29/09/2015
DISALLOWANCE AS DEDUCTION OF CASH PAYMENT IN EXCESS OF Rs. 20000/- FOR PURCHASES/EXPENSES
PROVISIONS OF SECTION 40A(3) AND SECTION 40A(3A)
Today tax evasion is a continuing and growing problem faced by the income tax department. Taxpayers deliberately misrepresents the true state of their affairs to the tax authorities to reduce their tax liability by declaring less income/profits/gains than the amounts actually earned, or overstating deductions. Tax evasion leads to under development of economy. The income tax department in its endeavor to cut the tax evasion mechanisms has introduced various provisions from time to time and one of them is introduction of section 40A(3). The object of the provisions of section 40A(3) is to curb flow of black money and not to put an impediment over the trade and business.
Section 40 A (3) provides that any expenditure incurred by an assessee above Rs. 20000/- in a day, other than by account payee cheque or draft shall not be allowed as a deduction. However, if the payments are made for plying, hiring or leasing carriages for goods such as lorries, trucks etc then the limit is extended to Rs 35000/-. Simply saying, expenditure made by bearer cheque or cash above Rs. 20000/35000 is not eligible for deduction while computing taxable income.
Scope of word expenditure u/s 40A (3)
The word expenditure covers all categories of expenditure involving payments for goods or services, which is deductible in computing the taxable income. It covers the payments made for goods purchased on credit, purchasing stock-in-trade. It also includes payments made in towns having banking facilities for purchase of goods from villager whose village does not have banking facilities. However it excludes:
Loan transactions or payments made by commission agents (arhatiyas) for goods received by them for sale on commission or consignment basis.
Hundi transactions entered into in connection with the advancing or the repaying of loans.
Payments made in advancing loans and returning the principal amount of borrowed moneys —Letter : F. No. 1(22)/69-TPL (Pt.), dated 18-4-1969.
Payment to milk producers in cash.
To further restrict any tax evasion, the Income Tax department has specified that this section extends to single payments or aggregate of payments made to a single person in a day. Aggregate of payments means if a person makes more than one different purchases for cash from same person in excess of Rs 20000 in a single day even though on separate cash memos, such aggregate payment will be disallowed u/s 40A(3). For example if Mr. B makes four purchases of Rs 9000 each from the same person during different time of the day and obtains four different cash memos, yet the transaction will be covered by section 40A(3) and such expenditure i.e. Rs. 36000 will be disallowed.
Applicability of Section 40A(3)
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).
Section 40A(3A)
Further enlarging the scope of the provisions of section 40A(3) a new Section 40A(3A) covering more area in relation to the cash payments has been introduced which further provides that in case an allowance is made in the assessment for any year on the basis of incurred liability, but in the subsequent year or years, assessee makes a payment exceeding Rs 20000/35000 in a day, otherwise than by an account payee cheque or account payee bank draft, in respect of such liability, then the payment so made shall be deemed to be the profit of the year in which such payment is made.
Proviso to section 40A (3A) provides that no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3) and this subsection [Section 40A (3A)] 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 Rs. 20000, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors. The factors which may affect the business expediency may be of below mentioned nature and this list is illustrative not exhaustive:-
(a) the purchaser is new to the seller; or
(b) the transactions are made at place where either the purchaser or the seller does not have a bank account; or
(c) the transactions and payments are made on a bank holiday; or
(d) the seller is refusing to accept the payment by way of crossed cheque/draft and the purchaser’s business interest would suffer due to non-availability of goods otherwise than from this particular seller; or
(e) the seller, acting as a commission agent, is required to pay cash in turn to persons from whom he has purchased the goods; or
(f) specific discount is given by the seller for payment to be made by way of cash; or
(g) the necessity for immediate settlement of the transaction.
