To check the misutilisation of cash and to ensure that the payments are made to genuine persons, a clause under section 40A (3) was introduced to be applicable from the assessment year 1969-70. Under this clause, all payments exceeding ` 20,000 are to be made only through a crossed cheque or a crossed bank draft. So, if any payment exceeding ` 20,000 is made otherwise than through a crossed cheque or draft, then 100% [upto Assessment Year 2007-08 it was only 20%] of such amount is to be disallowed as deduction while computing income under this head of income.
Enhanced Limit for Payment Made to Transport Operators. [Section 40A(3A)].
If the payment is made to a transport operator for plying, hiring or leasing goods carriage as freight etc. the enhanced limit of ` 35,000 shall be applicable. Thus, an assessee can make payment, in cash or by bearer cheque (i.e. otherwise than by account payee cheque or demand draft) to a transport oerator, or freight loading/unloading charger etc.
Payment or Payments exceeding ` 20,000 made during a day.
The Finance Act 2008 has amended Section 40-A (3) regarding the splitting up of payment exceeding ` 20,000 made to the same person during a day.
After this amendment, a payment or an aggregate of payments made to a person in a day otherwise than by an account payee cheque or an account payee bank draft shall be disallowed if the amount of payment exceeds ` 20,000. Similarly, if an expenditure is incurred in the previous year 2012-13 and the payment in cash exceeding ` 20,000 for the same is made in the previous year 2013-14, such payment shall be deemed to be the profits and gains of the business or profession of the previous year in which such payment is made.
The following are the exceptions :
I. Cash payments made under contracts entered into by the assessee before 1St April 1969.
2. Payment made in cash exceeding ` 20,000 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.
3. Payment made in cash to acquire capital assets.
The Central Board of Direct Taxes has framed Rule 6-DD which provides for cases and circumstances in which payments exceeding ` 20,000 / ` 35,000 in case of payment to transport operators may be made otherwise than by a crossed cheque or a crossed bank draft. This rule provides that under the following cases no disallowance u/s 40A(3) shall be made where any payment of sum exceeding ` 20,000 is made otherwise than by a crossed cheque or a crossed bank draft
1. Where the payment is made for the purchase of:
(i) agricultural or forest product, or
(ii) the produce of animal husbandry (including hides and skins) or dairy or poultry farming or
(iii) fish or fish products, or
(iv) the products of horticulture, to the cultivator, grower or producer of such articles, produce or products;
2. 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;
3. 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, or profession or vocation, in any such village or town;
4. where any payment by way of gratuity, retrenchment compensation or similar terminal benefit, is made to an employee of the assessee or heirs of any such employee or in connection with the retrenchment, resignation, discharge or death of such employee, if the income chargeable under the head, “salary” of the employee in respect of the financial year in which such retirement, resignation, discharge or death took place or the immediately preceding financial year did not exceed ` 75,000;
5. In case payment is made by an assessee as salary to his employee who is temporarily posted for a continuous period of more than 15 days at a place other than normal place of business or on a ship and such employee does not maintain a bank account at such place or at ship and tax as required u/s 192 has been deducted at source;
6. In case payment is made on such day or date on which banks are closed due to strike or holiday;
7. Where payment is made to an agent who is required to make further payment in cash.. (Notification no. 9977 dated 1-12-95).