Today tax evasion is a continuing
and growing problem faced by the income tax department. Taxpayers deliberately misrepresents the true
state of their affairs to the tax authorities to reduce their tax liability by
declaring less income/profits/gains than the amounts actually earned, or
overstating deductions. Tax evasion leads to under development of economy.
The income tax department in its endeavor to cut the tax evasion mechanisms has
introduced various provisions from time to time and one of them is introduction
of section 40A(3). The object of the
provisions of section 40A(3) is to curb flow of black money and not to put an
impediment over the trade and business.
Section 40 A (3) provides
that any expenditure incurred by an assessee above Rs. 20000/- in a day, other
than by account payee cheque or draft shall not be allowed as a deduction. However, if the payments are made for
plying, hiring or leasing carriages for goods such as lorries, trucks etc then
the limit is extended to Rs 35000/-. Simply saying, expenditure made by bearer
cheque or cash above Rs. 20000/35000 is not eligible for deduction while
computing taxable income.
Scope of word
expenditure u/s 40A (3)
The word expenditure covers all categories of expenditure involving
payments for goods or services, which is deductible in computing the taxable
income. It covers the payments made for goods purchased on credit, purchasing
stock-in-trade. It also includes payments made in towns having banking
facilities for purchase of goods from villager whose village does not have
banking facilities. However it excludes:
- Loan
transactions or payments made by commission agents (arhatiyas) for goods
received by them for sale on commission or consignment basis.
- Hundi
transactions entered into in connection with the advancing or the repaying
of loans.
- Payments
made in advancing loans and returning the principal amount of borrowed
moneys —Letter : F. No. 1(22)/69-TPL (Pt.), dated 18-4-1969.
- Payment to milk producers in cash.
To further restrict any tax
evasion, the Income Tax department has specified that this section extends to
single payments or aggregate of payments made to a single person in a day. Aggregate of payments means if a
person makes more than one different purchases for cash from same person in
excess of Rs 20000 in a single day even though on separate cash memos, such
aggregate payment will be disallowed u/s 40A(3). For example if Mr. B makes
four purchases of Rs 9000 each from the same person during different time of
the day and obtains four different cash memos, yet the transaction will be
covered by section 40A(3) and such expenditure i.e. Rs. 36000 will be
disallowed.
Applicability of Section 40A(3)
The provisions of section 40A(3) would apply in computing the income under
the heads "Profits and gains of business or profession" and
"Income from other sources" as per section 58(2).
Section 40A(3A)
Further enlarging the scope of the provisions
of section 40A(3) a new Section 40A(3A) covering more area in relation to the
cash payments has been introduced which further provides that in case an
allowance is made in the assessment for any year on the basis of incurred
liability, but in the subsequent year or years, assessee makes a payment
exceeding Rs 20000/35000 in a day, otherwise than by an account payee cheque or
account payee bank draft, in respect of such liability, then the payment so
made shall be deemed to be the profit of the year in which such payment is made.
Proviso to section 40A (3A)
provides that no disallowance shall be made and no payment shall be deemed to
be the profits and gains of business or profession under sub-section (3) and
this subsection [Section 40A (3A)] where 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, exceeds Rs. 20000, in such cases and under
such circumstances as may be prescribed, having regard to the nature and extent
of banking facilities available, considerations of business expediency and
other relevant factors. The factors which may affect the business expediency
may be of below mentioned nature and this list is illustrative not exhaustive:-
(a)
the purchaser is new to the seller; or
(b) the transactions are made at place where either
the purchaser or the seller does not have a bank account; or
(c) the transactions and payments are made on a
bank holiday; or
(d) the seller is
refusing to accept the payment by way of crossed cheque/draft and the
purchaser’s business interest would suffer due to non-availability of goods
otherwise than from this particular seller; or
(e) the seller, acting as a commission agent, is
required to pay cash in turn to persons from whom he has purchased the goods;
or
(f) specific discount is
given by the seller for payment to be made by way of cash; or
(g) the necessity for immediate
settlement of the transaction.
