Expenditure in excess of Rs.20,000/- made otherwise than crossed demand draft or crossed cheque

Amounts not deductible in respect of expenditure exceeding Rs. 20,000† [Sec. 40A(3)] * - If an assessee incurs any expenditure in respect of which payment in excess of Rs. 20,000 is made otherwise than by a crossed cheque or crossed bank draft, 20 per cent of such expenditure will be disallowed as expenditure. Rule 6DD, however, prescribes the cases and circumstances in which payment in excess of Rs. 20,000 may be made otherwise than by a crossed cheque or crossed bank draft without attracting the disallowance. Even payment made for purchase of goods falls within the expression “expenditure” occurring in this section.

49.3-1 EXCEPTIONS - Rule 6DD prescribes the following circumstances under which no disallowance will be made of the expenditure even if the payment exceeding Rs. 20,000 is made otherwise than by a crossed cheque or demand draft :

Payment made to banking and other credit institutions, such as the Reserve Bank of India commercial banks in the public and private sectors, co-operative banks or land mortgage, banks, primary credit/agricultural credit societies, Life Insurance Corporation of India, Industrial Finance Corporation of India, Industrial Development Bank of India, State Financial Corporations, etc. [rule 6DD(a)].

Payment made to Government (both Central and State Governments), if under the rules framed by it, such payment is required to be made in legal tender, such as a payment of direct taxes, customs duty, excise, railway freight, sales tax, etc. [rule 6DD(b)].

Payment required to be made in cash under a contract entered into before April 1, 1969 [rule 6DD(c)].

Payment through the banking system, e.g., letters of credit, mail or telegraphic transfer, book adjustment in the same bank or between one bank and another and bills of exchange including hundies made payable to a bank [rule 6DD(d)].

Payment made by book adjustment by an assessee in the account of the payee against money due to the assessee for any goods supplied or services rendered by him to the payee [rule 6DD(e)].

Payment to a cultivator, grower or producer in respect of the purchase of agricultural or forest produce or product of animal husbandry (including hides and skins) or dairy or poultry farming or fish or fish products or products of horticulture or apiculture (even if these products have been subjected to some processing provided the processing has been done by the cultivator, grower or the producer of the product) [rule 6DD(f)].

Payment made to a producer in respect of the purchase of the products manufactured or processed without the aid of power in a cottage industry [rule 6DD(g)].

Payment made to a person who ordinarily resides or carries on business in a village not served by any bank [rule 6DD(h)], [if, however, the payment is made in a town having banking facilities to a villager whose village has no bank, the exemption from the operation of section 40A(3) will not be available—Press Note dated May 8, 1969].

Payment of terminal benefits, such as gratuity, retrenchment compensation, etc., in respect of employees drawing salary not exceeding Rs. 7,500 per year in the year of retirement, etc., or in the preceding year [rule 6DD(i)].

Payment made by an assessee by way of salary to his employee after deducting the income-tax from salary in accordance with the provisions of section 192 and when such employee —

a]  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 ; and
b] does not maintain any account in any bank at such place or ship [rule 6DD(j)]1.

Payment required to be made on a day on which the banks were closed either on account of holiday or strike [rule 6DD(k)].

Payment made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person [rule 6DD(l)].

49.3-2 SCOPE OF SECTION 40A(3) -The following points should be considered to understand the scope of section 40A(3)—

1. If an assessee makes payments at different times during the day and he has no idea that he has to pay to the same person on more than one occasion, he cannot be subjected to the statutory provision of section 40A(3), unless any one payment exceeds Rs. 20,000.

2. If an assessee makes payment of two different bills (none of them exceeds Rs. 20,000) at the same time in cash or by bearer cheque, section 40A(3) is not applicable even if the aggregate payment is more than Rs. 20,000. This is because of the fact that section 40A(3) is applicable only in respect of an “expenditure” which is excess of Rs. 20,000. In other words unless the amount of the bill and the amount payment exceed Rs. 20,000, section 40A(3) is not applicable.

3. Where the assessee made payment over Rs. 20,000 at a time, partly by crossed cheque and partly in cash to some parties but the payment in cash alone at one time did not exceed Rs. 20,000, section 40A(3) is not attracted.

4. Provision of section 40A(3) does not apply in respect of an expenditure which is not to be claimed as deduction under sections 30 to 37. For instance, if an assessee gives donation in cash, section 40A(3) is not applicable, since donation is not deductible under sections 30 to 37.

5. Section 40A(3) is not applicable if an assessee purchases a capital asset.