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[Section 40A (3)] : Payments exceeding Rs. 20,000 by Cash / Bearer Cheque

If an assessee incurs any expenditure in respect of which payment in excess of Rs. 20,000 is made otherwise than by an account payee cheque or an account payee bank draft, 100% of such expenditure will not be allowable as deduction.

Rule 6DD, however, prescribes the cases and circumstances in which payment in excess of Rs.20,000 may be made otherwise than by an account payee cheque or an account payee bank draft without attracting the disallowance. Even payment made for purchase of goods falls within the expression “expenditure” occurring in this section.


Rule 6DD prescribes the following circumstances under which no disallowance will be made of the expenditure even if the payment exceeding Rs. 20,000 is made otherwise than by an account payee cheque or demand draft—

  • Payment made to banking and other credit institutions”, such as the Reserve Bank of India, commercial banks in the public and private sectors, co-operative banks or land mortgage banks, primary credit! agricultural credit societies, Life Insurance Corporation of India, [Rule 6DD(a)].

  • Payment made to Government (both Central and State Governments), if under the rules framed by it, such payment is required to be made in legal tender, such as a payment of direct taxes, customs duty, excise, railway freight, sales tax, etc. [Rule 6DD(b)]. It covers any payment to the Government (not merely taxes). For instance, if scrap is purchased from Indian Railways in cash, section 40A(3) is not applicable, as it is payment to the Government

  • Payment through the banking system, e.g., letters of credit, mail or telegraphic transfer, book adjustment in the same bank or between one bank and another and bifis of exchange payable to a bank, use of electronic clearing system through a bank account, credit card and debit card [Rule 6DD(c)].

  • Payment made by book adjustment by an assessee in the account of the payee against money due to the assessee for any goods supplied or services rendered by him to the payee [Rule 6DD(d) ].

  • Payment to a cultivator, grower or producer in respect of the purchase of agricultural or forest produce or product of animal husbandry (including live stock, meat, hides and skins) or dairy or poultry farming or fish or fish products or products of horticulture or apiculture (even if these products have been subjected to some processing provided the processing has been done by the cultivator, grower or the producer of the product) [Rule 6DD(e)].

Product of animal husbandry –

If payment exceeding Rs. 20,000 is made to a producer of the products of animal husbandry (including livestock, meat, hides and skins) otherwise than by an account payee cheque or draft for the purchase of such produce, no disallowance should be attracted under section 40A(3). This exception is, however, 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.

Purchase of animals –

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.

The exemption is subject to the following conditions—

  • A declaration from the person receiving the payment that he is a producer of meat;

  • A confirmation that the payment, otherwise than by an account payee cheque or account payee bank draft, was made on his insistence; and

  • 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.

    • Payment made to a producer in respect of purchase of products manufactured or processed without the aid of power in a cottage industry [Rule 6DD(f].

    • Payment made to a person who ordinarily resides or carries on business in a village not served by any bank [Rule 6DD(g)].

    • Payment of terminal benefits, such as gratuity, retrenchment compensation, etc., payable to an employee or his legal heirs and if such sum does not exceed Rs. 50,000 in aggregate [Rule 6DD(h)].

    • Payment made by an assessee by way of salary to his employee after deducting tax from salary in accordance with the provisions of section 192 and when such employee—

      • is temporarily posted for a continuous period of 15 days or more in a place other than his normal place of duty or on a ship; and

      • does not maintain any account in any bank at such place or ship [Rule 6DD(i)].

    • Payment required to be made on a day on which the banks were closed either on account of holiday or strike [Rule 6DD(j)].

    • Payment made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person [Rule 6DD(k)]. For instance, if cash payment (in excess of Rs. 20,000) is made by an assessee to his agent for procuring raw material, it cannot be disallowed under section 40A(3) read with Rule 6DD(k) - However, an employee cannot be considered as an agent for this purpose.

    • Payment made by an authorised dealer or a money changer against purchase of foreign currency or travelers cheques in the normal course of his business [Rule 6DD(J)].

SCOPE OF Section 40A(3) –

The following points should be considered to understand the scope of section 40A(3)—

  • If the aggregate payment (otherwise than by an account payee cheque/draft) to the same person during a day exceeds Rs. 20,000, the provisions of section 40A(3) will apply and the entire amount of such payment will be disallowed.

  • If an assessee makes payment of two different bills (none of them exceeds Rs. 20,000) at the same time lit cash or by bearer cheque or crossed cheque/draft, section 40A(3) is not applicable even if the aggregate payment is more than Rs. 20,000. This is because of the fact that section 40A(3) is applicable only in respect of an expenditure” which is excess of Rs. 20,000. In other words, unless the amount of the bill and the amount payment exceed Rs. 20,000, section 40A(3) is not applicable.

  • Where the assessee makes payment over Rs. 20,000 at a time, partly by an account payee cheque and partly in cash to some parties but the payment in cash alone at one time does not exceed Rs. 20,000 section 40A(3) is not attracted.

  • Provision of section 40A(3) does not apply in respect of an expenditure which is not to be claimed as deduction under sections 30 to 37.

Where Deduction has been Claimed Earlier on Due Basis and Payment is made in the Current Year –

A special provision has been made in respect of those cases where deduction was claimed earlier on due basis. These provisions are given below—

  • The taxpayer had claimed a deduction in respect of an expenditure in any of the earlier years.

  • The amount of deduction exceeded Rs. 20,000.

  • In the current year, payment is made in respect of the aforesaid liability.

  • The payment exceeds Rs. 20,000.

  • The payment is made otherwise than by an account payee cheque or draft.

If the above conditions are satisfied, the payment so made shall be deemed to be the business income of the taxpayer of the previous year in which the payment is made. No specific provision has been made that the payment so made shall be taxable as business income even if the business has been discontinued.

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