Section 40A(3) of the Income-tax Act, 1961--Payments in excess of Rs. 2,500 to be made by crossed cheques or crossed bank drafts--Suspension of clearing operations by banks--Clarification regarding - Income Tax - 001/1979

Section 40A(3) of the Income-tax Act, 1961--Payments in excess of Rs. 2,500 to be made by crossed cheques or crossed bank drafts--Suspension of clearing operations by banks--Clarification regarding Circular 001 Dated 11/1/1979 Representations have been received from the members of public, chambers of commerce, etc., pointing out the hardship resulting from the operation of the provisions of section 40A(3) in view of the difficulties in clearance of cheques issued on banks. Sub-section (3) of section 40A of the Income-tax Act, 1961, provides for the disallowance of expenditure incurred in business or profession for which payment is made in an amount exceeding Rs. 2,500 otherwise than by a crossed cheque drawn on a bank or a crossed bank draft. Under clause (j) of rule 6DD of the Income-tax Rules, the provision in section 40A(3) will not be applied by the Income-tax Officer where he is satisfied that the payment could not be made by crossed bank cheque or draft due to "exceptional or unavoidable circumstances" and the assessee furnishes evidence as to the genuineness of the payment and the identity of the payee. The hold-up in cheque clearing operations in the banks or any other similar circumstance which is likely to cause reasonable apprehension in the mind of the payee that the crossed cheque/bank draft will not be cleared expeditiously would constitute "exceptional or unavoidable circumstances" within the meaning of clause (j) of rule 6DD. Accordingly, any payment for business expenditure made during the period when the cheque clearing operations are suspended or other similar circumstance as aforesaid exists, will not be covered by the provisions of section 40A(3) of the Income-tax Act provided the assessee furnishes evidence to the satisfaction of the Income-tax Officer as to the genuineness of the payment and the identity of the payee.