Exceptions under Rule 6DD: These circumstances and cases as provided under Rule 6DD are as follows:
a) Where the payment is made to—
(i) the Reserve Bank of India or any banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949):
(ii) the State Bank of India or any subsidiary bank as defined in section 2 of the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959);
(iii) any co-operative bank or land mortgage bank:
(iv) any primary agricultural credit society or any primary credit society as defined under section 56 of the Banking Regulation Act, 1949(10 of 1949);
(v) the Life insurance Corporation of’ India established under section.3 of the Life Insurance Corporation Act, 1956 (51 of 1956);
(b) where the payment is made to the Government and, Under the rules framed by it, such payment is required to be made in legal tender;
(c) where the payment is made by—
(i) any letter of credit arrangements through a bank;
(ii) a mail or telegraphic transfer through a bank;
(iii) a book adjustment from any account in a bank to any other account in that or any other bank;
(iv) a bill of exchange made payable only to a bank;
(v) the use of electronic clearing system through a bank account
(vi) a credit card;
(vii) a debit card.
Explanation— For the purposes of this clause and clause (g), the term “bank means any bank, banking company or society referred to in sub-clauses (i) to (iv) of clause (a) and includes any bank [not being a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 ( 10 of 1949) whether incorporated or not, which is established outside India;
(d) where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee;
(e) 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;
Explanation---- For the purposes of sub-clause (ii) of clause (e) of rule 6DD -
The expression ‘the produce of animal husbandry’ used would include ‘livestock and meat’ and in a case where payment exceeding rupees twenty thousand is made to a producer of the products of animal husbandry (including livestock, meat, hides and skins) otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft for the purchase of such produce, no disallowance should be attracted under section 40A(3), read with rule 6DD.
This exception will not be available on the payment for the purchase of livestock, meat, hides and skins from a person who is not proved to be the producer of these goods and is only a trader, broker or any other middleman by whatever name called.
Who are the producers of livestock and meat
Any person, by whatever name called, who buys animals from the farmers, slaughters them and then sells the raw meat carcasses to the meat processing factories or to the traders/retail outlets would be considered as producer of livestock and meat.
What documents are required to be furnished in this regard by the persons making the payments.
The benefit of rule 6DD shall be available to the person making the payment subject to furnishing of the following :—
(i) A declaration from the person receiving the payment that he is a producer of meat;
(ii) A confirmation that the payment, otherwise than by an account payee cheque or account payee bank draft, was made on his insistence; and
(iii) A further confirmation from a veterinary doctor certifying that the person specified in the certificate is a producer of meat and that slaughtering was done under his supervision.
Explanation--- For the purposes of sub-clause (iii) of clause (e) of rule 6DD -
(i) The expression ‘fish or fish products’ would include ‘other marine products such as shrimp, prawn, cuttlefish, squid, crab, lobster, etc.’.
(ii) The ‘producers’ of ‘fish or fish products’ for would include, besides the fishermen, any headman of fishermen, who sorts the catch of fish brought by fishermen from the sea, at the sea-shore itself and then sells the fish or fish products to traders, exporters, etc.
The exception sub-clause (iii) of clause (e) of rule 6DD will not be available on the payment for the purchase of fish or fish products from a person who is not proved to be a ‘producer’ of these goods and is only a trader, broker or any other middleman, by whatever name called.
(f) 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;
(g) 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;
(h) 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; -
(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-
(i) is temporarily posted for a continuous period of fifteen days or more in a place other than his normal place of duty or on a ship and
(ii) does not maintain any account in any bank at such place or ship;
(j) where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike;
(k) 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;
(l) 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.
Explanation.— For the purposes of this clause, the expressions "authorised dealer" or "money changer" means a person authorised as an authorised dealer or a money changer to deal in foreign currency or foreign exchange under any law for the time being in force.]
Circumstance under which section 40A(3) is not-applicable
When income is estimated on gross profit rate, no disallowance can be made - When the income of the assessee was computed by applying a particular gross profit rate and when no deduction was allowed in regard to the purchases of the assessee, there would be no need to look into the provisions of section 40A(3) and rule 6DD(j) - CIT v. Banwari Lal Banshidhar [1998] 229 ITR 229 (All.)
