Best Section 40A (3) of income tax act

Section 40A (3) of income tax act Section 40A(3) of the Income Tax Act, introduced as an amendment in 2009, imposes restrictions on cash payments or receipts exceeding a specified threshold.

Section 40A (3) of income tax act This section disallows tax deductions for expenses exceeding Rs. 10,000 made in cash on a single day. The daily limit applies to all modes of transactions except bank drafts, account payee cheques, electronic payment systems, and prescribed electronic modes.

Section 40A (3) of income tax act Furthermore, under Section 40A(3), the ceiling is raised to Rs. 35,000 for cash payments made to transporters for hiring, leasing, or operating goods vehicles. Commission agents are also exempt from these provisions regarding goods received for commissions or consignments, as such expenses cannot be deducted by them.

Section 40A (3) of income tax act Payments made in violation of these provisions will not be recognized as business expenses. If a deduction claim is filed successfully, it will be treated under the head ‘profits and gains of business or profession,’ and the tax liability will arise in the preceding year.


An amendment to Section 40A(3) of the Income Tax Act

The earlier version of segment 40a (three) of the income tax act legitimate from 1/04/2009 positioned restrictions on an assessee who made an expenditure over rs.20,000 in a unmarried day via bills made thru any means aside from an account payee financial institution draft or cheque. It disallowed such individuals from claiming deductions on such prices. 

Furthermore, the section states that within the occasion that a man or woman claims tax deductions on these bills, they would be deemed to be the individual’s enterprise profits for the previous 12 months. 

An amendment was made to the provisions of section 40a (3) that decreased the coins restriction for enterprise transactions from rs.20,000 to rs.10,000 on an unmarried day. The identical limit was applicable for deeming a payment as earnings from enterprise/career. Moreover, using the digital clearing machine changed into the desired mode of payments. 

Exceptions to segment 40a (3) underneath rule 6DD 

The above disallowance does not occur while a taxpayer makes payments or a mixture of bills in sure conditions. Those circumstances and cases are described with the aid of rule 6dd which turned into brought through notification no. So2431(e) on 10/10/2008. The subsequent is a list of exceptions to section 40a (3) of the profits tax act:

Bills to the government

Disallowances aren’t made whilst you make bills to the union authorities or any country authorities thru prison smooth. This exception applies to bills like income tax, gst, customs, excise obligation, freight fees, railway bookings, and many others. 

Bills to banks and different credit score institutions

Section 40A (3) of income tax act You could make payments in non-unique modes (cash or bearer cheques) above the rs.10,000 limit to the reserve financial institution of India, state bank of india and any banking employer. Furthermore, you can pay in cash with limits to any cooperative bank, primary credit society, land mortgage bank, number one agricultural credit society or lic. 

 Bills made to an approved supplier

Exceptions underneath rule 6dd additionally observe approved dealers and cash changers, human beings authorised by law to offer foreign exchange services. Section 40A (3) of income tax act This exception most effectively applies to the purchase of guests’ cheques and overseas currencies from such sellers. 

Payments to low-paid personnel

The restrictions 40a (three) no longer follow employers for paying retrenchment reimbursement, gratuity or other terminal benefits to personnel or their heirs. But, there are  situations. First of all, the sum or combination sum must now not be over rs.50,000. Secondly, it must be paid upon retirement, resignation, discharge or death of a worker. 

Payments of salary in far flung places

This exception applies to employers paying salaries to employees published briefly at any location other than his/her everyday vicinity of duty or on a delivery for 15 days or greater. Section 40A (3) of income tax act The employee has to no longer have a financial institution account that is accessible in such an area.

Payments thru sure alternatives

Exceptions to disallowances below section 40a (3) of the earnings tax act observe to payments made via the following modes:

Mail or telegraphic transfers from one financial institution to another

Letter of credit score issued by banks

Invoice of trade payable to a financial institution

E book adjustment from one financial institution account to some other

Bills thru credit cards and debit playing cards

For this clause, Section 40A (3) of income tax act the time period ‘financial institution’ refers to any bank, banking enterprise or banking society and any financial institution outside India described via the banking law act, 1949. 

