ILLUSTRATIONS ON PROFITS AND GAINS FROM BUSINESS AND PROFESSION 

      

SECTION 40A (3): AMOUNTS NOT DEDUCTIBLE IN RESPECT OF EXPENDITURE EXCEEDING RS. 20,000/-

Determine the amount of disallowance attracted by C Ltd. on the following payments made during the Previous Year 2009-10 (Assessment Year 2010-11):-

  1. Payment made to Mr. X a creditor amounting to Rs. 27,000/- through cash on May 12th’ 09.

  2.  Payment made for purchases of Goods to ABC Ltd. in the following fashion:

1.    Rs. 55,000/- through Crossed Cheque on 10th June’ 09;

2.    Rs. 21,000/- through Bearer Cheque on 14th June’ 09;

3.    Rs. 19,990/- Cash paid on 22nd July’ 09;

4.    Rs. 20,000/- Cash paid on 23rd July’ 09;

  1. Separate bills for purchase of Office Stationery and Printer Cartridge refilling amounting to Rs. 16,000/- and Rs. 4,100/- respectively paid to ‘V Enterprises’ through cash.

  2. Salary paid to Director Rs. 47,700/- (Gross Salary Rs. 50,000) through a Bearer Cheque.

  3. Donation paid to Gyanganga Charitable trust amounting to Rs. 50,000/-.

 

SOLUTION:

As per provisions of Section 40A (3) relevant to the Assessment year 2010-11, any payment made exceeding Rs. 20,000/- at a time either in cash or through a bearer cheque  is disallowed to the extent of 100% of such expenditure incurred. Keeping in mind these provisions following are the consequences of above situations in case of C Ltd.:-

  1.  Since the payment is in excess of Rs. 20,000/- in cash, the whole expenditure of Rs. 27,000/- will get disallowed.

  2. Following are the disallowances/ allowances attracted by C Ltd.:-

  1. Allowable since payment made by crossed cheque.

  2. Whole expenditure of Rs. 21,000 disallowed since payment entire payment made through a bearer cheque.

  3. Allowable expenditure though incurred in cash but is within the applicable limit of Rs. 20,000.

  4. Allowable expenditure since provision says any payment exceeding Rs. 20,000, so in case if the payment would have exceeded Rs. 20,000/- the expenditure had got disallowed in this case.

  1. As per the Scope of Section 40A (3), if an assessee makes a payment of two different bills and none of them exceeds Rs. 20,000/-at the same time on cash / bearer cheque, this section is inapplicable even if the aggregate payment exceeds Rs. 20,000/-, hence expenditure of Rs. 20,100 (16000+4,100) is allowable as a deduction.

  2. Since the payment is in excess of Rs. 20,000/- made through Bearer cheque, the whole expenditure of Rs. 47,700/- will get disallowed.

  3. Provision of Section 40A (3) is not applicable in respect of an expenditure not deductible u/s 30 to 37, hence donation paid to a charitable trust being a non- deductible expenditure (claimable under Section 80G) does not attract any disallowance.