Lets go back to accounting here principles:

1. expense relevant to the reporting period should be charged to P&L A/c.

Entry:

Expense A/c

To creditor or Cash A/c

In the year end the expense is to be transferred to P&L A/c

Profit & Loss A/c

Dr to expense A/c

When payment is made to creditor:

Creditor A/c

To cash/bank A/c

The balance in creditors a/c is shown as liability in the balance sheet.

Tax:

the payments made in cash above Rs 20000 are disallowed under 40A(3). Read read the section again,

"payment in respect of an expenditure".

If the payment is for a creditor for a purchase of a capital asset then 40A(3) wont apply. However, payment made to any creditor vide cash for revenue expense shall be disallowed if exceed Rs 20 thousand.

CS,CA F,Numrologi TusharSampat

CS,CA F,Numrologi TusharSampat (Expert)
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02 January 2014 i know you are right but some1 was arguing with me as i did with you but i lost my cool now i will just post this link.....

Nikhil Kaushik

Nikhil Kaushik (Expert)
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02 January 2014 i dont lose cool. I wanted to retort in that section 56 post, but then kya fark padta hai..chalta hai..

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CS,CA F,Numrologi TusharSampat

CS,CA F,Numrologi TusharSampat (Expert)
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02 January 2014 i know you would have ans cooly manner only but just as to proove i was right asn expert like u is backing me i was arguing ...and you were right...thoda mazzak kara raha tha...

Nikhil Kaushik

Nikhil Kaushik (Expert)
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02 January 2014 tum timepass hi karo...but seriously man...sometimes people give such absurd argument or ask such basic queries that I fail to understand what is the future of this CA community!!!

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CS,CA F,Numrologi TusharSampat

CS,CA F,Numrologi TusharSampat (Expert)
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03 January 2014 The way u felt i felt 10 times more angry so wanted this to be proved by some1...

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