Circular No. 33

What it does

Solves the proof problem under section 40A(3) by letting banks hand back paid cheques. The sub-section disallows expenditure incurred after 31st March, 1969 where a payment exceeding Rs. 2,500 is made otherwise than by a crossed cheque drawn on a bank or a crossed bank draft. Bank pass book entries do not show whether a cheque was bearer or crossed, and the paid cheques stayed with the bank, so an assessee could not prove that he had paid by crossed cheque. In consultation with the Department of Banking the Board settles that banks may return paid cheques to their constituents on a formal undertaking that the constituent will keep them for eight years and produce them before the Income-tax Officer whenever called upon.

Why it was issued

It was represented to the Board that assessees could not prove the mode of payment because pass book entries do not distinguish a crossed from a bearer cheque and the encashed cheques were retained by the bank.

Who it reaches

Businesses and professionals making payments above the section 40A(3) limit
Banks returning paid cheques to their customers
Assessees defending a section 40A(3) disallowance
Assessing Officers calling for proof of the mode of payment

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.40A	s.29, s.36

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

SECTION 40A l EXPENSES OR PAYMENTS NOT DEDUCTIBLE
Disallowance of expenditure for which payment exceeding Rs. 2,500 is made otherwise than by crossed cheque/bank draft under sub-section (3), read with rule 6DD of the Income-tax Rules - Scope and operation of the sub-section explained

Section 40A(3) requires that if any payment in a sum exceeding Rs. 2,500 in respect of an expenditure incurred after March 31, 1969 is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, such expenditure shall not be allowed as a deduction. It has now been represented to the Board that the entries in bank pass book do not specifically indicate whether the payment made is by a bearer or crossed cheque. The cheques after their encashment are retained by the bank and cannot be produced before the assessing authorities to prove that the payments have been made by crossed cheques.
2. The difficulty pointed out has been considered by the Board in consultation with the Department of Banking and it has been decided that the banks may now return the paid cheques to their constituents after obtaining a formal undertaking from them to the effect that they shall retain the returned paid cheques for a period of eight years and produce them before the Income-tax Officer whenever called upon to do so.
Circular : No 33 [F. No. 9/50/69-IT (A-II) ], dated 29-12-1969.

What to watch

The return of paid cheques is conditional on a formal undertaking to retain them for eight years and produce them on demand; the retention period is the practical burden.
The disallowance applies to expenditure incurred after 31st March, 1969, and the Rs. 2,500 figure is the limit as the sub-section then stood; it has been revised since in terms this text does not carry.
The circular is about proof, not about the exceptions in rule 6DD; a payment outside the permitted modes still has to find a rule 6DD exception to survive.

Where you meet it

In an assessment where the officer asks for evidence that a large payment was made by crossed cheque, and in the appeal against a section 40A(3) disallowance.

What it names

Rules it names. Rule 6DD of the Income-tax Rules, 1962. The 1962 Rules were replaced by the Income-tax Rules, 2026, which renumbered nearly everything: a rule number quoted here almost never means the same rule today.

On the same provision

Other instruments in this library that name the same provision of the 1961 Act. They are not necessarily still operative, and a later one may have replaced an earlier one without saying so.

Circular No. 27/2017 — Clarification on cash sale of agricultural produce by cultivators/agriculturists 3 November 2017
Circular No. 10/2008 — Clarification Regarding the Meaning of the Expression 'Fish or Fish Products' Used in Sub-clause (iii ) of Clause (f) of 5 December 2008
Notification No. 98 — Income-tax (Eighth Amendment) Rules, 2008 - Insertion of rule 18DDA and Form No. 10CCBD 22 October 2008
Circular No. 3/2008 — Explanatory Notes to the Provisions of the Finance Act, 2007 12 March 2008
Circular No. 8/2006 — 8/2006 dated 06 10 2006 6 October 2006
Circular No. 4/2006 — Clarification Regarding the Meaning of the Expression "The Produce of Animal Husbandry’ Used in Sub-clause (ii) of Claus 29 March 2006

← Circular No. 34 · Circular No. 32 →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.

What this is