Section 40A(3) of the income tax act says that if the assessee makes any payment or receipt, expect from cross payee cheque or dd or any banking mode, exceeding Rs. 20000 to a single party is disallowed and treated as the personal expenditure or receipt of the assessee.
There are some exemption of the section 40 A (3) in which this expenditure or receipt will be treated as the genuine expenditure or receipts which are as under.
1- Any payment to Reserve Bank of India or any banking company as specified under section 5(c) of the banking regulation act, 1944. Like if assessee deposits cash in the accounts in bank, section 40A (3) does not effect it.
2- Any cooperative or land mortgage bank
3- Any primary agricultural society or any primary credit society under section 56 of banking regulation act 1949.
4- The Life Insurance Corporation of India.
5- Where any payment required to be made in legal tender to the government, no disallowance operates.
These banking activities are also have exemption from section 40A (3) of the income tax act which are as under.
- Any letter of credit arrangement through a bank.
- A mail or telegraphic transfer through a bank.
- A book adjustment from any account to other through a bank.
- A bill of exchange made payable on a bank.
- RTGS, NEFT or any mode of using an electronic clearing system through a bank account.
- Credit card.
- Debit card.
(1) Payment by adjustment of a liability for goods supplied or services rendered: - 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, no disallowance operates.
(2) No disallowance operates where payment is made to cultivator, grower or producer of following purchases.
- Agriculture or forest produces.
- The product of animal husbandry.
- Fish or fish products.
- The products of horticulture or apiculture.
- Produce of animal husbandry would include livestock, meat, hides, and skin. Benefits of rule 6DD are available in this condition.
(3) No disallowance operates where the payment is made to a producer for the purchase of the products manufactured or processed without the aid of power in a cottage industry.
(4) No disallowance operates where any payment is made in a village or town which on the date of such payment is not served by bank to any person who ordinarily resides or is carrying on any business, profession or vocation, in any such village or town.
(5) No disallowance operates where any payment by way of gratuity, retrenchment compensation or similar terminal benefit, is made to an employee of the assessee or his heirs of any such assessee 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 in the immediately preceding financial year did not exceeds Rs. 50000.
(6) Where salary is paid after deducting tax by an employer to an employee, no disallowance operates, after fulfilling such condition.
(a) Such employee is temporarily posted for a continuous period of 15 days or more in a place other than his normal place of duty or on a ship.
(b) He does not maintain any account in any bank at such place or ship.
(7) No disallowance operates where the payment was made on a day on which the banks were closed either on account of holiday or strike.
(8) No disallowance operates where the payment is made by any person to his agent who is required to make payment in cash for goods or services.
(9) Authorized dealers and money changers are required to pay cash against purchase of foreign currency. So no disallowance is made in this respect.
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