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[Section 40A(3)] : Amount Not Deductible in respect of Expenditure Exceeding Rs.10,000

The provisions of section 40A(3) are given below —

Disallowance is attracted under section 40A(3) if the following conditions are satisfied —

  1. 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. 10,000 (Rs. 35,000 if an assessee makes payment for Plying, Hiring or Leasing Goods Carriages).

  2. A payment (or aggregate of payments made to a person in a day) in respect of the above expenditure exceeds Rs. 10,000 (Rs. 35,000 if an assessee makes payment for Plying, Hiring or Leasing Goods Carriages).

  3. The above payment is made otherwise than by an account payee cheque or an account payee demand draft or use of electronic clearing system through a bank account. If all the above conditions are satisfied, then 100 % of such payment will be Disallowed.

Exceptions - The above rule i.e. Section 40A(3) is not applicable to a few cases given below –

  1. Payment made to a bank (including private sector banks, co-operative bank, credit societies), LIC, etc.

  2. Payment made to Government.

  3. Payment through banking system.

  4. 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.

  5. Payment made to a cultivator, grower or producer in respect of the purchase of agricultural or forest produce or product of animal husbandry (including livestock, 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).

  6. Payment made to a producer in respect of the purchase of the products manufactured or processed without the aid of power in a cottage industry.

  7. Payment made to a person who ordinarily resides or carries on business in a village not served by any bank.

  8. Payment of terminal benefits, such as gratuity, retrenchment compensation, etc., not exceeding Rs. 50,000.

  9. Payment made by an assessee by way of salary to his employee after deducting tax 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.

  10. Payment required to be made on a day on which the banks were closed either on account of holiday or strike.

  11. 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.

  12. Payment made by an authorised dealer or a money changer against purchase of foreign currency or travellers cheques in the normal course of his business.
  13. Following Table showing the Examples towards Nature of Transactions with Disallowed Amount :
Nature of Transactions Disallowed Amount

1. Generally X pays salary to his employees by account payee cheques. Salary of December 2018 is, however, paid to three employees A, B and C by bearer cheques (payment being Rs. 6,000, Rs. 10,000 and Rs. 10,500, respectively).

1. Rs. 10,500, being 100% of salary paid by bearer cheque to C, will be disallowed.

2. X Ltd. purchases goods on credit from Y Ltd. on May 6, 2018 for Rs. 86,000 which is paid as follows—

  1. Rs. 5,000 in cash on May 11, 2018;
  2. Rs. 30,000 by a bearer cheque on May 31, 2018;
  3. Rs. 51,000 by an account payee cheque on May 16, 2018.
  1. Nothing will be disallowed out of the payment of Rs. 5,000 in cash on May 11, 2018, as the payment does not exceed Rs. 10,000.
  2. 100% of Rs. 30,000 will be disallowed.
  3. Nothing will be disallowed out of Rs. 51,000.

3. Z Ltd. purchases goods on credit from A Ltd. on May 10, 2018 for Rs. 6,000 and on May 30, 2018 for Rs. 5,000. The total payment of Rs. 11,000 is made by a crossed cheque on June 1, 2018.

3. Though the amount of payment exceeds Rs. 10,000, nothing shall be disallowed. To attract disallowance, the amount of bill as well as the amount of payment should be more than Rs. 10,000.

4. A Ltd. purchases goods on credit from a relative of a director on June 20, 2018 for Rs. 50,000 (market value: Rs. 42,000). The amount is paid in cash on June 25, 2018.

4. Out of the payment of Rs. 50,000, Rs. 8,000 (being the excess payment to a relative) shall be disallowed under section 40A(2). As the payment is made in cash and the remaining amount exceeds Rs. 10,000, 100% of the balance (i.e., Rs. 42,000) shall be disallowed under section 40A(3).

5. B Ltd. purchases raw material on credit from A who holds 20 per cent equity share capital in B Ltd. (the amount of bill being Rs. 36,000, market price being Rs. 9,000). It is paid in cash on July 26, 2018.

5. Out of the payment of Rs. 36,000, Rs. 27,000 (being the excess payment to a person holding a substantial interest) shall be disallowed under section 40A(2). The remaining amount (i.e., Rs. 9,000) does not exceed Rs. 10,000. Nothing shall be disallowed under section 40A(3) even if the payment is made in cash.

Topics...on ‘Profits and Gains of Business or Profession’

Define … ‘Profits and Gains of Business or Profession’ and its Computation (Section 28)
Method of Accounting for Computing Business Income (Section 145)
Principles for Allowing Business Deductions / Allowances from Profits and Gains of Business or Profession.
Expenses Allowed as Deductions against Profits and Gains of Business or Profession [Section-30-37]
[Section 37(1)] : General Or Allowable Deductions under Business or Professions
Business Losses Deductible under the head  'Profits and Gains of Business or Profession'.
Expenses Not Deductible under the head 'Profits and Gains of Business or Profession (Section 40, 40A, 43B)
DEEMED PROFITS Chargeable to Tax as Business Income Under Profits and Gains of Business or Professions [Section 41]
Taxation of Undisclosed Business Income/Investments from Undisclosed Sources
Deduction in respect of Expenditure incurred on setting up of a Specified Business [Section-35AD] :
When Maintenance of Books of Accounts becomes Compulsory (Section 44AA)
Compulsory Audit of Books of Accounts by Chartered Accountant (Section 44AB)
Computation of Income On Estimated Basis Under Sections 44AD, 44ADA and 44AE

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