## Payments Made in Cash — Section 40A(3) and (3A)

### Idea

To discourage cash transactions, an otherwise-allowable expense is disallowed if paid in cash beyond the limit. A later cash payment of a previously-allowed liability is deemed income.

### 1. Section 40A(3) — current-year disallowance

An expenditure is disallowed if payment to a person in a single day exceeds ₹10,000 and is made otherwise than through:

Account payee cheque, or
Account payee bank draft, or
Prescribed electronic modes — Credit/Debit card, Net Banking, IMPS, UPI, RTGS, NEFT, BHIM/Aadhaar.

### 2. Section 40A(3A) — deemed income on later cash payment

If an expense was allowed on accrual in an earlier year, but later paid in cash exceeding ₹10,000 (not via prescribed mode), that payment is deemed to be income of the subsequent previous year.

### 3. Higher limit for transport operators

The ₹10,000 limit is raised to ₹35,000 for payments to a transport operator for plying, hiring, or leasing goods carriages.

### 4. Scope

Disallowance applies only to expenditure covered u/s 30 to 37. Hence the following are outside its scope:

Repayment of loans
Advance payments by commission agents to principals for goods received to sell on commission.

### Exemptions — Rule 6DD (cash payment still allowed)

Payments to RBI, banks, PACCS/PCS, LIC.
Payments to Government.
Payment via Letter of Credit, Telegraphic Transfer, Book adjustment, or Bill of exchange payable at a bank.
Book adjustment against a liability.
Payment to a cultivator/producer for agricultural produce, animal husbandry/dairy, poultry, fish or fish products, horticulture, apiculture. (Traders in fish products are NOT covered.)
Payment for products made without the aid of power in a cottage industry.
Payment in a village/town with no bank, on a bank holiday, to a person ordinarily residing or carrying on business there.
Retirement/retrenchment benefits to employees where the aggregate does not exceed ₹50,000.

Worked example

### Example 1

Cash payment above limit.

A business pays a supplier ₹15,000 in cash in a single day for goods.

Exceeds ₹10,000 and not via prescribed mode → entire ₹15,000 disallowed u/s 40A(3) (not just the excess of ₹5,000).

### Example 2

Transport operator higher limit.

A business pays ₹34,000 in cash to a goods-transport operator for hiring a goods carriage.

The limit here is ₹35,000, and ₹34,000 ≤ ₹35,000 → fully allowed, no disallowance.

### Example 3

Deemed income u/s 40A(3A).

An expense of ₹20,000 was allowed on accrual in PY 2023-24. In PY 2024-25 it is settled in cash.

Since the later cash payment exceeds ₹10,000 → ₹20,000 is deemed income of PY 2024-25.

⚠️ Common exam mistakes

Disallowing only the excess over ₹10,000 — the ENTIRE payment is disallowed once the limit is breached.
Applying the ₹35,000 limit to all payments — it applies ONLY to payments to transport operators for goods carriages.
Applying 40A(3) to loan repayments or commission-agent advances — these are not 'expenditure u/s 30–37' and are outside the section.
Treating traders in fish products as exempt under Rule 6DD — only cultivators/producers are exempt, not traders.
Measuring the ₹10,000 limit per bill instead of per person per day.

Reference: Section 40A(3) and 40A(3A) (read with Rule 6DD)

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

Worked example

⚠️ Common exam mistakes