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sec 40a(3)

02 December 2010

hi,
My question is whether sec 40A(3) is applicable for cash deposited in bank account exceeding Rs. 20000 instead of making cash payment direct to Debtor.
eg Mr X(Punjab) sell goods to Mr y(Delhi) amounted to Rs. 50000.Now Mr Y deposited cash Rs. 50000 to the bank account of MR X.
My question is that what entry should passed in accounts?
what is the correct accounting treatment in this case.

thanks & Regards

Vishal

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21 Replies

Ankur (Ipcc student) (332 Points)
Replied 02 December 2010

please see that 40a(3) says that for payment exceeding 20000(35000 in plying....)should be account to account ////

this restriction is done so that our income tax authorities can easily check the payments by contacting various banks

please see that no cash exceeding 20000(35000 in plying....)is in cash.....

i think ur a beginner u should refer vinod singhnias book for clearing ur concepts it has all the questions that ur mind can think

hope ur satisfied with the answer lets wait for others .......to reply

3 Like

Santhosh Poojary (SIEMPRE AHÍ PARA TI) (15607 Points)
Replied 02 December 2010

Agree with Ankur,

if u makes payment by any mode other than a a/c payee cheque or bank draft then it shall attract disallowance u/s 40A(3).. so in my opinion if u deposits money directly into bank which is exceeding Rs 20000 and ( Rs 35000 in case transport business) then it shall be disallowed.

Sunshine (Helping All) (10575 Points)
Replied 02 December 2010

yeah..i agree with ankur...it will be disallowed...payment over 20000 is allowed only by way of account payee cheque or account payee draft....

priyanka (CA Final student) (895 Points)
Replied 02 December 2010

mr ankur, i thnk u r absolutely correct.............payment has not been made in cash........yes, u r right......gud job

so that means day mrY shall be allowed to debit Rs50000 na??

Aditya Maheshwari (CA in Practice) (35867 Points)
Replied 02 December 2010

Two interpretations have been made above for the same reply.

If payment towards any expenditure exceeds Rs. 20,000, it must be by means of account-payee crossed cheque or draft. If not, the entire expenditure is not eligible for deduction.

The monetary limit of Rs. 20,000 is prescribed in Section 40A(3) and there are certain exceptions to the disallowance, which are mentioned in Rule 6 DD.

Cash payment by the buyer into the bank account of the supplier of merchandise does not fall within the exception and, hence, liable for disallowance. In the K. Abdu & Co vs ITO (2008 170 Taxman 297 Kerala) case, cash payment into the bank account of the supplier was held as breach of Section 40A(3) and liable for disallowance.

So if entry in books of accounts is passed for more than Rs. 20,000/- then disallowance u/s 40A(3) will be attracted.

4 Like

CA DeePak Goyal (Employed) (28 Points)
Replied 02 December 2010

if any payment exceeding rs 20000(Rs 35000 in case transport business) is disallowed if it is not in a/c payee cheque and demand draft so direct deposited in creditors a/c is not allowed for tax purpose

CA Abhishek Banka (Accounts & Finance Manager) (108 Points)
Replied 02 December 2010

Making direct payment in the bank acoount of party is same as making the cash payment.If you deposited it directly in a/c then it will be treated as you have made the payment in cash to party and party deposited in his a/c.So DISALLOWED.

1 Like

Ram Avtar Singh (Nagari Sultanpur U.P.Delhi) (14477 Points)
Replied 03 December 2010

It will be disallow under sec 40A(3)

Ganesh iyer (C.A M.com B.com(accounting and finance) ncfm) (75 Points)
Replied 03 December 2010

the basic purpose of introduction of sec 40A(3) is basically to encourage payment through banking channels and that the transaction should be traceable in the above case case mentioned by u the cash is credited by y to x's a/c there can be two interpretations for this

1)disallow it completely

2) allow it by giving ref to the case RENUKESWARA RICE MILLS Vs ITO.

in the case mentioned above i.e RENUKESWARA RICE MILLS Vs. ITO it had been upheld by the supreme court that direct credit is permissible as the transaction is traceable .the fundamental issue behind this ruling that 40 a(3) is basically for preventing the use of black money..

2 Like

CA PuRvI M!$rA (-) (2260 Points)
Replied 03 December 2010

Originally posted by : SAN...
	Agree with Ankur, if u makes payment by any mode other than a a/c payee cheque or bank draft then it shall attract disallowance u/s 40A(3).. so in my opinion if u deposits money directly into bank which is exceeding Rs 20000 and ( Rs 35000 in case transport business) then it shall be disallowed.

Vivek Romee (Practice) (39 Points)
Replied 03 December 2010

Hi Vishal Sir,

Views of all my friends are right.

Listen Section 40A(3) of Income tax Act was enacted to prevent manipulation of accounting transaction.

If you makes any payment which is deductible as a business expenditure in profit & Loss A/c, then you must pay the same via A/c payee crossed cheque, draft, Pay order, RTGS or NEFT

If you makes a Donation of Rs25000/- & pay the same in Cash then you haven't contavented the said section since Donation is not an item deductible as business expenditure.

So money deposited in Debtors bank A/c will attract disallowance & to be reported by the auditor under clause 17 (B) of Tax Audit Report.

You Just Once read Section 40A(3) togetherwith RULE 6DD of Income Tax Rules.

Regards,

Vivek Singh