Business expenditure paid in cash to a person in a single day is allowed up to Rs. 20, 000. If you make different payments at a different time in a single day which aggregate to more than Rs. 20, 000 then the entire expenditure will be disallowed as business expenditure.
In the case of plying, hiring or leasing goods carriage business the limit of cash expenditure under section 40A(3) is Rs. 35, 000.
To claim expenses more than Rs. 20, 000 or Rs. 35, 000 as business expenditure, you need to pay it in Account Payee cheque or Account Payee bank draft. Even payment by using credit card, debit card, NEFT, RTGS and bill of exchange are allowed under section 40a(3) of income tax act.
This provision will not be applicable for capital expenditure i.e. you can pay it in cash if such expenses are more than Rs. 20, 000/Rs. 35, 000. You can claim depreciation for your machinery, plant, building if you have paid it in cash which exceeded Rs. 20, 000 or Rs. 35, 000 limits.
Relevant points to Section 40A (3)
- If you are making payment of Rs. 20, 000 or less than Rs. 20, 000, in a single day to a person for an invoice or expenditure which is more than Rs. 20, 000 then the above provisions as stated under section 40A(3) will not be applicable. You can make payment in cash for expenses of more than Rs. 20, 000 but that cash payment should not exceed Rs. 20, 000 per day per person. If you have a business expenditure of Rs. 80, 000 then you can make cash payment for such expenditure in 4 different days in cash of Rs. 20, 000 each.
- If you have received different bills amounting to more than Rs. 20, 000 from a single party and wants to make such payment in a single day then such payment will be disallowed as the payment exceeded Rs. 20, 000 in a single day to a single person.
Exception to the above provisions of Business Expenditure– Rule 6DD as applicable to section 40A(3)
Following exceptions are provided in the act to the above rules. That means in following cases you can pay your business expenditure in cash even though it exceeded the above limit of Rs. 20, 000 or Rs. 35, 000;
Where the payment is made to—
- the Reserve Bank of India or any banking company;
- the State Bank of India or any subsidiary bank of SBI;
- any co-operative bank or land mortgage bank ;
- any primary agricultural credit society or any primary credit society;
- the Life Insurance Corporation of India;
- the Industrial Finance Corporation of India;
- the Industrial Credit and Investment Corporation of India Ltd. ;
- the Industrial Development Bank of India;
- the Unit Trust of India;
- the Madras Industrial Investment Corporation Ltd., Madras ;
- the Andhra Pradesh Industrial Development Corporation Ltd., Hyderabad ;
- the Kerala State Industrial Development Corporation Ltd., Trivandrum ;
- the State Industrial and Investment Corporation of Maharashtra Ltd., Bombay ;
- the Punjab State Industrial Development Corporation Ltd., Chandigarh ;
- the National Industrial Development Corporation Ltd., New Delhi ;
- the Mysore State Industrial Investment and Development Corporation Ltd., Bangalore ;
- the Haryana State Industrial Development Corporation Ltd., Chandigarh ;
- any State Financial Corporation established under section 3 of the State Financial Corporations Act, 1951;
Where the payment is made to Government and, under the rules framed by it, such payment is required to be made in legal tender (cash);
Where under any contract entered into by the assessee before the 1st day of April, 1969, the payment is required to be made in legal tender (cash);
Where the payment is made by
- any letter of credit arrangements through a bank;
- a mail or telegraphic transfer through a bank ;
- a book adjustment from any account in a bank to any other account in that or any other bank
- a bill of exchange made payable only to a bank.
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
Where the payment is made to the cultivator, grower or producer of such articles, produce or products for the purchase of-
- agricultural or forest produce; or
- the produce of animal husbandry (including hides and skins) or dairy or poultry farming; or
- fish or fish products; or
- the products of horticulture or apiculture
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;
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;
Where any payment by way of gratuity, retrenchment compensation or similar terminal benefit, is made to an employee of the assessee or the heirs of any such employee on or in connection with the retrenchment, resignation, discharge or death of such employee, if the income chargeable under the head “Salaries” of the employee in respect of the financial year in which such retirement, resignation, discharge or death took place or the immediately preceding financial year did not exceed Rs. 7,500
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 Income-tax Act, 1961, and when such employee—
- 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
- does not maintain any account in any bank at such place or ship;
Where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike;
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;
Where the payment is made by an authorised dealer or a money changer against purchase of foreign currency or travellers cheques in the normal course of his business; (Explanation: For the purpose of this clause, the expression “authorised dealer” or “money changer” means a person authorised as an authorised dealer or money changer to deal in foreign currency or foreign exchange under any law for the time being in force).