Section 40A Certain Expense Disallowed

Section 40A

These provisons are applicable not withstanding anything contained in any other provison of Income tax Act { Section 40A(1) }

Excessive and Unreasonable Expenses paid to Relative etc {Section 40A(2) }

When payments have been made to Certain Persons

And

AO is of the view that expenditure incurred is excessive

Or unreasonable keeping in view Fair Market Value of goods and legitimate needs of business

He can disallow unreasonable portion of such expense

Payments to following persons covered here

1. Relatives of Individual
2. Directors of Company
3. Partners of Partnership firm
4. Members of AOP
5. Individual holding substantial interest in assessee’s business
6. Partnership firm/Company/AOP holding substantial interest in assessee’s business
7. Director/Partner/Member/Relatives  of 2-6 above

Exception

This section not applicable for a specified domestic transaction mentioned in 92BA if such transaction is at arm’s length price. In this case, expense will be allowed

Q 1

Goods purchased from a relative for Rs 200000 whose actual market value was Rs 160000

Section 40A(3)

Cash Payments > 20000 10000

If any expenditure has been paid otherwise then through Account payee cheque

Payment 20000 in a single day

          OR

Aggregate of all transaction in a day   20000 10000

Then the expense is not allowed as deduction

(1) In case payment is made to a goods transport operator (person in the business of plying /Hiring / leasing of goods carriages)  then limit is 35000 per day  

(2) This section is only applicable regarding expenses hence it is not applicable on transaction such as purchase of fixed assets or repayment of loan 

From 1/4/2017
Any payment made in cash against acquisition of asset would be cover by Sec 43(1).
With this introduction, cash payment exceeding Rs 10000/- per day per person would not be allowed as a cost for the purpose of depreciation and neither it would be considered as a cost at the time of sale.  

Earlier
Cash payment more than 20000 is disallowed

Only expenses were covered, not fixed assets

For transporter, limit was 35000

Now
Cash payment more than 10000 is disallowed

For transporter, limit is 35000

Only expenses were covered, not fixed assets

For fixed assets, dep will not be allowed

Exceptions

Following payments are allowed even if amount is more than 10000/350000 and amount not paid by account payee cheque. .

(1) Payment by debit card / credit card / online fund transfer /TT (Telegraphic transfer) / loan from bank / book adjustment by bank from one account to another.

(2) Payment to any bank / RBI /LIC / Agricultural Credit Society

(3) Payment made in legal tender given to government.

(4) Any adjustment made in books (Journal Entry passed in Books adjusting the amount)

(5) Payment for agricultural purpose (horticulture / Apiculture / Pisciculture / Animal Husbandry Covered here) 

(6) Payment, in village of loan which does not have any bank, to a person who lives in such Village or has business in such village .

(7) Payment to cottage industry which is working without power (this can be in village or in city )

(8) During bank holiday or bank strikes payment can be made in cash

(9) Money changer can make payments in cash in exchange of for foreign currency .

(10) Payment to agent when agent has to make payment in cash on behalf of the person.

­­­­(11) Any salary paid to an employee who is

              temporarily posted for 15 days or more in a place other normal place

                 and

             does not maintain any account at such place

           (if a employee is posted on a ship then also covered here)

(12) Any payment paid on retirement/retrenchment/resignation/death of employee if such payment does not exceed Rs.50000. Such amount may be paid to the employee or this heir (on death of employee etc) .

Q2

Suppose Expenses Include

Cash payment made to following persons

Earlier

Now

Note:-On goods transport,deduction not available

Section 40A(4)

If in any contract,payment was to be made in cash and the party actually made payment by account payee cheque etc in compliance with Section 40A(3),then such payment shall be valid.

The other party cant raise objection or plea in any suit/case/proceeding on this ground that payment was to be made in cash but not done so

Section 40A(7) Payment to Gratuity Fund

No deduction for provison for gratuity unless it is towards Approved Gratuity fund.

Hence, Deduction available only for Gratuity fund which is approved .

Section 40 A(9)

No deduction for contribution towards any providend fund or superannuation fund unless it is of nature mentioned in Section 36(1)(iv) and Section 36(1)(v)

Hence, Deduction available only for Recognized Provident or Approved Superannuation fund.