PAYMENTS EXCEEDING Rs 10,000 TO BE MADE BY ACCOUNT PAYEE CHEQUE/DRAFT
Section 40 A (3)PAYMENTS EXCEEDING Rs 10,000 TO BE MADE BY ACCOUNT PAYEE CHEQUE/DRAFT
Applicability of Sectior 40A(3)
• Section 40A(3) applies where all the following conditions are satisfied:
❑ The assessee has incurred any revenue expenditure; and
❑ Payment or aggregate of payments made in a single day to a single person in respect of such expenditure exceeds Rs 10,000.
• If both the conditions specified above are fulfilled and payment has been made otherwise than by way of account payee cheque or account payee draft or use of electronic clearing system ('ECS') through a bank account, the amount of payment shall be disallowed (ie not allowed to be deducted).
• In other words, this section requires that payment to a single person in a single day for expenditure incurred should be made by an account payee cheque, account payee draft or by using ECS through a bank account if the payment amount in a single day exceeds Rs 10,000.
• Where the payment is being made to a transport operator carrying on the business of plying, hiring or leasing goods carriages, the limit of Rs 10,000 shall be taken as Rs 35,000.
ANY-EXPENSE (+) SINGLE PERSON (+) TOTAL PAYMENT IN SINGLE DAY EXCEEDS Rs 10,000
Payment Exceeding Rs 10,000 Made Aft_ Claiming Deduction
• This special provision applies where all the following conditions are satisfied:
❑ An expenditure has been allowed as deduction in earlier years on accrual basis;
❑ Payment exceeding Rs 10,000 in respect of such expenditure is made in subsequent years; and
❑ Such payment has been made otherwise than by way of account payee cheque or account payee draft or by using EC5 through a bank account.
• If all the above conditions are fulfilled, the payment so made shall be deemed be to the PGBP income of the assessee for the year in which the payment has been so made.
Mr X has claimed a deduction of Rs 25,000 for rent expenses during PY 2016-17 on accrual basis. Payment for this expenditure was made on 01/05/2017 in cash. The amount of Rs 25,000 shall be deemed to be the PGBP income of Mr X for PY 2017-18.
Non applicability of Section 40A(3) in Certain Situation -Rules of 6DD the Income Tax Rules, 1962
Section 40A(3) is not applicable in the following situations even though payment exceeding Rs 10,000 is made otherwise than by way of account payee cheque or account payee draft or by using ECS. These situations are given under Rule 6DD:
• Where payment is made to the Reserve Bank of India, State Bank of India or other banking institutions, LIC, UTI, Central Government, State Government, etc.
• Where payment is made in a village or a town which does not have any bank on the date on which the payment is made and the person to whom payment is made ordinarily resides at such place or has his business/profession at such place.
• Where payment is made by transferring funds from one bank account to the other or payment is being made by any credit card/debit card/letter of credit, etc.
• Where payment is made by way of account settlement (eg, Mr B owes Mr A, an amount of Rs 50,000. Further Mr A has to make a payment of Rs 30,000 to Mr B for purchase of raw material. Mr A adjusted the payment of Rs 30,000 against the receivable appearing in the books of accounts).
• Where the payment is to be made on a particular day but banks are closed on that day because of holiday or strike.
• Where products have been manufactured in a cottage industry without the aid or power and the payment is being made to the producer of such products.
• Where the payment is made for the purchase of
❑ agricultural or forest produce; or
❑ the produce of animal husbandry or dairy or poultry farming; or
❑ fish or fish products; or
❑ the products of horticulture or apiculture,
to the cultivator, grower or producer of such articles, produce or products.
• Where payment is made to an employee on his retirement or payment is made to his family member after the employee's death and payment is in connection with gratuity or any other retirement benefit and the payment amount does not exceed Rs 50,000.
• Any other situation given under Rule 6DD.
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