B. P. Mundra & Co. Mobile 9314501680, 9314501791, 8561948425
Chartered Accountants
822 A, Mundra House, Shivaji Nagar, Near Hanuman Temple, Civil Lines, Jaipur-302006
Ph.No. (O) 2225110, 2225116, 2224085
[email protected] url bpmundraca.com
Dear Sir,
Kindly refer to our discussion on
Analysis of Section 40A(3) and 40A(3A)
Disallowance of expenditure exceeding Rs. 10,000/- in cash:
Finance act 2018 made an amendment under section 40A(3) and 40A(3A), and made it applicable for trusts also. Thus, payment exceeding Rs. 10,000 in cash will not be considered as the application of income and the same will be taxable in the hands of trusts.
Disallowance of expenditure exceeding Rs. 10,000/- in cash:
1. Where an assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, or use of electronic clearing system through a bank account [or through such other electronic mode as may be prescribed], exceeds Rs. 10,000 , no deduction shall be allowed in respect of such expenditure. [40A (3)]
2. Where an allowance has been made in the assessment for any year in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year (hereinafter referred to as subsequent year) the assessee makes payment in respect thereof, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, or use of electronic clearing system through a bank account [or through such other electronic mode as may be prescribed], the payment so made shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as income of the subsequent year if the payment or aggregate of payments made to a person in a day, exceeds ten thousand rupees. [40A (3A)]
Provided that the provisions of section 40A(3A) shall not be applicable in case where there is restrictions in regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors.
Earlier this section was not applicable for trusts and hence trusts were availing benefits even in respect of the application of income by way of cash payments. Finance act 2018 made an amendment under section 40A(3) and 40A(3A), and made it applicable for trusts also. Thus, payment exceeding Rs. 10,000 in cash will not be considered as the application of income and the same will be taxable in the hands of trusts.
Maximum limit of cash donations reduced from Rs. 10,000/- to Rs. 2,000/-
Restrictions have been imposed on cash donations of the charitable trusts under section 80G by reducing the capping from Rs. 10,000 to Rs. 2,000. This is to ensure that unaccounted money does not flow into the charitable institutions in the form of anonymous donations.
(a) Analysis of sec 40A(3) of the Act.
Where payment is made in the year the expenditure is incurred: 100% disallowance of payment if in excess of Rs. 10,000 and not by a/c payee cheque/draft/ECS. [Sec 40A(3)] There are following two conditions for the applicability of this section. If both of these two conditions are satisfied, then the provisions of this section will be applicable.
Condition 1.
The assessee incurs any expenditure exceeding Rs.10000/- which is allowable for computing income under the head business or profession.
Condition 2.
The assessee has made payment or aggregate of payments in a day exceeding Rs.10000/- in cash.
If the above two conditions are satisfied, then whole of the expenditure shall be disallowed under this section. In case where payment is made to the transporters for plying, hiring or leasing goods carriages, then amount of Rs.10000/- shall be increased to Rs.35000/ in the above two conditions.
Example: Where expenditure of shop expenses for Bill raised on 11/11/2019 is made on 03/03/2020 by cash amounting to Rs. 30,000, then the payment of Rs. 30,000 will not be allowed as a deduction for the PY 2019-20
Payments made on a single day: where the payment or the aggregate of payments made to a single person on a single day against one bill exceeds Rs 10,000 then the disallowance of such expenditure will be covered by Sec 40A. Thus for disallowance u/s 40A(3) the amount of the bill raised and the payment or payment(s) made to the person on a single day both exceed Rs 10,000.
Illustrations for Sec 40A(3)
(i) An expenditure of Rs. 40,000 is incurred for purchase of stationary against Bill no 2 from M/s XYZ Ltd on 01/01/20. The assessee makes separate payments of Rs. 15,000, 16,000 and Rs. 9,000 all by cash, to the person concerned in a single day. Since the aggregate amount of payment made to a person in a day, in this case, is Rs. 40,000. Since, the aggregate payment by cash exceeds Rs. 10,000, Rs. 40,000 will not be allowed as a deduction in computing the total income of the taxpayer in accordance with the provisions of the Act.
(ii) An expenditure of Rs. 30,000 is incurred for purchase of stationary against Bill No 1, 2 & 3from M/s XYZ Ltd on 01/01/20, 28/01/20 & 01/02/20 for Rs 10,000 each. The assessee makes separate payments of Rs. 10,000, Rs. 6,000, Rs 5,000 and Rs. 9,000 all by cash at different times, to the person concerned on a single day. Since the aggregate amount of payment made to a person in a day, in this case, is Rs. 30,000 however since the payment is on account of three bills, none of which is in excess of Rs 10,000,
thus the entire payment will be allowed
(iii) An expenditure of Rs. 37,000 is incurred for purchase of stationary against Bill No 1 & 2 from M/s XYZ Ltd on 01/01/20 and 01/02/20 for Rs 28,000 and Rs 9,000 respectively. The assessee makes separate payments of Rs. 15,000, Rs. 13,000 and Rs. 9,000 all by cash, to the person concerned in a single day. Since the aggregate amount of payment made to a person in a day, in this case, is Rs. 37,000 however since the payment is on account of two bills, one of which exceeds Rs 10,000, thus only Rs 28,000 will be disallowed
Example: An expenditure of Rs. 60,000 is incurred freight against Bill no 2 from M/s NITCO Roadways on 01/05/19.The assessee makes separate payments of Rs. 24,000, Rs. 36,000 on 01/09/19 and 01/10/19 respectively. In this case since the payment made is not in excess of the limit of Rs 35,000 thus it will not be disallowed, however the payment made on 01/10/19 shall be disallowed as it exceeds the limit of 35,000. Thus out of expenditure of Rs 60,000 only Rs 24,000 will be allowed as a deduction
(b) Analysis of sec 40A(3A) of the Act.
Where payment is made in the subsequent years (after deduction has been claimed in an earlier year): where an expenditure has been allowed as a deduction in an earlier year(on due basis) and if in any subsequent year the payment in respect of such expenditure is in excess of Rs 10,000 and not by an account payee cheque, account payee bank draft or ECS – then the payment shall be deemed to be income under the head business & profession for the previous year in which payment is made.
There are following two conditions for the applicability of this section. If both of these two conditions are satisfied ,then the provisions of this section will be applicable
Condition 1.
The assessee had claimed deduction in respect of an expenditure exceeding Rs.10000/- in any of the earlier years.
Condition 2.
The assessee has made payment of the liability(condition no.1)in cash in subsequent year and payment is exceeding Rs.1 0000/-in a day