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40(a)(3)

CA Darshan Soni (D.P.BARBHAYA & ASSOCIATES) (150 Points)

07 January 2017

SUPPOUSE I AM A TRADER OF ORNAMENTS . I AM PURCHASING GOODS WORTH RS.300000 FROM A REGISTER DEALER . AND MAKE PAYMENT TO HIM IN CASH OF RS.19000 IN DIFFRENT DAYS AND SQUARE OF BILL OF RS.300000 . IS THIS ALSO WOULD BE DISALLOWED ?

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5 Replies

VIKASH SINGH (ARTICLE) (92 Points)
Replied 07 January 2017

no it will not disallow if payment is less than 20000 per day

Mukesh Kumar (Accounts Manager) (1466 Points)
Replied 08 January 2017

AGREE WITH VIKAS SIR.,,,,,, IT WILL NOT DISALLOW TO CASH PAYMENT IN EVERY DAY UNDER 20000.00 TO SAME PARTY

JIBIN THOMAS BABU (CA FINAL STUDENT) (147 Points)
Replied 08 January 2017

Different views are available for your case; But by considering Income tax Act & Case laws it is purely misinterpretation of Law, and also Sec 40A(3) disallowance is applicable.

Kindly go through my view;

``Sec. 40A(3) must not be read in isolation or to the exclusion of rule 6DD. The section must be read along with the rule. If read together, it will be clear that the provisions are not intended to restrict the business activities. There is no restriction on the assessee in his trading activities. Sec. 40A(3) only empowers the assessing officer to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed cheque or crossed bank draft. The payment by crossed cheque or crossed bank draft is insisted on to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of the income from undisclosed sources. The terms of Sec. 40A(3) are not absolute. Considerations of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the assessing officer the circumstances under which the payment in the manner prescribed in Sec. 40A(3) was not practicable or would have caused genuine difficulty to the payee.

Also note that the intention of the provision was to curb the use of black money, reduce tax evasion and inculcate the banking habits.(Mudiam Oil Company v ITO 19730 92 ITR 519 (AP)."

Considering the facts and circumstances, Assessing Officer in his opinion can say that this case consciously split up the payments of a single bill, which is illogical and it was done just to circumvent the provisions of law. You have to prove the genuinity of the transaction & hardships faced for giving cheque to the respective payments before the assessing officer. Other wise Sec 40A(3) attracted.