Cash payment under income tax

Hi Kumar Rajat,

Your query is about making cash payments for company expenses (like staff welfare, traveling, entertainment)through an employee (Ravi) as petty cash and whether splitting cash payments over multiple days to stay within the ₹10,000 daily cash limit under Income Tax is correct.

Key Points:

Income Tax and Cash Payment Limits:

Under Section 40A(3) of the Income Tax Act, payments exceeding ₹10,000 in cash to a single person for expenses are disallowed as deduction.
This means the company cannot claim a deduction for expenses paid in cash exceeding ₹10,000 per day per person.

Using Petty Cash Employee as a Way to Circumvent Limits:

If the company pays expenses in cash to an employee (say Ravi) as petty cash and then he pays the suppliers/parties, the limit applies to payments made to Ravi in cash.
The company can pay up to ₹10,000 in cash to Ravi per day without disallowance.

Splitting Payments Over Multiple Days:

Splitting large payments into multiple smaller cash payments over different days to avoid the ₹10,000 limit can be viewed as tax evasion or "sham" transactions by the tax authorities.
Courts and IT authorities generally disallow such splitting if they see it as a method to avoid cash payment limits.

Correct Way:

Payments above ₹10,000 should ideally be made by cheque or bank transfer to avoid disallowance.
If cash payments are made, ensure not exceeding ₹10,000 per person per day.
If multiple payments are made to the same person in the same day to avoid limits, that could be disallowed.

Conclusion:

Paying cash to an employee as petty cash and splitting payments over multiple days is acceptable only if genuine and necessary.
But if it is done intentionally to circumvent the ₹10,000 cash payment limit, it can be disallowed by Income Tax.
Proper documentation, purpose, and genuine need for such payments are essential.