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Payment in excess of Rs. 20000/35000 in cash / cross cheque is disallowed under Section 40A (3) of Income Tax Act

Any payment in excess of Rs 20000/- to any person other than account payee cheque on single day will disallowed as expenditure under the Income tax act and such amount will added back to income of that person. Calculating Business Gain on Presumptive Basis under Section 44AD of the Income Tax Act: Deemed Income

 Condition for disallowance of Payment under Income Tax Act

  1. Payment is made in excess of RS. 20000/35000
  2. To a single person
  3. On a single day
  4. by cash / cross cheque/ bearer cheque/cross bank draft
  5. Then whole payment will be disallowed.
  6. In case of Transportation expenditure limit is 35000 i.e. in case of any other expenditure limit is 20000.

 Exception to above Section: Rule 6DD Allow Expenditure Read Income Tax Challan Correcttion, Rectification of Challan Details

In following cases, even payment in cash / cross cheque and exceeding the specified limit then also expenditure is allowable.Compulsory Audit of Business and Profession under Section 44AB of the Income Tax

  1. Payment is made to RBI/ any bank/ govt.
  2. Payment is made to cottage industries which run s without aid of power
  3. Payment is made in a village/town where bank facility is not available
  4. Payment is required to be made on a day on which banks were closed
  5. Payment is made directly to the grower of agriculture products or to poultry, dairy, horticulture, pisci culture
  6. Any capital expenditure
  7. Payment is made to an agent who is required to make payment for goods, etc. on behalf of such person
  8. Payment is made to an authorized money exchanger who is engaged in the business of conversion of foreign currency
  9. VRS/ gratuity, etc. retirement benefits if paid to an employee whose taxable salary in the previous year just preceding the year of retirement is <= Rs.50000 i.e. lower paid employee.

Reference: Section 40A (3) of the Income Tax Act 1961: Expenses or payments not deductible in certain circumstances List of Income Taxable as Profits and Gains of Business or Profession

40A(3) Where the 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, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure.

(3A) 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, 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 twenty thousand rupees:How to Claim Deduction for Interest Expenses from Business Income under Section 36(1)(iii)

Provided 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 sub-section 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 twenty thousand rupees, 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 :How to Claim Deduction for Payment made to relatives as Business Expenditure under section 40A (2) of Income Tax Act

Provided further that in the case of payment made for plying, hiring or leasing goods carriages, the provisions of sub-sections (3) and (3A) shall have effect as if for the words “twenty thousand rupees”, the words “thirty-five thousand rupees” had been substituted.]

(4) Notwithstanding anything contained in any other law for the time being in force or in any contract, where any payment in respect of any expenditure has to be made by an account payee cheque drawn on a bank or account payee bank draft] in order that such expenditure may not be disallowed as a deduction under sub-section (3), then the payment may be made by such cheque or draft; and where the payment is so made or tendered, no person shall be allowed to raise, in any suit or other proceeding, a plea based on the ground that the payment was not made or tendered in cash or in any other manner.

Disallowance of Certain Expenses if TDS has not been Deducted or if Deducted then not Deposited to Government within time 

(1) Notwithstanding anything to the contrary contained in this Act, where the amount received during a previous year by any trade, professional or similar association [(other than an association or institution referred to in clause (23A) of section 10)] from its members, whether by way of subscription or otherwise (not being remuneration received for rendering any specific services to such members) falls short of the expenditure incurred by such association during that previous year (not being expenditure deductible in computing the income under any other provision of this Act and not being in the nature of capital expenditure) solely for the purposes of protection or advancement of the common interests of its members, the amount so fallen short (hereinafter referred to as deficiency) shall, subject to the provisions of this section, be allowed as a deduction in computing the income of the association assessable for the relevant assessment year under the head “Profits and gains of business or profession” and if there is no income assessable under that head or the deficiency allowable exceeds such income, the whole or the balance of the deficiency, as the case may be, shall be allowed as a deduction in computing the income of the association assessable for the relevant assessment year under any other head.

(2) In computing the income of the association for the relevant assessment year under sub-section (1), effect shall first be given to any other provision of this Act under which any allowance or loss in respect of any earlier assessment year is carried forward and set off against the income for the relevant assessment year.

(3) The amount of deficiency to be allowed as a deduction under this section shall in no case exceed one-half of the total income of the association as computed before making any allowance under this section.

(4) This section applies only to that trade, professional or similar association the income of which or any part thereof is not distributed to its members except as grants to any association or institution affiliated to it.

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