Amount not deductible under section 40A (3)

The provisions of section 40A (3) are given below – RULE – The following conditions should be satisfied –

Condition one – The assessee incurs any expenditure, which is otherwise deductible under the other provisions of the Act for computing business/profession income (e.g., expenditure for purchase of raw material, trading goods, expenditure on salary, etc.). The amount of expenditure exceeds Rs. 20,000.

Condition two – A payment in respect of the above expenditure (or part thereof) exceeds Rs. 20,000.

Condition three – The payment mentioned in condition two is made in cash or by bearer cheque (i.e., not by crossed cheque or crossed demand draft).

If all the above conditions are satisfied, then 20 per cent of such payment is not allowable as deduction. However there are certain exceptions to the above rule.

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 (as given above) to the same person made during a day as referred above and to increase the efficacy of the provision, an amendment was made through Finance act 2008 and after 01.04.2008, 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.

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