## Cash Payments — Sec. 40A(3) & 40A(3A)

To discourage cash transactions and promote a digital economy, the Act disallows expenditure paid in cash above specified thresholds.

### The Basic Rule — Sec. 40A(3)

If aggregate payment to a single person in a single day for an expenditure exceeds:

₹10,000 (general limit) → 100% disallowed
₹35,000 (for payment to a transporter — plying, hiring, leasing of goods carriages)

when paid by:

Cash, OR
Bearer cheque, OR
Crossed cheque (note: not account-payee)

→ The entire expenditure is disallowed (100%).

### Sec. 40A(3A) — Subsequent Cash Payment

If an expense was claimed in an earlier year on due/accrual basis (mercantile system), and subsequently paid in cash/bearer/crossed cheque exceeding ₹10,000 in a day:

→ The earlier deduction is reversed by treating it as PGBP income in the year of cash payment.

### Non-Applicability (Exceptions)

The disallowance does NOT apply if payment is made:

1. By A/c Payee Cheque / DD / ECS or any other electronic mode (NEFT, RTGS, debit/credit card, UPI, etc.)

2. To Banks / LIC / Government

3. By book entry (adjustment, no cash flow)

4. In a village/town where no banking facility exists

5. As retirement benefits to employees or their family — up to ₹50,000

6. As salary to employee posted away from normal duty place for 15 days or more

7. To producers/cultivators of agricultural products, forest produce, poultry/dairy/fish products, livestock (NOT to middlemen/traders)

Worked example

### Example 1

Example 1: ABC Ltd. paid ₹12,000 in cash on 1.4.2025 to a supplier (single payment).

→ Exceeds ₹10,000 → ₹12,000 disallowed.

Example 2: ABC Ltd. paid ₹6,000 cash in the morning and ₹5,000 cash in the evening on the same day to the same supplier.

→ Aggregate = ₹11,000 > ₹10,000 → Entire ₹11,000 disallowed (single day, single person test).

Example 3: ABC Ltd. paid ₹30,000 cash on 1.4.2025 to a transporter.

→ Within ₹35,000 limit for transporter → Allowed.

Example 4: In F.Y. 24-25, ABC accrued ₹50,000 expense to Mr. X (deduction claimed). In F.Y. 25-26, ABC pays ₹50,000 in cash on one day.

→ Sec. 40A(3A) applies → ₹50,000 deemed PGBP income in P.Y. 25-26.

Example 5: ABC paid ₹2,00,000 cash to a farmer for purchase of his agricultural produce.

→ Exception (vii) applies → Allowed.

Example 6: ABC paid ₹40,000 retirement gratuity to employee in cash.

→ Exceeds ₹50,000 limit? No, within ₹50,000 → Allowed.

⚠️ Common exam mistakes

Splitting cash payments across multiple smaller cheques on the same day to a single person — aggregation test catches this.
Assuming crossed cheque is safe — only account payee cheque qualifies; ordinary 'crossed' cheque attracts disallowance.
Applying ₹35,000 limit to all cash payments — it applies ONLY to transporters (goods carriage business).
Allowing cash payment to a middleman dealing in agricultural produce — the exception applies only to direct payment to producers/cultivators.
Forgetting Sec. 40A(3A) — even past deductions get clawed back if later paid in cash exceeding limits.

Bare-Act text Section 40A(3) and 40A(3A); Rule 6DD for exceptions · Income-tax Act, 1961 · click to expand

Section 40A(3): Where the assessee incurs any expenditure in respect of which 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, or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed, exceeds ten thousand rupees, no deduction shall be allowed in respect of such expenditure. Section 40A(3A): Where an allowance has been made in the assessment for any year in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year the assessee makes payment in respect thereof, otherwise than by an account payee cheque... the payment so made shall be deemed to be the profits and gains of business or profession.

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Cash Payments [Section 40A(3) and 40A(3A)]

Worked example

⚠️ Common exam mistakes