Bills through e-book adjustment

Disallowances are exempted for payments made via adjusting the client’s legal responsibility against goods/services rendered through the seller in the past. 

Purchase of animal/agricultural produce

Restrictions on payments beneath section 40a (3) do not now apply when you purchase any produce from chicken farming, animal husbandry, dairy farming, apiculture, horticulture or fisheries. However, the fee must be made to the cultivator, grower or producer of those items. The exception is no longer observed to third parties selling these products.  


Buy of animals via a butcher

The rs.10,000 disallowance u.S.40a (three) does not observe to meat producers or butchers. Such folks ought to be engaged inside the enterprise of slaughtering animals to sell uncooked meat or animal carcasses to investors, shops or meat processing factories. The individual should claim his/her career and get hold of certification from a veterinary physician. 

Buy of cottage industry produce: Section 40A (3) of income tax act

Payments can be made in coins to purchase products from manufacturers who no longer use electricity for manufacturing or processing.

Summary of the cases illustrating the application of Section 40A(3) of the Income Tax Act:

Case 1: CIT Vs. K.K.S K. Leather Processor P Ltd [2007] 292 ITR 669 (Mad)

Section 40A (3) of income tax act The court ruled that exceptions could be made for payments made on bank holidays or during strikes. Such payments made through non-specified modes wouldn’t fall under Section 40A(3)’s provisions in such circumstances.

Case 2: Attar Singh Gurmukh Singh Vs. ITO, 191 ITR 667 (SC)

The Supreme Court held that Section 40A(3) shouldn’t disregard the exceptions provided by Rule 6DD. Section 40A (3) of income tax act It emphasised that the section wasn’t meant to restrict business activities and taxpayers could demonstrate impracticality in adhering to specified modes of payment.

Case 3: Harshila Chordia v. ITO [2008] 298 ITR 349 (Rail)

Section 40A (3) of income tax act The Rajasthan High Court determined that Rule 6DD’s exceptions weren’t exhaustive. Therefore, Section 40A(3) should be interpreted liberally, allowing for additional exceptions beyond those explicitly stated in the rule.

Case 4: A. Daga Royal Arts Vs. ITO

Section 40A (3) of income tax act The court observed that despite new amendments to Rule 6DD, the consideration of expediency, as established by previous judgments, remained valid. It highlighted the insufficiency of Rule 6DD and emphasised the need for authorities to provide mechanisms for exceptions in unavoidable circumstances.

Difference between Section 40A (3) and Section 40A (3a)

Section 40A(3) of the Income Tax Act applies to any taxpayer who makes payments exceeding Rs.10,000 to a single person in a single day using any mode other than an account payee cheque, bank draft, or electronic clearing system. In such cases, Section 40A (3) of income tax act he expenses incurred are disallowed for tax deduction purposes.

Section 40A (3) of income tax act Conversely, Section 40A(3A) addresses situations where an expense is booked in one year but the payment is made in the subsequent year. If such a payment exceeds Rs.10,000 in a single day to a single person via a mode other than an account payee cheque, bank draft, or ECS, the expense is treated as business or professional profit in the subsequent year and is subject to income tax.

In essence, Section 40A(3) aims to restrict tax deductions on cash payments exceeding Rs.10,000 in a day to a single entity, particularly when the payment method cannot be easily tracked by tax authorities. Section 40A (3) of income tax act This provision is intended to combat tax evasion and the illicit circulation of unaccounted funds in the Indian economy.




Section 40A (3) of income tax act In conclusion, Sections 40A(3) and 40A(3A) of the Income Tax Act serve to regulate and monitor cash transactions exceeding Rs.10,000 made to a single entity in a single day. These provisions aim to prevent tax evasion and the use of unaccounted funds by disallowing tax deductions for such expenses or treating them as business profits liable for taxation. Section 40A (3) of income tax act By imposing restrictions on payment modes and promoting transparency in financial transactions, these sections contribute to the government’s efforts to combat black money circulation and ensure tax compliance among taxpayers.



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