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TMI BlogDisallowance of expenditure for which payment exceeding Rs. 2,500 is made otherwise than by crossed cheque/bank draft under sub-section (3), read with rule 6DD of the Income-tax Rules - Scope and operation of the sub-section explainedX X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the new provision in section 40A(3) for the disallowance of expenditure in business and professions for which a payment exceeding Rs. 2,500 is made otherwise than by a crossed cheque or bank draft. 2. The above provision applies to payments made on or after April 1, 1969. Certain categories of payments have been excluded from its operation. These exclusions have already been notified by the Central Board of Direct Taxes in the Gazette of India, Extraordinary, dated 14-2-1969 and the Gazette of India, Extraordinary, dated 25-3-1969. Broadly, the following categories of payments have been excluded from the operation of the above provisions : Payments which under contracts entered into before April 1, 1969, have to be made in cash P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ineness of the payment and the identity of the payee. 3. The points on which enquiries have been made, and clarifications in the matter are given below : Question 1 : Does the requirement of making payments over Rs. 2,500 by cheque or draft apply also to payments made for purchase of goods for the business? Answer : Yes, the provisions apply to all categories of expenditure involving payments for goods or services, which is deductible in computing the taxable income. Question 2 : Does the requirement apply also to loan transactions? Answer : No, because advancing of loans or repayment the principal amount of the loan do not constitute expenditure deductible in computing the taxable income. However, interest payments in amounts exceedin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the Gazette of India, Extraordinary, dated 14-2-1969. Question 6 : Are payments made to the grower or producer of agricultural products excluded from the operation of section 40A(3) even where these have been subjected to some processing by him? Answer : Yes, payments made to the grower or producer of agricultural or forest produce, produce of animal husbandry, dairy or poultry farming, etc., have been specifically excluded from the requirement in section 40A(3) by the Gazette Notification, dated 14-2-1969, read with the corrigenda published in the Gazette of March 25,1969. Thus, payments made to a grower or producer of kapas ginned by him or to a grower of paddy which has been converted by him into rice, are excluded from this provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hardship to taxpayers, particularly in the rural areas, certain exceptions were notified under rule 6DD by virtue of which payment in a sum exceeding Rs. 2,5001 may be made otherwise than by a crossed cheque drawn on a bank or a crossed bank draft in certain circumstances. These exceptions cover, inter alia, payments made for purchases of agricultural or forest produce, cottage industry products, etc., from the producers of such products; payments made in villages or towns having no banking facility to any person carrying on business or profession in any such village or town; payments made through the banking system, that is, in the form of letter of credit arrangements, telegraphic transfers, adjustments in accounts, or bills of exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the income under the heads Profits and gains of business or profession and Income from other sources as per section 58(2). All payments in excess of Rs. 2,500 at one time whether for goods or services obtained for cash or credit, which are deductible in computing the income, have to be made by crossed cheque or bank draft. Thus, the price of goods purchased for resale or use in manufacturing process or payments for services will be covered by the provisions of section 40A(3). However, the section will not apply to repayment of loans or payment towards the purchase price of capital assets such as plant and machinery not for resale. 3. A large portion of trade in agricultural commodities is channelled through the institution of arhatias. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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