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Disallowances under Section 40A (3) and Rule 6DD

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A business has numerous expenses being incurred in one day. It may range from procuring raw materials, payment of services, repairs, wages, etc. Since it is impossible to draw a comprehensive list of such expenditures or prove their genuineness, a step was taken to initiate Section 40A (3) under the Income Tax Act.

About Section 40A
Section 40A (3) and Section 40A (2) are anti-tax evasion measures that disallow actual expenses if they do not comply with the Income Tax Act guidelines. However, both these sections are overriding. Therefore, if any expenditure or allowance comes under the purview of any other section, their treatment should only be done as per the provisions in these sections. 

Section 40A (3): Disallowance of expenses
Section 40A (3) (a) of the Income Tax Act provides any expense incurred regarding which payment is made in a sum exceeding Rs. 10,000 in a single day otherwise than by an account payee cheque drawn on a bank or an account payee bank draft or through an electronic clearing system, shall not be permitted as a deduction. 

Section 40A (3) (b) also provides for deeming a remittance as profits and gains of a business or profession if the expense is incurred in a specific year. Still, the payment is made in any subsequent year in a sum exceeding Rs. 10,000 otherwise than by an account payee cheque or by an account payee bank draft or through an account clearing system.

Rule 6DD – Cases where disallowances specified under Section 40A (3) is not applicable
No disallowance under subsection (3) of Section 40A should be made even if the expenditures exceeds Rs 10,000 and the specified payment made is otherwise than by account payee cheque or account payee bank draft or use of electronic clearing system or through any other mode prescribed. Below are the specified payments to specified persons:

  • Where the remittance is made to:-
    1. Reserve Bank of India or any banking company
    2. Any co-operative Bank or Land Mortgage Bank
    3. Any primary agricultural credit society or any immediate credit society
    4. Life Insurance Corporation of India
  • Where the remittance is made by:-
    1. Any letter of credit arrangements through a bank
    2. A mail or telegraphic transfer through a bank
    3. A book adjustment from any account in a bank to any other account in that or any other bank
    4. A bill of exchange made only payable to a bank
    5. The use of an electronic clearing system through a bank account
    6. A credit card
    7. A debit card
  • The remittance is made to the government and, under the rules framed by it, such payment must be made in legal tender.
  • The remittance is made by way of adjustment against the sum of any liability incurred by the payee for any stock supplied or services rendered by the assessee to such payee.
  • Where the remittance is made for the procurement of the products produced or processed without the aid of power in a cottage industry to the producer of such products.
  • Where the remittance is made to the cultivator, grower or producer for the procurement of the following:
    1. Agricultural or forest produce; or
    2. Produce of animal husbandry (including livestock, meat, hides and skins)
    3. Fish or fish products; or
    4. Products of horticulture of apiculture
  • Where any remittance is made to an employee of the assessee or the heir of any such employee, on or in connection with the retirement, retrenchment, resignation, discharge or death of such employee, on account of gratuity, retrenchment compensation or similar terminal benefit and the aggregate of such sums payable to the employee or his heir does not exceed Rs 50,000.
  • Where the remittance is made by an assessee by way of salary to his employee after deducting the income-tax from salary under the provisions of Section 192 of the Act, and when such personnel:-
    1. Is temporarily posted for a continuous period of 15 days or more in a place other than his usual site of duty or on a ship; and
    2. Does not keep up any account in any bank at such place or ship
  • Where an individual makes the payment to his agent, who is needed to make remittance in cash for goods or services on behalf of such individual.
  • Where the payment is made by an authorized dealer or a money changer against the procurement of foreign currency or travellers’ cheque in the ordinary course of business.
  • Where the remittance is made in a village or city, which on the date of such remittance is served by any bank, to any individual who usually lives in or is carrying on any occupation, profession or vocation in any such village or town.
  • Where the payment was needed to be made on a day on which the banks were shut either on account of day off or strike. It is pertinent to consider here that such payment would be permitted as a cost only when it has been confirmed that the payment was needed to be made on the day the bank was shut, and the payment could not have been made on a working day.

At AJSH, we assist our clients in dealing with various income tax compliances, including income tax assessments, ITR filings, tax advisory and other related services by providing them adequate support and guidance from our end. If you have any questions or wish to know more about Section 40A (3) and Rule 6DD, kindly contact us.

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