Section 40A(3) — Disallowance of Cash Expenses Exceeding ₹10,000

Section 40A(3) disallows any business expenditure (otherwise deductible) if it is paid in cash to a single person in a single day exceeding ₹10,000. This provision promotes digital payments in business transactions and prevents tax-evasion through cash purchases. Here is the complete guide.

The Core Rule

• If a business makes a payment of more than ₹10,000 in cash (currency notes) to a single person in a single day — the entire payment is disallowed as a business expense
• The disallowance is 100% of the payment amount — not just the excess above ₹10,000
• The ₹10,000 limit is per person per day — aggregate across multiple transactions to the same person in a day
• Limit is ₹35,000 for payments to transport operators (Rule 6DD exception for goods transport)
• Applies to all revenue expenditure including purchases of goods, services, salaries, rent, professional fees — any payment that is otherwise deductible

Section 40A(3A) — Subsequent Year Cash Payment

• If an expense was accrued in a prior year (deduction claimed on accrual basis) but the actual payment is made in cash exceeding ₹10,000 in a subsequent year — the amount paid is taxable as business income in the year of payment
• This prevents the strategy of claiming the deduction in year 1 (on accrual) and then paying cash in year 2

Exceptions — Rule 6DD

Cash payments above ₹10,000 are allowed (not disallowed) in these cases:

• Payment to the government, banking company, or co-operative bank
• Payment by letters of credit, demand drafts, mail transfer or telegraphic transfer
• Payment to an agent who pays on behalf of the payer — and the agent pays by account payee cheque to the actual payee
• Payments in areas where banking facilities are not available
• Payments for purchase of agricultural produce from the cultivator
• Payments for goods/services at a place where no banking facility is available within 20 km
• Payments to transport operators for goods carriage: ₹35,000 (not ₹10,000)

Capital Expenditure — Section 43(1)

Section 40A(3) applies to revenue expenditure (P&L items). For capital expenditure paid in cash exceeding ₹10,000, a parallel disallowance applies under Section 43(1) — the cash-paid portion of capital expenditure is not included in the "actual cost" for depreciation purposes.

Conclusion

Section 40A(3) cash payment disallowance is a significant tax risk for businesses that rely on cash transactions — the 100% disallowance can significantly inflate taxable income. SPOTON provides tax audit services and Section 40A(3) compliance review for businesses across Kerala. Contact us for expert tax compliance services.