When cash payments can be disallowed for business tax calculation

Expenses can be paid in cash or by using any banking mode. If it’s not specifically disallowed for calculating business tax liability, then you need to check whether the business expenditure is paid in cash or banking mode.

Government has taken initiative to discourage cash payments for businesses.

If aggregate payments in respect of a expenditure is made to a person in a day is in excess of Rs 10000, then to be tax deductible you have to pay it by way of account payee cheque, demand draft or through any other banking mode.

In aboves cases, the whole amount paid in any mode other than a account payee cheque or demand draft or by using any other banking mode shall be disallowed while calculating tax liability. Please note, total cash payment will be disallowed.

This means if aggregate cash payments for expenses per person per day is in excess of Rs 10000, then the whole expenditure paid in cash shall not be allowed as a deduction.

If the payment is made for plying, hiring or leasing goods carriage, then the limit is to be considered as Rs 35000 instead of Rs 10000.

To summarize, under section 40A (3) deduction will be disallowed if following conditions are satisfied:

  • Payment towards an expenditure is made to a person in a day.
  • Amount of such payment or aggregate of the payment in a day exceeds Rs 10000 (Rs 35000 in case of payment made for plying, hiring or leasing goods carriage).
  • Payment is made otherwise than any banking mode.

When expenditure claimed on due basis

When expenses is allowed as businesses expenditure on due basis for a previous year, and the liability is settled in the subsequent period otherwise than by account payee cheque or any other banking mode for a aggregate of payment to a person made in a day exceeds 10,000 rupees, then such payment will be deemed to be business income of the previous year in which payments are made.

This means if any deductions are allowed for expenses in a previous year for which payment is made in subsequent year otherwise than an account payee cheque or bank draft or any other banking mode then it shall be deemed to be income under the head “profits and gains of business or profession” in the year in which such aggregate payments are made to a person in a day is in excess of 10,000 rupees.

Exception to the above rules

However, we have exemption to the above rules. This means in certain cases, if payments are made in excess of 10,000 rupees without an account payee cheque or draft or banking mode, then also expenses are allowed while computing tax liability.

These exceptions are specified in rules 6DD. Here is a list of some of those exceptions where payment is made to:

  • reserve bank of india (RBI), any banking company and life insurance corporation of India (LIC).
  • Government.
  • a party by using bank through letter of credit, mail or telegraphic transfer, book adjustment, a bill of exchange or use of electronic clearing system.
  • a party through a credit or debit card.
  • a party for agricultural or forest produce of animal husbandry or dairy or poultry or fish or fish products or products of horticulture or apiculture, to the cultivator, grower or producer of such product.
  • Producers of goods in cottage industry without the aid of power.
  • To employee or his legal heir for any terminal retirement or gratuity, provided the agreement of the sum payable does not exceed Rs 50,000.
  • a person on a day on which bank were closed due to holiday or strike.
  • an agent who is required to make payment in cash for goods or services on behalf of the principal or assessee

Example 1

XYZ private limited, claims a sum of 85,000 rupees as deduction towards business expenditure for the year ended 31-03-2018. The entire sum of 80,000 rupees has been paid by cash on 14.08.2017 to Mr A.

In view of provisions of section 40A(3), entire expenditure of 80,000 rupees will be disallowed in the financial year 2018-19 (AY 2019-20) while calculating company’s tax liability.

Example 2

Mr X has incurred an expenditure of 60,000 rupees for business purposes. He paid Rs 22,000, Rs 28,000 and Rs 10,000 all by cash in a single day.

The aggregate payment per person per day crosses Rs 10,000. Hence, the entire sum of Rs 60,000 is disallowed while calculating tax liability of the business.

Example 3

Mr X incurred a business expenditure of Rs 65,000 and makes payment of Rs 62,000 by account payee cheque and Rs 3,000 in cash.

In this case, section 40A(3) is not applicable and total amount is allowed as business expenditure.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.