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Section 40A(3) IT Act

ACMA Ayan Paul (Analyst-Corporate Rating at CARE Ratings) (284 Points)

20 May 2010

Hello guys , I am stuck with a question...

if i advance some money exceeding Rs.20,000 for Purchase of goods and suppose if i get the delivery on the very next day, does it fall under section 40A(3) and will it be disallowed?

Pls Clarify.

Thanks in advance.

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36 Replies

stepping stone (mr.) (61 Points)
Replied 20 May 2010

Yes it is covered u/s 40 A(3) and it is disallowed under the computation of income tax

santhosh (CA) (636 Points)
Replied 20 May 2010

Delivery is not relevant at all.Any payment for expenditure exceeding Rs 20000 is disallowed.

Shudhanshu Agrawal (Business) (2570 Points)
Replied 20 May 2010

Originally posted by : santhosh
	Delivery is not relevant at all.Any payment for expenditure exceeding Rs 20000 is disallowed.

Section 40A(3) is related to payment and as the payment is more than Rs. 20,000. It will be disallowed.

CA. Gurdeep Singh Chawla (C A) (7080 Points)
Replied 20 May 2010

It will be disallowed.

ACMA Ayan Paul (Analyst-Corporate Rating at CARE Ratings) (284 Points)
Replied 20 May 2010

I got my answer partially...let reframe it...if i paid an advance against any capital goods say Rs 30000(other than account payee cheque or draft) and i also paid an advance Rs 35000(other than account payee cheque or draft) for supplying of raw material...in that case both should be disallowed...i guess no....so my question is if I advance some money for future delivery of goods wiil be disallowed...coz there are cases where some parties ask for 30% or 20% in advance while making purchase order...so if that portion of advance crosses Rs 20000 should it get disallowed?

Shudhanshu Agrawal (Business) (2570 Points)
Replied 20 May 2010

Section 40A(3) doesnt apply to capital goods. As on capital goods depreciation is charged.

According to me you are talking if suppose there is a bill of Rs. 1,00,000 and we paid Rs. 30,000 in cash and Rs. 40,000 and Rs. 30,000 by cheque. In such a case Rs. 30,000 will be disallowed.

1 Like

NITIN JAIN (CA FINAL STUDENT) (42 Points)
Replied 20 May 2010

this section is not apply on purchase of capital goods..

any payment which is expences as per P&L a/c are covered in this section...

CA Amit Kumar Khaitan (Research Analyst) (360 Points)
Replied 20 May 2010

Hi Ayan... you have a good question here.

I guess you mean to simply ask that whether or not we should consider Advance for expenditure as Expenditure itself..

Advance cannot be the same as expenditure itself... but going by the intention of the statute to curb cash dealings (and hence money laundering)... advance for revenue expenditure should be treated as expenditure itself for 40A(3)

1 Like

kantijain (Chartered Accountant in Practice) (385 Points)
Replied 20 May 2010

Dear paul,

Firstly let me clarify that section 40A(3) of the Income Tax Act, 1961 provides for disallowance where the assessee incurs any expenditure in respect of which the payment or aggregate of payments made to a person in a day exceeds Rs.20000 (subject to Rule 6DD of the Income Tax Rules, 1962). Question of disallowance will only come when it is debited to P&L a/c, so generally this provision will not apply for purchase of fixed asset. However the income tax offcier may take a view that it will apply to depreciation on the fixed asset......In connection with purchase of raw material, there is no doubt and amt paid as advance will get disallowed....

Regards

Kanti jain

2 Like

CA LOVELY ARORA (C.A. B.Com (H) Graduate) (2151 Points)
Replied 20 May 2010

capital expenditure above Rs. 20000/- will be allowed

but revenue expenditure above Rs. 20000/- will not be allowed as it is covered u/s 40A(3) of Income Tax Act, 1961........

CA Maninder (CA) (44 Points)
Replied 20 May 2010

Since both the exp and payment exceeds 20000,it is disallowed u/s 40(A)(3)

Nitin Grover (CS) (1228 Points)
Replied 20 May 2010

Dear Friends

Payment made above 20,000 in a day in cash ot otherwise than by an account payee cheque drawn on a bank or account payee bank draft in the cases and circumstances specified hereunder, namely is disallowed only

`'The main part of the Rule earlier read as,No disallowance under clause (a) of sub-section (3) of section 40A shall be made and no payment shall be deemed to be the profits and gains of business or profession under clause (b) of sub-section (3) of section 40A where any payment in a sum exceeding twenty thousand rupees is made otherwise than by an account payee cheque drawn on a bank or account payee bank draft in the cases and circumstances specified hereunder, namely'`

Regards

Varun.T.K (CA Final, CS Executive) (365 Points)
Replied 20 May 2010

Delivery is not important. 'Money', if is paid otherwise than a acount payee cheque, would attract 40A(3). However these must be read with Rule 6dd which deal with exceptional cases which included exceptions for purchase too.

ACMA Ayan Paul (Analyst-Corporate Rating at CARE Ratings) (284 Points)
Replied 21 May 2010

Originally posted by : Amitkk
	Hi Ayan... you have a good question here. I guess you mean to simply ask that whether or not we should consider Advance for expenditure as Expenditure itself.. Advance cannot be the same as expenditure itself... but going by the intention of the statute to curb cash dealings (and hence money laundering)... advance for revenue expenditure should be treated as expenditure itself for 40A(3)

Yes you got my answer correct..those two were just example to ask...i know that Capital goods are allowed....but doubt was in my mind about the advance for revenue expenditure in cash exceeding 20000....now its cleared..thanx all for sharing ur views...thats the power of a forum..