Generally, it is common for the businesses to incur expenditure in Cash, and claim the
expense while filing Income Tax Return. In order to discourage the Cash transactions, the Government of India has amended the Section 40A(3) of Income Tax Act,1961. According to Section 40A(3),
If an assesse incurs expenditure in respect of which the payment or aggregate of payments made to a person in a day otherwise than by an account payee cheque drawn on a bank or by an account payee draft or use of electronic system through bank account exceed Rs.10,000, such expenditure shall not be allowed as deduction.
It means that the cash payments made in excess of Rs.10,000 to a person in a single day
is not allowed as deduction in Income Tax Return.
However, in case of payments made to transport operators, the limit has been
increased to from Rs.10,000 to Rs.35,000.
Cases where Dis-allowances would not be attracted are
- Loan Transactions: Advancing of Loans or repayment of principal does not
come under dis-allowance u/s 40A(3). However, payment of interest exceeding
Rs 10000 in cash will be disallowed in Income Tax
- Payment made by Commission Agents: Payments made by commission
agent for goods received by them for sale on commission or consignment
basis does not come as dis-allowance u/s 40A(3)
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