Sec 40A(3)

The above will not lead to disallowance. However a wages register should be prepared and signature on the vouchers should be taken at the time of payment to the workers.

Can u provide any source of your reply like notifications/ circulars etc from Department?

Plzz note that Payment is made on contract basis

Section 43 A (3) will be applicable because section say that any payment made against expenditure in excess of prescribe limits. and this section refers to paid to contractor and not labour.

Mr. Adithya!!!!!  Wats ur stand on mr. Khan's reply?

Amendment to the provisions of section 40A(3) of the Income-tax Act,

• Section 40A(3)(a) of the Income-tax Act, 1961 provides that any expenditure incurred in respect of which payment is made in a sum exceeding Rs.20,000/- otherwise than by an account payee cheque drawn on a bank or by an account payee bank draft, shall not be allowed as a deduction.

• Section 40A(3)(b) also provides for deeming a payment as profits and gains of business or profession if the expenditure is incurred in a particular year but the payment is made in any subsequent year in a sum exceeding Rs. 20,000/- otherwise than by an account payee cheque or by an account payee bank draft.

• The provisions of this section are subject to exceptions as provided in Rule 6DD of the Income-tax Rules, 1962.

• Section 40A(3) is an anti tax-evasion measure. By requiring payments to be made by an account payee instrument, it is possible to verify the genuineness of the transaction thereby mitigating the risk of evasion.

• Person are splitting a particular high value payment to a person into several cash payments, each below Rs.20,000/-. This splitting is also resorted to for payments made in the course of a single day.

• Courts have also held that the statutory limit in section 40A(3) applies to payment made to a party at one time and not to the aggregate of the payments made to a party in the course of the day as recorded in the cash book.

• According to the judicial opinion, the words used are ‘in a sum’, i.e., single sum.Therefore, irrespective of any number of transactions, where the amount does not exceed the prescribed amount in each transaction,the rigours of section 40A(3) will not apply.

To overcome the splitting of payments to the same person made during a day as referred above and to increase the efficacy of the provision, the amendment seeks to substitute the present provision to provide that where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, the disallowance of such expenditure shall be made under the proposed sub-section (3) of section 40A or the payment shall be deemed to be the profits and gains of business or profession under the proposed sub-section (3A) of section 40A,as the case may be.

• To illustrate with an example, let us assume a taxpayer has incurred an expenditure of Rs 40,000/-. The taxpayer makes separate payments of Rs 15,000/-, Rs 16,000/- and Rs 9,000/- all by cash, to the person concerned in a single day. The aggregate amount of payment made to a person in a day, in this case, is Rs 40,000/-. Since, the aggregate payment by cash exceeds Rs 20,000/-,Rs. 40,000/- will not be allowed as a deduction in computing the total income of the taxpayer in accordance with the proposed amendment.

The proviso to the proposed sub-section (3A) provides that in certain prescribed cases and circumstances the provisions of proposed sub-sections (3) and (3A) shall not apply.
This amendment will take effect from 1st April, 2009 and will accordingly apply in relation to assessment year 2009-10 and subsequent assessment years.

Hence Section 40A(3) shall apply.

regards,

ratan

 

Dear Balaji,

Good Question.....!

In ur case the work was actually performed by different workers so let me post a simple situation where work is performed by same person and payment is made to diffrent person on his behalf.

Suppose  -

If payments in excess of Rs. 20,000 is to be made to Mr. A, now what payer does to defeat Sec 40A(3), he makes the payment to 4 diffrent people (say his family members) on behalf of Mr. A. {Remember in the books the payer will debit the account of Mr. A}

Now if u read Sec 40A(3) -  

"Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure.'"

Now the words "On behalf" which should have been there are missing in Sec 40A(3).

So a literal interpretation of Sec 40A(3) does not cover such cases where payment is made on behalf of someone to different persons.

Pls express ur views on this??

Hi Balaji,

Amir has pointed out a way to wriggle out of the disallowance.

I would also suggest you make some clause in the agreement that you will be disbursing wages to each worker.

However, in ur case,

Aggregate Cash paid to contractor in a single day exceeds Rs.35000/-.

Prima facie it will be disallowed, because the payment is made to the contractor.

The disbursement of workers' wages is not assessee's concern....

Your business is with the contractor, not his workers.

The payment is against the contractor's bill (expenditure as per bill) and the wage sheet signed is only part of the expenditure, which i expect, is provided as per the Contract Labour Regulation and Abolition act...

I feel you have incurred expenditure in relation to which aggregate payments in a day exceeds Rs.20,000 and wil have to disallow the same.

The section will not Attract but appropriate supporting should be attached to the voucher................