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Sec 40a(3)

CA Krishna Chaitanya M (Chartered Accountant) (463 Points)

18 September 2012

payment in excess of 20000 is made otherwise than by account payee cheque or draft is inadmissable. Is this provision applicable to payment made for purchase of traded goods.

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14 Replies

Devendra (Chartered Accountant) (4775 Points)
Replied 18 September 2012

Yes. It is applicable.

Giridhar S Karandikar (Team Lead) (7543 Points)
Replied 18 September 2012

Yes it is. Any expenditure that is debited to trading/Profit&Loss A/c violating the provison of section 40(A)(3) shall be disallowed.

CA Krishna Chaitanya M (Chartered Accountant) (463 Points)
Replied 18 September 2012

is this provision applicable for purchase of agricultural produce? if traded good is rice or dall, puchase of rice or dall in excess of 20000 in cash is admissable?

Giridhar S Karandikar (Team Lead) (7543 Points)
Replied 18 September 2012

Yes it is applicable, because you are not carrying out agricultural operationss, but you are acting as a trader by purchasing the dal, rice directly.

ACMA Obulirajan R (M.Com, ACMA) (1119 Points)
Replied 18 September 2012

Originally posted by : Giridhar S Karandikar
	Yes it is. Any expenditure that is debited to trading/Profit&Loss A/c violating the provison of section 40(A)(3) shall be disallowed.

Agreed

Ayyswariya RG (Knowledge Seeker) (3711 Points)
Replied 18 September 2012

Yes, it is applicable.

According to Section 40A(3) of Income Tax Act,1961 , Under 'Exceptions' , it says no disallowance shall be made under the following cases:-

> Where the payment is made for the purchase of-

(i) agricultural or forest produce; or.

(ii) the produce of animal husbandry (including livestock, meat, hides and skins) or dairy or poultry farming; or

(iii) fish or fish products; or

(iv) the products of horticulture or apiculture,

To the cultivator, grower or producer of such articles produce or products;

> where the payment is made for the purchase of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such products;

> where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town;

> where any payment is made to an employee of the assessee or the heir of any such employee on or connection with the retirement retrenchment resignation, discharge or death of such employee, on account of gratuity, retrenchment compensation or similar terminal benefit and the aggregate of such sums payable to the employee or his heir does not exceed fifty Thousand rupees; -

> where the payment is made by an assessee by way of salary to his employee after deducting the income-tax from salary in accordance with the provisions of section 192 of the Act, and when such employee-

(i) where the payment is made by an assessee by way of salary to his employee after deducting the income-tax from salary in accordance with the provisions of section 192 of the Act, and when such employee-

(a) is temporarily posted for a continuo is period of fifteen days or more in a place other than his normal place of duty or on a ship and

(b) does not maintain any account in any bank at such place or ship;

> where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike;

> where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person;

> where the payment is made by an authorised dealer or a money changer against purchase of foreign currency or travelers cheques in the normal course of his business.

Varshit Shah (Self Employed) (676 Points)
Replied 18 September 2012

All such exceptions are mentioned under Rule 6DD of Income Tax Rules. Even as mentioned above if you have purchased agricultural produce then disallowance under section 40A(3) will not apply. Pls read Rule 6DD.

Gunjan Tulsyan (Article) (222 Points)
Replied 18 September 2012

Yes it is applicable to it and if u want as to where its not applicable than read Rule 6DD whch contains the exception to this section...!!!!

CA.Vinita Gupta (Deputy Manager- Finance) (2918 Points)
Replied 18 September 2012

1. The assesse incurs any expenditure which is otherwise deductible under the other provisions of the Act for computing business/ profession income (eg: expenditure for purchase of raw material, trading goods, expenditure on salary, etc). The amount of expenditure exceeds Rs.20000/-.

Then the above would be inadmissible u/s 40(A)(3)

Varshit Shah (Self Employed) (676 Points)
Replied 19 September 2012

Dear All ,

Pls tell me how the disallowance U/s 40A(3) applicable in case of agriculture produce?

what will be the case If such trader has purchased goods from the cultivator , or producer of agriculture produce?

C.A.Sharad (p) (22 Points)
Replied 19 September 2012

disallowance not made in the case of agriculture produce purchased directly from agriculturiest. please refer rule 6DD clause (e) (i). In my opinion 40 A (3) is applicable to all expenditure even incurred on purchase of fixed assets then depreciation shall disallowed.It is also applicable when we made payment to creditors for their dues against purchased goods.

Giridhar S Karandikar (Team Lead) (7543 Points)
Replied 19 September 2012

Mr Sharad, could you please clariy with the help of a case law or any sectino reference as how depreciation would be disallowed if the Fixed assets purchased in cash exceeds 20k. In my opinion depreciation is an loss and not expenditure. Section 40(A)(3) speaks clearly about 'An Expenditure'. Since depreciation is a loss and not an expenditure so how can the loss be disallowed.

If we take one more case say if the cashier of the organization absconds by removing an amount of Rs 50k from the cash box & he is untraceable. so will the amount of 50k be disallowed while computing the taxable income.

Depreciation & loss of cash are both losses so how could teh amounts be disallowed.

Gulshan Kumar (Professional Accountant) (119 Points)
Replied 22 September 2012

Amount Exceeds Rs.20,000/- made in cash is disallowed u/s 40a(3)

deepak kumar srivastava (na) (281 Points)
Replied 27 September 2012

MR. gridhar in my opinion the reason given by u is wrong because:--

1. depreciation is not a loss rather it is a revenue expenditure

whether the capital expenditure incurred on purchase of fixed assest is covered by sec-40A(3)

THE ANSWER IS NO

REASON READ THE FOLLOWING CIRCULAR OF CBDT

Circular : No 34 [F. No. 13A/92/69-IT(A-II)], dated 5-3-1970.

The provisions of section 40A(3) would apply in computing the income under the heads “Profits and gains of business or profession” and “Income from other sources” as per section 58(2). All payments in excess of Rs. 2,500 at one time whether for goods or services obtained for cash or credit, which are deductible in computing the income, have to be made by crossed cheque or bank draft.

Thus, the price of goods purchased for resale or use in manufacturing process or payments for services will be covered by the provisions of section 40A(3).

HOWEVER, THE SECTION WILL NOT APPLY TO REPAYMENT OF LOANS OR PAYMENT TOWARDS THE PURCHASE PRICE OF CAPITAL ASSETS SUCH AS PLANT AND MACHINERY NOT FOR RESALE.