Amendment to the provisions of section 40A(3) of the Income-tax Act, Read more: BUDGET CHANGES -MISSED BY U -40A(3) CASH PAYMENT EXCEEDING 20000 RS.

Section 40A(3)(a) of the Income-tax Act, 1961 provides that any expenditure incurred in respect of which payment is made in a sum exceeding Rs.20,000/- otherwise than by an account payee cheque drawn on a bank or by an account payee bank draft, shall not be allowed as a deduction.
Section 40A(3)(b) also provides for deeming a payment as profits and gains of business or profession if the expenditure is incurred in a particular year but the payment is made in any subsequent year in a sum exceeding Rs. 20,000/- otherwise than by an account payee cheque or by an account payee bank draft.
The provisions of this section are subject to exceptions as provided in Rule 6DD of the Income-tax Rules, 1962.
Section 40A(3) is an anti tax-evasion measure. By requiring payments to be made by an account payee instrument, it is possible to verify the genuineness of the transaction thereby mitigating the risk of evasion.
Person are splitting a particular high value payment to a person into several cash payments, each below Rs.20,000/-. This splitting is also resorted to for payments made in the course of a single day.
Courts have also held that the statutory limit in section 40A(3) applies to payment made to a party at one time and not to the aggregate of the payments made to a party in the course of the day as recorded in the cash book.
According to the judicial opinion, the words used are ‘in a sum’, i.e., single sum.Therefore, irrespective of any number of transactions, where the amount does not exceed the prescribed amount in each transaction,the rigours of section 40A(3) will not apply.

To overcome the splitting of payments to the same person made during a day as referred above and to increase the efficacy of the provision, the amendment seeks to substitute the present provision to provide that where 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, exceeds twenty thousand rupees, the disallowance of such expenditure shall be made under the proposed sub-section (3) of section 40A or the payment shall be deemed to be the profits and gains of business or profession under the proposed sub-section (3A) of section 40A,as the case may be.

To illustrate with an example, let us assume a taxpayer has incurred an expenditure of Rs 40,000/-. The taxpayer makes separate payments of Rs 15,000/-, Rs 16,000/- and Rs 9,000/- all by cash, to the person concerned in a single day. The aggregate amount of payment made to a person in a day, in this case, is Rs 40,000/-. Since, the aggregate payment by cash exceeds Rs 20,000/-,Rs. 40,000/- will not be allowed as a deduction in computing the total income of the taxpayer in accordance with the proposed amendment.


Read more: BUDGET CHANGES -MISSED BY U -40A(3) CASH PAYMENT EXCEEDING 20000 RS. | SIMPLE TAX INDIA-ITR FORM -TDS RATE 11-12

Internal Sources of Finance

Definition

These are sources of finance that come from the business' assets or activities.
Retained Profit

If the business had a successful trading year and made a profit after paying all its costs, it could use some of that profit to finance future activities .

This can be a very useful source of long term finance, provided the business is generating profit (see section on profit & loss accounts).

Sale of Assets

The business can finance new activities or pay-off debts by selling its assets such as property, fixtures & fittings, machinery, vehicles etc.

It is often used as a short term source of finance (e.g. selling a vehicle to pay debts) but could provide more longer term finance if the assets being sold are very valuable (e.g. land or buildings)

If a business wants to use its assets, it may consider sale and lease-back where it may sell its assets and then rent or hire it from the business that now owns the assets. It may mean paying more money in the long run but it can provide cash in the short term to avoid a crisis.

Reducing Stocks

Stock is a type of asset (see balance sheet work for more on assets) and can be sold to raise finance. Stock includes the business' holdings of raw materials (inputs), semi-finished products and also finished products that it has not yet sold.

Businesses will usually hold some stock. It can be useful if there is an unexpected increase in demand from customers. Stock levels tend to rise during economic slowdowns or recessions as goods are not sold and 'pile-up' instead.

It is not usually a source of large amounts of finance - if a business has very large stock piles, it might mean that nobody wants to buy the product and reducing stocks will therefore be hard. It is often considered to be a short term source.

Trade Credit

Unlike you and me, a business does not normally pay for things before it takes possession of them. Instead, it will usually place an order for supplies / inputs and will pay after receiving the items. It is good practice to pay quickly (often within one month) as this will help the business develop a good relationship with its suppliers.

This source of finance appears on the balance sheet as trade credit. This method of deferring (delaying) payment to a future date is a form of very short term borrowing and helps with the problems of the cash cycle identified in the work on liquidity.

Internal Sources of Finance

Definition

These are sources of finance that come from the business' assets or activities.
Retained Profit

If the business had a successful trading year and made a profit after paying all its costs, it could use some of that profit to finance future activities .

This can be a very useful source of long term finance, provided the business is generating profit (see section on profit & loss accounts).

Sale of Assets

The business can finance new activities or pay-off debts by selling its assets such as property, fixtures & fittings, machinery, vehicles etc.

It is often used as a short term source of finance (e.g. selling a vehicle to pay debts) but could provide more longer term finance if the assets being sold are very valuable (e.g. land or buildings)

If a business wants to use its assets, it may consider sale and lease-back where it may sell its assets and then rent or hire it from the business that now owns the assets. It may mean paying more money in the long run but it can provide cash in the short term to avoid a crisis.

Reducing Stocks

Stock is a type of asset (see balance sheet work for more on assets) and can be sold to raise finance. Stock includes the business' holdings of raw materials (inputs), semi-finished products and also finished products that it has not yet sold.

Businesses will usually hold some stock. It can be useful if there is an unexpected increase in demand from customers. Stock levels tend to rise during economic slowdowns or recessions as goods are not sold and 'pile-up' instead.

It is not usually a source of large amounts of finance - if a business has very large stock piles, it might mean that nobody wants to buy the product and reducing stocks will therefore be hard. It is often considered to be a short term source.

Trade Credit

Unlike you and me, a business does not normally pay for things before it takes possession of them. Instead, it will usually place an order for supplies / inputs and will pay after receiving the items. It is good practice to pay quickly (often within one month) as this will help the business develop a good relationship with its suppliers.

This source of finance appears on the balance sheet as trade credit. This method of deferring (delaying) payment to a future date is a form of very short term borrowing and helps with the problems of the cash cycle identified in the work on liquidity.