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40A(3) disallowance

11 October 2017

Assume ABC & co. a partnership firm is dealing in Medicines. It incurred carriage expenses of Rs.11,000. The bill was booked in the name of firm & amount was paid in cash by a partner out of his personal money. Later his account was adjusted to give that effect. In the above will sec 40A(3) is applicable? If yes how?

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24 Replies

Ashwin Kumar (1229 Points)
Replied 12 October 2017

effect of 40 (A3) won't be applicable since the said amount is less than rs 20000

ANIL KUMAR KHETAN (PROPRIETOR) (486 Points)
Replied 12 October 2017

Present limit is rs 10000

Akarsh Prince (47 Points)
Replied 12 October 2017

@ Ashwin - consider my question with regard to AY 2018-19 in which case limit is Rs.10,000.

Dhirajlal Rambhia (SEO Sai Gr. Hosp.) (160322 Points)
Replied 12 October 2017

Section 40A(3) of IT Act:

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 Rs. 10,000 (Rs. 35,000 where payment is made for plying, leasing or hiring goods carriages), no deduction shall be allowed in respect of such expenditure.

Where payment is made for plying, hiring or leasing goods carriages, the payment shall have to be made by account-payee cheque or account-payee draft if the amount of payment exceeds Rs. 35,000 instead of Rs. 10,000 applicable in all other cases.

Akarsh Prince (47 Points)
Replied 12 October 2017

@ Dhirajlal : sir, reply in the given context. My question is what if the payment is made by a partner in cash out of his personal money... And partner's account is credited in books to that extent.

Dhirajlal Rambhia (SEO Sai Gr. Hosp.) (160322 Points)
Replied 12 October 2017

I have given the text of the act......... so that can be modified to your requirement.

Otherwise, Mr. Ashwini Kumar has already replied.......... it will be disallowed.....

Ashwin Kumar (1229 Points)
Replied 12 October 2017

current provision is cash transaction limit is 20000 ...the limit of 10000 is proposed one....am i right dhirajlal sir ? correct me if I am wrong

Dhirajlal Rambhia (SEO Sai Gr. Hosp.) (160322 Points)
Replied 12 October 2017

It was proposed in the finance bill, 2017.

When the bill was passed by parliament without change, particularly for this amendment, it became act.

So the limit of Rs.10,000/- became applicable u/s. 40A(3) from AY 2018-19.

But for students..... Finance bill 2017, is not included in Nov. 2017 exams. So, the old limit of 20,000/- is still valid for exam purpose.

Ashwin Kumar (1229 Points)
Replied 12 October 2017

thank u sir

chamarthi venkatesh (Student CA Articleship) (848 Points)
Replied 12 October 2017

Rs. 10000 limit is applicable from AY 2018-19

That means, it is applicable to FY 2017-18

Ashok J (CA Final) (880 Points)
Replied 12 October 2017

All reasons mentioned above for attracting disallowance is wrong. There wont be any disallowance because the sum of 11000 is being paid by the partner in his personal capacity. Please note an expenditure will be disallowed only if the assessee pays in cash more than the limit of 10K and not by any one else. The query is very much clear that the partner's account is adjusted to that extent which simply means a journal entry is passed i.e Carriage exp Dr to Partner Cap A/c.

This entry has not resulted in outflow of money from the assessee i.e firm. Where is the question of disallowance?

Akarsh Prince (47 Points)
Replied 12 October 2017

@ Ashok sir - sir only you understand my query properly. But if you are right people can misuse the law right... the intention of section 40A(3) goes may fail...

chamarthi venkatesh (Student CA Articleship) (848 Points)
Replied 13 October 2017

Act says that "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 Rs.10000 no deduction shall be allowed in respect of such expenditure."

Act is using the words "other than" cheque or draft.
The word cash is not mentioned
that means expenses are disallowed, because they are in a mode other than a/c payee cheque or a/c payee draft.
And, if the firm reimburses the