A business incurs a range of expenses in a single day. It could include things like paying for services, making repairs, paying employees, and buying raw materials. Since it is impossible to compile a complete inventory of such expenses or to establish their veracity, Section 40A(3) of the Income Tax Act was introduced.

According to section 40A(3), business expenses paid in cash that total more than Rs 10,000 are not deductible for income tax purposes. Additionally, there are certain exceptions to this rule. The specific guidelines have been further clarified in this guide.

What is the meaning of Section 40A(3) of the Income Tax Act?

If a business makes a payment or incurs an expense to -

ü   A single person

ü   In a single day

ü   Aside from an account payee cheque or account payee bank draught or use of electronic system (i.e. Makes payment via cash)

ü   Exceeding Rs 10,000/-

     Therefore section 40A(3) of the income tax act does not permit such an expense to be deducted.

This indicates that it won't be viewed as a business expense and will instead be deducted from the income. Additionally, it will result in greater tax payments. However, Rule 6DD specifies specific instances and situations in which the aforementioned expenses will be recognized as a deduction even if they were paid in cash.

The maximum has been set at Rs. 35,000 instead of Rs. 10,000/- in the event of a transporter (i.e., if the payments are made for renting or leasing carriages for commodities such as lorries, trucks, etc.).

The following list contains the provisions of section 40A(3):

Ø   The maximum is 35,000 if payment is made to the transporter.

Ø    For the purpose of calculating business/profession income, the assessee incurs any expenses that are normally deductible under the other provisions of the Act (e.g., expenditure for purchase of raw material, trading goods, expenditure on salary, etc.). The cost is greater than Rs. 10,000. (Rs. 35,000 if an assessee makes payment for Plying, Hiring or Leasing Goods Carriages). 

Ø   The following payment is made using a method other than an account payee demand draught, account payee cheque, or an electronic clearing system through a bank account. If all of the aforementioned requirements are met, the entire payment will be disallowed. 

Ø   If an expense was paid via cross cheque, no deduction is permitted.

Ø   This section will not be applicable to any payments made by commission agents to receive items for commission-based sales (as commission treated as income of agent). However, if a commission agent purchases products on his own expense, this section's restrictions will be applicable.

What are the exceptions specified in Rule 6DD?

According to Rule 6DD of the Income Tax Act, if a payment in cash or by bearer cheque in excess of Rs 10,000 is made, it is allowed under the following exceptional cases:

·       The Reserve Bank of India, LIC, banks, the government, primary agriculture credit societies, co-operative banks, or land mortgage banks are the recipients of payments.

·       Payment is made by RTGS, ECS, UPI, BHIM, NEFT, Credit Card and Debit Card.

·       Payment made by the payee's book entry adjustment against the amount owed to the assessee for the provision of goods or services.

·       Amount paid to a cultivator, grower, or producer of an agricultural product, a forest product, an animal husbandry product (including live animals, meat, hides, and skin), a dairy product, a poultry product, a fish or fisheries product, an agricultural product, etc.

·       When a gratuity payment is paid to an employee or the employee's heir in connection with the employee's retirement, retrenchment, resignation, or death, the amount must not exceed Rs. 50,000.

·       payment of salary to an employee who is transferred to another location or ship for a period of time of at least 15 days outside of his regular place of duty.

·       When purchasing goods produced in a cottage industry without the use of power, payment is provided to the manufacturer of those goods.

·       Payment had to be made on a bank holiday or strike- or holiday on which banks were closed.

·       A payment made in the course of regular business by a licensed dealer or money changer in exchange for the purchase of foreign currency or traveler's cheques.

·       Payment made where Banking facility not available.

Conclusion

The article examines how section 40A(3) of the Income Tax Act of 1961 should be applied to expenses over Rs. 10,000 that an assessee incurs in cash or bearer cheques.