40A(3) DISALLOWANCE ATTRACTED???

Tax queries 1084 views 11 replies

'A' & 'B' ARE TWO FIRMS HAVING COMMON PARTNERS FUNCTIONING IN THE SAME TOWN. 'A' PURCHASED GOODS VALUED ABOVE 50000 FROM 'B', FOR WHICH 'A'  DEPOSITED CASH DIRECTLY INTO B'S BANK ACCOUNT . WILL 40A(3) DISALLOWANCE BE ATTRACTED??? 

Replies (11)

Dear Divya

As per Section 40A(3) since payment exceed Rs 20000 in cash to a person in a particular day, AO will disallow the entire expenses.

But if the payment has been made by an account payee cheque then what be the case??

It has been then disallowed u/s 40A(2) or we have to wait to complete the assessment as the income tax officer is going to pass the order or complete the assessment??

Dear Monik

If you made a payment by Account payee cheque then Section 40A(3) will not attract.

However for second question AO might disallow the expenses if he find that expenses in not the geniun business expenditure.

Please go through this link;

 

/experts/tax-audit-sec-40a-3--398785.asp

Sec 40A(3) applies and whole payment will get disallowed but if you pay via Account Payee Cheque than Sec 40A(2) applies and only unreasonable or excess amount will be disallowed.

my undertstanding of the issue here is  A deposited cash directly in to B's bank account/

B has not received the cash in hand

one can make attempt 6DD para commencing from "payment through banking system XXX"

 

 

agree with Mr. Ganapathy. Falls in exception Rule 6DD.

yeah 40(A)3 will attracted only if it is payment made in cash but if payment through A/c payee cheque than 40(A)3 will not b attracted if deposited in cash than u have to see rule 6DD.

@ GANAPATHY, KAUSHAL & AMIT SIR : RULE 6DD (a) APPLIES ONLY TO PAYMENTS TO INSTITUTIONS REFERRED TO THEREIN AND NOT TO PAYMENTS MADE IN ANY PARTY'S ACCOUNT MAINTAINED BY INSTITUTIONS REFERRED TO THEREIN ( K.ABDU & CO. VS ITO 2008 ) .  CAN YOU PLEASE CLARIFY YOUR VIEWS BASED ON THE ABOVESAID CASE????

The very purpose of account payee cheque is too see whether the money is routed to the correct person and it is traceable and to check whether it is genuine and not paid out of undisclosed income. Here A has deposited to B's account directly the amount. 40A(3) does not attract. Even if cash is deposited it will not get attracted . 

For detail Refer the Case : Shri Renukeswara Rice mills ltd 93 ITD 263 (Bang).

Rule 6DD applies but Cash Deposit will still Disallowed as per details i have read in Rule 6DD for all other banking transactions the line is as follows:

 

(c)  where the payment is made by—

       (i)  any letter of credit arrangements through a bank;

      (ii)  a mail or telegraphic transfer through a bank;

     (iii)  a book adjustment from any account in a bank to any other account in that or any other bank;

     (iv)  a bill of exchange made payable only to a bank;

      (v)  the use of electronic clearing system through a bank account;

     (vi)  a credit card;

    (vii)  a debit card.

 

here it means it must come from one bank account to another bank account. It clearly states that Payer & payee must transact through bank. It doesn't show any cash transaction because Cash deposit includes only one side bank account where the bank account of payer is not disclosed and traceable.

 

So Cash deposit must be disallowed as per Sec 40A(3)


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