Section 40A(3) disallows a business expenditure as a deduction if the payment, or aggregate of payments to a person in a single day, exceeds Rs.10,000 and is made otherwise than by an account-payee cheque, bank draft or electronic mode. The limit is Rs.35,000 for payments to transporters. Rule 6DD lists exceptions.
The rule
Where a business pays an expense in cash above Rs.10,000 to a single person in a single day, the entire payment is disallowed as a deduction — not just the excess. The aim is to curb cash dealings and unaccounted transactions. Payments by account-payee cheque/draft, NEFT/RTGS/IMPS, UPI and other banking channels are outside the bar.
Worked example
A firm pays a supplier Rs.18,000 in cash in one day for goods. The whole Rs.18,000 is disallowed under Section 40A(3) and added to taxable income. Splitting it into two cash payments of Rs.9,000 on the same day does not help — the test is the aggregate to one person in a day.
Rule 6DD exceptions
Rule 6DD exempts specified situations, including payments to banks and government, payments in a village without banking facilities, payments on a bank holiday, and certain payments to producers of agricultural/forest/dairy produce. These are narrow and fact-specific.
Practical controls
- Route all material payments through banking channels.
- Watch the aggregate-per-day test, not just single-bill amounts.
- 40A(3A) also disallows a deduction allowed earlier if later paid in cash above the limit.
- This is a tax-audit (Form 3CD) reporting clause — keep cash-payment records clean.
Key takeaways
- Cash expense above Rs.10,000/day to a person is fully disallowed.
- Transporter limit is Rs.35,000.
- Test is the aggregate per person per day, not per bill.
- Rule 6DD provides narrow exceptions; report in Form 3CD.