Disallowance of cash payments
Introduction
No deduction is allowed for an expenditure incurred by the assessee if payment in respect of such expenditure exceeds Rs. 10,000 per day and it is made otherwise than by an account payee cheque or bank draft or use of electronic clearing system through a bank account or through prescribed electronic modes. However, the disallowance shall not be made in certain circumstances as referred to in Rule 26.
1. About
1.1. When disallowance is made?
No deduction shall be allowed for an expenditure, even if it is deductible under any other provision, if payment (or aggregate of payments) for such expenditure to a person in a day exceeds Rs. 10,000 and it is made by any mode other than by specified banking or online mode or through prescribed electronic modes
If aggregate payment in a day (otherwise than by specified banking or online mode or through prescribed electronic modes) to the same person in respect of an expenditure, exceeds Rs. 10,000 it will be disallowed under section 40A(3), even if none of the individual payment made in the day exceeds Rs. 10,000. The disallowance under this provision applies only if both, expenditure and payment in respect of that expenditure in a day, exceed Rs. 10,000.
1.1-1. Whether loan payment is covered?
Repayment of loan does not constitute an expenditure deductible in computing taxable income
1.1-2. Whether payment made by agents is covered?
This provision does not apply
1.1-4. Whether disallowance is made if income is computed on presumptive basis?
The disallowance can be made in respect of deductions allowed to the assessee in computing his total income. Where books of account of the assessee were rejected and the profits computed by applying a flat GP rate, no addition can be further made to such profits by disallowing the expenditure under Section 36(4)
1.1-5. Whether payment of any liability is covered?
Where taxpayer had claimed a deduction in respect of an expenditure in any of the earlier years and subsequently he makes payment thereof, otherwise than by an account payee cheque or bank draft, in excess of Rs. 10,000, in that situation, the payment so made is deemed to be business income of the previous year in which payment is made.
In case such expenditure is incurred in the business of plying, hiring or leasing goods carriages, the ceiling of Rs. 35,000 shall be considered instead of Rs. 10,000.
1.2. Exceptions
The disallowance under this provision does not apply or no payment shall be treated as business income of the assessee, even if payment exceeding Rs. 10,000/Rs. 35,000 is made otherwise than by specified banking or online mode or through prescribed electronic modes, under certain circumstances as prescribed in Rule 26. These circumstances are prescribed below.
1.2-1. Payment to Specified Institutions
No disallowance shall be made for the payment made in non-specified mode (i.e., cash, crossed cheque, bearer cheque, etc.) to the following institutions:
(a) RBI or any banking company
(b) State Bank of India or any its subsidiary bank
(c) Co-op. banks or land mortgage bank
(d) Primary Agricultural Credit Society or Primary Credit Society
(e) LIC
1.2-2. Payment in Legal Tender to Government
No disallowance shall be made for an expenditure whose payment is required to be made to the Government in legal tender, such as payment of income-tax, customs duty, railway freight, GST, purchase of scrap from railways
1.2-3. Payment by specified modes
No disallowance operates where the payment is made by the following modes:
(a) Letter of credit arrangements through a bank
(b) Mail or telegraphic transfer through a bank
(c) Book adjustment from one bank account to another bank account
(d) Bill of exchange payable only to a bank
Here bank includes a bank established outside India also
1.2-4. Payment by book adjustment
No disallowance to be made for the payment made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to him.
1.2-5. Payment for agriculture or animal produce
No disallowance shall be made for payment made to cultivator, grower or producer in respect of following purchases:
(a) Agriculture or forest produce
(b) Produce of animal husbandry (including, livestock, meat, hides and skins) or dairy or poultry farming
(c) Fish or fish products
(d) Products of horticulture or apiculture (bee-keeping for sale of honey)
The immunity from disallowance under this provision shall be available to the payer if payment for animal husbandry is made to a person who is the producer of these goods. If these goods are purchased from trader, broker or any other middleman, this exception shall not operate
1.2-6. Purchase of animal
Any person who buys animals from farmers to slaughter them and to sell their raw meat or carcasses, to the meat processing factories, traders or retail outlets, may be considered as producer of livestock and meat. This exemption shall be available to the payer subject to fulfilment of following conditions
(a) The person receiving the payment files a declaration that he is a producer of meat
(b) The producer of meat declares that the payment, otherwise than through account payee cheque or bank draft, was made on his insistence; and
(c) A veterinary doctor certifies that the person specified in the certificate is a producer of meat and that slaughtering was done under his supervision.
1.2-7. Payment for produce of cottage industry
No disallowance operates where the payment is made to a producer for the purchase of the products manufactured or processed without the aid of power in a cottage industry.
1.2-8. Payment in remote places
No disallowance for the cash payment if payment is made in a village or town, to any person who ordinarily resides or carries any business, profession or vocation, in such village or town which, on the date of such payment, is not served by bank. If place, where recipient resides or carries on business, is having banking facility, this exemption is not available just because recipient has not opened his bank account
1.2-9. Terminal payments to low paid employees
No disallowance shall be made from any payment made by the employer by way of gratuity, retrenchment compensation or similar terminal benefit to an employee (or to his heirs) on or in connection with the retirement, retrenchment, resignation, discharge or death of such employee. Such immunity is allowed if aggregate of such sum payable to the employee or his heir does not exceed Rs. 50,000.
1.2-10. Payment of salary at remote places
Where salary is paid after deducting tax at source under Section 392 by an employer to an employee, no disallowance shall operate if following conditions are satisfied:
(a) 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
(b) He does not, maintain any bank account at such place or ship.
1.2-11. Payment on a bank holiday or strike
No disallowance to be made for the payment made on a day on which the banks are closed on account of holiday or strike.
1.2-12. Payment to agent
Payment made in non-specified mode shall not be disallowed if it is paid by any person to his agent who is required to make payment in cash for goods or service on behalf of such person. An employee shall not be treated as an agent for this purpose
1.2-13. Payment made by authorized dealer
Authorized dealers and money changers are normally required to pay cash against purchase of foreign currency or travelers’ cheque in the normal course of their business. Hence, no disallowance operates for any cash payments made by them.
Authorized dealer or money changer means a person authorised as such to deal in foreign currency or foreign exchange under any law for the time being in force.
2. No dispute requiring payment in cash
Where payment in respect of an expenditure has been made in the prescribed mode so that such expense may not be disallowed as deduction, no person shall be allowed to raise a plea, whether by way of suit or other proceeding, that the payment was not made in cash or in any other manner.
References
Prescribed Electronic Mode are defined under Rule 48
Press Release, dated 2-5-1969
Vijay Kumar Ajit Kumar v. CIT (1991) 55 Taxman 388 All.)
CIT v. Banwari Lal Banshidhar (1998) 229 ITR 229 (All.)
Devendrappa M. Kalal v. ITO [2012] 53 SOT 23 (Bang.)
Devendrappa M. Kalal v. ITO [2012] 23 taxmann.com 404/53 SOT 23 (URO) (Bang. - Trib.)
Circular No. 4/2006, dated 29-3-2006
Circular No. 8/2006, dated 06-10-2006
ITO v. Kenaram Saha & Subhash Saha [2008] 116 TTJ (Kol.)(SB) 289
Dy. CIT v. Vijay Kumar Ramesh Chand & Co. [2007] 108 ITD 626 (Pune - Trib.)
This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.