All of it, not a proportion: where a payment or the aggregate of payments to one person in one day exceeds the limit and is not made by account payee cheque, account payee bank draft or a prescribed electronic mode, no deduction is allowed for that expenditure. The limit is Rs 10,000, and Rs 35,000 for payments for plying, hiring or leasing goods carriages. Section 40A(3A) does the same job a year late, by taxing as income of the later year a liability allowed earlier and then paid in cash. Rule 6DD is the only statutory escape, and the courts are split on whether anything outside it helps.
Section 40A(3) disallows the expenditure, not the excess. Where the assessee incurs expenditure in respect of which a payment or aggregate of payments made to a person in a day is made otherwise than by account payee cheque, account payee bank draft or a prescribed electronic mode, and the amount exceeds the limit, no deduction is allowed in respect of such expenditure. Two things follow that people get wrong. The test is per person per day, so three payments of Rs 4,000 to the same supplier on the same day are one payment of Rs 12,000. And the consequence is the whole expenditure, not the amount above the line.
The present limit is Rs 10,000, with Rs 35,000 for a payment made for plying, hiring or leasing goods carriages, and both figures are on the enacted text. The main limb of s.40A(3) as it currently stands disallows the deduction where a payment or aggregate of payments made to a person in a day, otherwise than by account payee cheque, account payee bank draft, electronic clearing system through a bank account or such other prescribed electronic mode, exceeds ten thousand rupees. The second proviso to s.40A(3A) reads: "Provided further that in the case of payment made for plying, hiring or leasing goods carriages, the provisions of sub-sections (3) and (3A) shall have effect as if for the words 'ten thousand rupees', the words 'thirty-five thousand rupees' had been substituted." The substitution is against ten thousand, so the departmental page that still prints twenty thousand in the proviso is a snapshot taken before the 2017 reduction. Both figures survive the recodification: s.36(4) of the Income-tax Act, 2025 carries the Rs 10,000 limb and s.36(5) the deemed-income limb, and s.36(6) carries the goods carriage relief as a free-standing sub-section, drafted in figures - for the purposes of sub-sections (4) and (5) the figures Rs 10,000 are to be read as Rs 35,000 where the payment is made for plying, hiring or leasing of goods carriages.
Section 40A(3A) closes the timing gap. Where a deduction has already been allowed for a liability in one year and the payment is then made in a later year in cash above the limit, the payment made is deemed to be the profits and gains of business or profession and is chargeable to income-tax as income of that subsequent year. The disallowance therefore follows the cash, not the accrual, and an assessee who books a liability in year one and settles it in currency in year three is taxed in year three.
Rule 6DD is the exception list, and it is a list of circumstances, not a general dispensation. Its opening words are that no disallowance under sub-section (3) of section 40A shall be made in the cases and circumstances specified. The clauses cover payments to banks and specified financial institutions, payments to Government where the payment is required to be made in legal tender, payments made by prescribed banking channels, adjustments against liabilities for goods supplied or services rendered, payments for agricultural, forest, animal husbandry, dairy, poultry, fish or horticultural produce to the cultivator, grower or producer, products of cottage industry made without the aid of power, payments in a village or town not served by a bank, terminal benefits to an employee up to fifty thousand rupees, salary to an employee temporarily posted elsewhere and without a bank account there, payments to an agent required to pay cash for goods or services on the assessee's behalf, and payments to an authorised dealer or money changer for foreign currency or travellers cheques.
What the litigation is actually about is whether anything outside Rule 6DD helps. The Supreme Court in Attar Singh Gurmukh Singh v. ITO, which this library already holds, upheld the section, applied it to purchases of stock-in-trade, and said that considerations of business expediency and other relevant factors are not excluded. Tribunals have run with that: in A. Daga Royal Arts v. ITO the Jaipur Bench deleted a disallowance on cash paid to sellers named in registered sale deeds, treating Rule 6DD as not exhaustive, and in the Delhi Bench order reported as TS-1093-ITAT-2025(DEL) a liquor retailer's cash purchases from an identified vendor, on which tax had been collected at source, were allowed on the same reasoning.
The High Court line is stricter. In Vaduganathan Talkies v. ITO the Madras High Court upheld a disallowance where the assessees relied on genuineness and identifiable payees, noting that three-quarters of the consideration had gone through banking channels; and in Arasappan Madhivanan v. ITO (2025) 476 ITR 169 the same Court read Rule 6DD(e)(ii) narrowly, holding that a company engaged in pasteurisation is not a 'cultivator, grower or producer' of milk, applying noscitur a sociis to the word 'producer' in the company of 'cultivator' and 'grower'. The practical position is that a Rule 6DD clause is the argument that travels; business expediency is the argument that has to be proved with dates, distances and the payee's insistence, and it fails in the High Courts more often than the Tribunal orders suggest.
One boundary worth naming: s.40A(3) disallows a deduction. It is not a penalty, and it is not the same fight as s.269SS or s.269ST, which attack the receipt of cash and carry a penalty equal to the amount. The same cash payment can produce a disallowance in the payer's assessment and a penalty in the recipient's.
The disallowance is of the whole expenditure at the assessee's marginal rate, so a single Rs 4 lakh cash payment on a purchase costs more than the margin on the transaction. Because the test is per person per day, the exposure is usually found by the officer in the ledger rather than in a single voucher, and the reply has to be built on Rule 6DD clause by clause, since the High Court authority on genuineness alone is against the assessee.
I paid cash for stock purchases. Can the AO disallow it under 40A(3), and is that section even valid?
I broke the foreign exchange law to move stock I could not otherwise sell. Can I still deduct what that cost me as a business expense?
I am a transport contractor who hires trucks from individual owners and pays them freight. Does section 194C apply, and can section 40(a)(ia) disallow amounts I have already paid rather than merely owe?
My principal insisted I pay in cash because my bank is a cooperative bank and cheques take days to clear. The payments are genuine and identified. Will section 40A(3) still disallow them?
Does the jewellery instruction explain the source of the gold, or only stop the department seizing it?
The officer rejected my books and estimated my income by applying a gross profit rate, and then also disallowed my cash purchases under section 40A(3). Can he do both?
The Assessing Officer rejected my books because of a section 40A(3) cash disallowance and an ad hoc disallowance, then raised my gross profit rate. If those two go, can the gross profit addition survive?
I collect cash from my scooter buyers and pass it to my principal dealer the same day. Can the officer both disallow those cash payments under section 40A(3) and add the same cash as unexplained credits under section 68?
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