Exceptions under Rule 6DD:
These circumstances and cases as provided under Rule 6DD are as follows:
a) Where the payment is made to—
(i) the Reserve Bank of India or
any banking company as defined in clause (c) of section 5 of the Banking
Regulation Act, 1949 (10 of 1949):
(ii) the State Bank of India or
any subsidiary bank as defined in section 2 of the State Bank of India
(Subsidiary Banks) Act, 1959 (38 of 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(10 of 1949);
(v) the Life insurance
Corporation of’ India
established under section.3 of the Life Insurance Corporation Act, 1956 (51 of
1956);
(b) where the payment is made to
the Government and, Under the rules framed by it, such payment is required to
be made in legal tender;
(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
(vi) a credit card;
(vii) a debit card.
Explanation— For the purposes of this clause and clause (g), the
term “bank means any bank, banking company or society referred to in
sub-clauses (i) to (iv) of clause (a) and includes any bank [not being a
banking company as defined in clause (c) of section 5 of the Banking Regulation
Act, 1949 ( 10 of 1949) whether incorporated or not, which is established
outside India;
(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;
(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;
Explanation----
For the purposes of sub-clause (ii) of clause
(e) of rule 6DD -
The expression
‘the produce of animal husbandry’ used would include ‘livestock and meat’ and
in a case where payment exceeding rupees twenty thousand is made to a producer
of the products of animal husbandry (including livestock, meat, hides and
skins) otherwise than by a crossed cheque drawn on a bank or by a crossed bank
draft for the purchase of such produce, no disallowance should be attracted
under section 40A(3), read with rule 6DD.
This exception
will not be available on the payment for the purchase of livestock, meat,
hides and skins from a person who is not proved to be the producer of these
goods and is only a trader, broker or any other middleman by whatever name
called.
Who are the producers of livestock and meat
Any person, by
whatever name called, who buys animals from the farmers, slaughters them and
then sells the raw meat carcasses to the meat processing factories or to the
traders/retail outlets would be considered as producer of livestock and meat.
What documents are required to be furnished in this regard by the persons
making the payments.
The benefit of
rule 6DD shall be available to the person making the payment subject to
furnishing of the following :—
(i) A declaration from the person receiving
the payment that he is a producer of meat;
(ii) A confirmation that the payment, otherwise
than by an account payee cheque or account payee bank draft, was made on his
insistence; and
(iii) A further confirmation from a veterinary doctor certifying that the
person specified in the
certificate is a producer of meat and that slaughtering was done under his
supervision.
Explanation---
For the purposes of sub-clause (iii) of clause (e)
of rule 6DD -
(i) The expression ‘fish or fish products’
would include ‘other marine products such as shrimp, prawn, cuttlefish, squid,
crab, lobster, etc.’.
(ii) The ‘producers’ of ‘fish or fish products’ for
would include, besides the fishermen, any headman of fishermen, who sorts the
catch of fish brought by fishermen from the sea, at the sea-shore itself and
then sells the fish or fish products to traders, exporters, etc.
The
exception sub-clause (iii) of
clause (e) of rule 6DD will not be available on the
payment for the purchase of fish or fish products from a person who is not
proved to be a ‘producer’ of these goods and is only a trader, broker or any
other middleman, by whatever name called.
(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;
(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;
(h) where any payment is made to
an employee of the assessee or the heir of any such employee on or 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 fifty Thousand rupees; -
(i) where the payment is made by
an assessee by way of salary to his employee after deducting the income-tax
from salary in accordance with the provisions of section 192 of the Act, and
when such employee-
(i) is temporarily posted for a
continuous period of fifteen 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;
(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;
(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;
(l) where the payment is made by
an authorised dealer or a money changer against purchase of foreign currency or
travelers cheques in the normal course of his business.
Explanation.— For the purposes of this clause, the expressions
"authorised dealer" or "money changer" means
a person authorised as an authorised dealer or a money changer to deal in
foreign currency or foreign exchange under any law for the time being in
force.]
Circumstance under which section 40A(3) is not-applicable
When
income is estimated on gross profit rate, no disallowance can be made - When the income of the assessee was
computed by applying a particular gross profit rate and when no deduction was
allowed in regard to the purchases of the assessee, there would be no need to
look into the provisions of section 40A(3) and rule 6DD(j) - CIT
v. Banwari Lal Banshidhar [1998] 229 ITR 229 (All.).
Contributed by:
Ms. Veenu Bansal(Pursuing CA Final)
Article With Shiv Jindal & Co.
Under the Guidance of CA. Vikram Jindal, Ludhiana
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