As per Section 40A(3) of Income Tax Act 1961
Expenditure made and paid in Cash in Current Year
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, or
use of electronic clearing system through a bank account or
through such other electronic mode as may be prescribed
exceeds ten thousand rupees, no deduction shall be allowed in respect of such expenditure.
As per Section 40A(3A) of Income Tax Act 1961
Expenditure made but paid in Cash in subsequent Years
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, or
use of electronic clearing system through a bank account or
through such other electronic mode as may be prescribed
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 ten thousand rupees.
However, Rule 6DD Defines the circumstances where Payment Or AggregateOfPayments Exceeding Ten Thousand Rupees May Be Made To A Person In A Day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as prescribed in rule 6ABBA.
A. Where payment is made to
1. the Reserve Bank of India or any banking company as defined in clause(c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);
2. the State Bank of India or any subsidiary bank as defined in section 2 of the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959);
3. any co-operative bank or land mortgage bank;
4.any primary agricultural credit society or any primary credit society section 56 of the Banking
Regulation Act, 1949 (10 of 1949);
5.the Life Insurance Corporation of India established under section 3 of the Life Insurance
Corporation Act, 1956 (31 of 1956);
B. Where the payment is made to the Government and, under the rules framed by it, such payment is required to be made in legal tender;
C. where the payment is made by—
1. any letter of credit arrangements through a bank;
2. mail or telegraphic transfer through 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 payable only to a bank;
D., 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;
E. where the payment is made for the purchase of
1. agricultural or forest produce.
2. the produce of animal husbandry(including livestock, meat,hides and skins) or dairy or poultry
3. fish or fish products
4. the products of horticulture apiculture
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