HI,

Scope of disallowance of cash payments under section 40A(3) - Section 40A(3) applies to all categories of expenditure involving payments for goods or services, which is deductible in computing the taxable income.

‘Expenditure’ - meaning

All outgoings, including purchase of stock-in-trade are covered - Section 40A(3) refers to the expenditure incurred by the assessee in respect of which payment is made. It means all outgoings are brought under the word ‘expenditure’ for the purpose of the sub-section. The expenditure for purchasing the stock-in-trade is one of such outgoings. - Attar Singh Gurmukh Singh v. ITO [1991] 191 ITR 667 (SC).

Advance payments are also covered - Even if the payments were made by way of advances and were ultimately treated as discharg­ing the liability to pay the price of the goods purchased, the payments so made must be considered to fall within the expression ‘expenditure’ incurred for payment of the price of the goods - Kejriwal Iron Stores v. CIT [1988] 169 ITR 12 (Raj.).

Thanks.

Dear paul,

with regard to advance payment for purchase of goods:

Section 40A(3) is applicable in this case as it was confirmed by the Supreme Court in Vijay kumar Ajit Kumar Vs CIT case which is produced below

"Merely because a payment in excess of prescribed limit is made prior to delivery of goods, it cannot be said that it constitutes an advance and not expenditure for the purposes of sec-40A(3)" 

So the amount must be disallowed as per sec-40A(3).

sai

i agreed with Mr.Kantijain

Originally posted by : sai CA Final
	Dear paul, with regard to advance payment for purchase of goods: Section 40A(3) is applicable in this case as it was confirmed by the Supreme Court in Vijay kumar Ajit Kumar Vs CIT case which is produced below "Merely because a payment in excess of prescribed limit is made prior to delivery of goods, it cannot be said that it constitutes an advance and not expenditure for the purposes of sec-40A(3)"  So the amount must be disallowed as per sec-40A(3). Regards, sai

thanx...

Can  i come up with another question??

Suppose A company has advanced its Sales Person for Sales Tour Rs.25,000 then when he came back he submitted the expense details for Rs 18,000 and returned back balance Rs.7,000....what will be its implication under section 40A(3)??

don't mind pls for this odd kind of question!

any payment exceeding 20000-00 in a single time for any expenses its should be disallowed as per 

income tax act 1961 ( 40a(3).

you can't make any payment 20000-00 ( other than specify by 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

Rs. 18,000 is allowed as an expenditure. Rs. 25000 is just an advance give for convinience. But if the expenditure exceeds Rs.25000 and that too paid by cash on a single day, then it is disallowed.

Conversely put, irrespective of the advance made, if the utilisation of Rs. 25000 is done on same day to same party then it is disallowed.

Regards

Kaushik

Originally posted by : Kaushik Vankadkar
	Rs. 18,000 is allowed as an expenditure. Rs. 25000 is just an advance give for convinience. But if the expenditure exceeds Rs.25000 and that too paid by cash on a single day, then it is disallowed. Conversely put, irrespective of the advance made, if the utilisation of Rs. 25000 is done on same day to same party then it is disallowed. Regards Kaushik

So you are saying that in this case 18,000 is allowed irrespective of  advance made...got it...but again suppose this advance is made in the month of march and the refund was made by that sales person after the tax audit has been made...so what will you do ...are u gonna disallow that or allow it?? coz u can not wait to know the exact amount of expenditure...and another thing is that here accrual of expenses is important...if it doesn't exceed the limit of 20000...pls clarify.

In that case you have to confirm with Sales person for its utilisation.

If he has not at all utilised it till the audit then it will remain as an advance for expense.

If before audit you have the information about the expenditure incurred then you will have to book the expenditure on the basis of accrual system.

Remember one thing if he has made any payment above Rs. 20,000 to a person in a single day then it is dissallowed.

Now here u have another situation on cash expenses clarify me on that......

payment is made in aggregate above 20000 in a single day but against more than one bill of the party..now is it dissallowed u/s 40A3

It will not be disallowed. The condition is that bill also exceed Rs. 20,000 against which the payment exceeds Rs. 20,000 then that expenditure will be disallowed.

Hello,

This expenditure quite clearly comes under the purview of disallowances. But Section 40(A)(3) has to be read alongwith Rule 6DD of the IT Act. Nowhere is it mentioned in the exception list that a Tour Advanced is allowable and so therefore in this scenario, the entire Rs. 25,000 advanced is dis-allowable.

Pls correct me if I’m wrong.

Originally posted by : Ayan Paul
	Can  i come up with another question?? Suppose A company has advanced its Sales Person for Sales Tour Rs.25,000 then when he came back he submitted the expense details for Rs 18,000 and returned back balance Rs.7,000....what will be its implication under section 40A(3)?? don't mind pls for this odd kind of question!

 In such a situation expense will not be disallowed as the bill amount is less than Rs. 20,000 but if bill amount is not confirmed till Computation date in such a case it will be disallowed for the year of computation but if bill amount is less than Rs. 20,000 then they can be claimed in the next year.

" In such a situation expense will not be disallowed as the bill amount is less than Rs. 20,000 but if bill amount is not confirmed till Computation date in such a case it will be disallowed for the year of computation but if bill amount is less than Rs. 20,000 then they can be claimed in the next year."

Mr Sudhanshu,

The case here is an advance given to an employee in cash. Rule 6DD is very specific and does not include such a payment so the entire amount is disallowed.