Section 40A(3) of Income Tax Act

If you have made a payment of more than ₹10,000, to a person in a single day, you need to understand the Section 40A(3) of Income Tax Act. This act would apply for a single payment or multiple payments made, that exceed ₹10,000 in a particular day. However, if you have made this payment using an account payee cheque, electronic clearing system, or a bank draft, then section 40a(3) of income tax act would not apply. 

But what is section 40a(3) of income tax act about? Let’s learn in detail. 

What is section 40a(3) of income tax act?

Section 40a(3) of income tax act is used to prevent tax evasion due to the use of non-digital or cash payments. This act disallows all single day non-digital transactions above ₹10,000, made to a single individual, from being considered as expenses. Therefore, you cannot consider such an expense for claiming tax deduction. 

Section 40a(3) is a part of the Section 40a of Income Tax Act. Let’s learn more about Section 40a and its subsections.

Section 40a of Income Tax Act and Subsections

Section 40a pertains to gains and profits incurred under business or profession. 

A few significant subsections under this act are given below:

Section 40a (1) of Income Tax Act

This is an overriding clause, which means that other clauses would apply if there are overlaps between the clauses. 

Section 40a (2) of Income Tax Act

There are two parts of the Section 40a(2) of income tax act, viz, Section 40a (2)(a) and Section 40a(2)(b) of Income Tax Act. 

Section 40a(2)(a)

Individuals tend to grant money in an unreasonable or excess manner in close relationships and biases. Section 40a(2)(a) legally disallows and embodies this disallowance as a rule, preventing the benefit of tax deduction claim under the same.   

Section 40a(2)(b)

For the closeness in relationships and biases mentioned in Section 40a(2)(a), the Section 40a(2)(b). provides the list of specified persons.  

Persons specified under Section 40a(2)(b) are individual relative, company/firm with relatives as directors/partners, members of association of individuals and relatives, Hindu Undivided Family (HUF). 

Section 40a (2) b also implies to any assessee with substantial business or professional interest and relatives, the director and the director’s relatives; partner’s firm and the partner’s relatives; HUF and family or member’s relatives; and other members of the aforementioned family members and relatives. 

Particulars of payments made to persons specified under section 40a(2)(b) would apply if they are identified to have substantial interest in the assessee’s profession or business. Such disallowance under Section 40a (2) b would apply to beneficial equity share owners with at least 20 percent voting power for company and substantial interest persons with at least 20 percent of of profit entitlement in assessee’s profession or business under Section 40a(2)(b) for tax audit.

Section 40a(3) of Income Tax Act

In addition to the disallowance under Section 40a 2b, Section 40a(3) of Income Tax Act adds another category for the expenditures disallowed. It promotes the Government of India’s Digital India Initiative. The objective of this subsection is to keep the payment source disclosed. This has been relaxed with exemptions under rule 6DD and the income tax rules 1962. 

If the expenditure in question was made in the previous year of the assessment year, section 40a(3a) of the Income Tax Act would apply. 

Section 40a(9) of Income Tax Act

Section 40a(9) incentivises employers to contribute to their employee’s provident fund, superannuation fund and gratuity fund. With this contribution, employers and employees can avail tax deductions. Here, an employer’s pension scheme contribution is made in reference to Section 80CCD. However, Section 40a(9) restricts contributions for any individual or entity registered under Societies Registration Act 1860. 

Section 40a(ia) of Income Tax Act

As per this subsection, expenses made with non-deduction or non-payment of Tax deduction at Source (TDS) by the debitor are disallowed for claiming tax deduction under the Income Tax Act. 

Conclusion 

While the taxpayers are allowed numerous slacks for tax deductions and exemption claims, stringent measures are essential to keep them from being misused. Therefore, Section 40A(3) of Income Tax Act provides necessary curbs for non-digital transactions to control tax evasion by individuals and businesses.