Section 40A(3) & 40A(3A) - Payment made otherwise than by account payee cheque - Income Tax - Ready Reckoner - Income Tax

SEC 40A(3) and 40A(3A) : Payment made otherwise than by account payee cheque or account payee bank draft Section 40A(3): Where the assessee incurs any expenditure in respect of which the payment or aggregate of payments made to a person in a day, otherwise than by a cheque drawn on a bank or bank draft or use of electronic clearing system through a bank account, exceeds 10,000/- no deduction shall be allowed in respect of such expenditure. Section 40A(3A): Where any allowance has been made in AY in respect of any liability incurred by the assessee for any expenditure and subsequently during any PY the assessee makes payment in respect thereof, otherwise than by a cheque drawn on a bank or bank draft or use of electronic clearing system through a bank account the payment so made shall be deemed to be the profits of business and accordingly chargeable to income-tax as income of the subsequent year if the payment made to a person in a day, exceeds 10,000/- No disallowance shall be made under sub-section (3) where a payment or aggregate of payments made to a person in a day, otherwise than by a cheque drawn on a bank or bank draft or use of electronic clearing system through a bank account, exceeds 10,000/ in such cases having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors. In the case of payment made for plying, hiring or leasing goods carriages, the provisions of sub-sections (3) and (3A), 10,000/- is substituted with 35,000/- [ Rule 6ABBA ]. Exception In the following cases as specified in Rule 6DD , payment in a sum exceeding 10,000 may be made otherwise than by an account payee cheque/DD. Payment to Specified payee [ Rule 6DD(a) ] - Where the payment is made to i. Reserve Bank of India or any banking company as defined in section 5(c) of Banking Regulation Act, 1949; ii. State Bank of India or any subsidiary bank as defined in section 2 of SBI (Subsidiary Banks) Act, 1959; iii. any co-operative bank or land mortgage bank; iv. any primary agricultural credit society or any primary credit society as defined under section 56 of the Banking Regulation Act, 1949; v. Life Insurance Corporation of India. Payment to Government [ Rule 6DD(b) ] - Where payment is made to the Government and, under the rules framed by it, such payment is required to be made in legal tender. Payment by certain modes [ Rule 6DD(c) ] - Where the payment is made by i. any letter of credit arrangements through a bank; ii. a mail or telegraphic transfer through a bank; iii. a book adjustment from any account in a bank to any other account in that or any other bank; iv. a bill of exchange made payable only to a bank; v. the use of electronic clearing system through a bank account or sny other mode such as ; credit card; debit card. Net Banking IMPS (Immediate Payment Service); UPI (Unified Payment Interface); RTGS (Real Time Gross Settlement); NEFT (National Electronic Funds Transfer). and BHIM (Bharat Interface for Money) Aadhar Pay Adjustment in books [ Rule 6DD(d) ] - Where the payment is 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 such payee. Purchase of certain products [ Rule 6DD(e) ] - Where the payment is made for the purchase of: i. agricultural or forest produce; or ii. the produce of animal husbandry (including livestock, meat, hides and skins) or dairy or poultry farming; or iii. fish or fish products; or iv. the products of horticulture or apiculture, to the cultivator, grower or producer of such articles, produce or products. Cottage industry [ Rule 6DD(f) ] - 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. No bank service [ Rule 6DD(g) ] - 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, profession or vocation, in any such village or town. Terminal benefit to employee [ Rule 6DD(h) ] - Where any payment is made to an employee of the assessee or the heir of any such employee, on or in connection with the retirement, retrenchment, resignation, discharge or death of such employee, on account of gratuity, retrenchment compensation or similar terminal benefit and the aggregate of such sums payable to the employee or his heir does not exceed ₹ 50,000. Temporary posting of employee [ Rule 6DD(i) ] - Where the payment is made by an assessee by way of salary to his employee after deducting the income-tax from salary as per section 192, and when such employee i. 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 ii. does not maintain any account in any bank at such place or ship. Bank closed [ Rule 6DD(j) ] - Where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike. Payment to agent [ Rule 6DD(k) ] - Where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person. Foreign currency [ Rule 6DD(l) ] - Where the payment is made by an authorized dealer or a money changer against purchase of foreign currency or travelers cheques in the normal course of his business. POINTS TO REMEMBER: Section 40A(3) shall also apply in case of advance payment for the expenditure made otherwise than by account payee cheque. Disallowance shall be in the year in which expenditure is incurred. If an assessee makes payment of two different bills (none of them exceeds 10,000) at the same time in cash or by bearer cheque or crossed cheque/ draft, section 40A(3) is not applicable even if the aggregate payment is more than 10,000. In other words, unless the amount of the bill and the amount payment exceed 10,000, section 40A(3) is not applicable. Where the assessee makes payment over 10,000 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 10,000, section 40A(3) is not attracted. NOTE: Section 40A(3) and 40A(2) are both anti-tax evasion measure which disallow certain expenses if they are not in compliance with the guidelines laid by the Income Tax Act. Both these sections are over-riding sections and if any expenditure or allowance comes under the purview of any other section, there treatment should only be done as per provisions laid down in these sections.