Permissible cash expenses as deductible expenses

Income Tax law provides for permissible cash expenses as deductible expenses for cash payments exceeding Rs 10,000  in a single day i.e. payment is made otherwise than by electronic clearing system or an account payee check or an account payee bank draft won’t be permitted as a deductible expense.

Introduction

The income tax law provides for deeming the payments as profits and gains from business or profession in case the expenditure of Rs 10,000 is incurred in any particular year, and the payment for such expenditure is made in cash in any subsequent year above Rs 10,000 in a single day.

Brief Background

This law was introduced by Finance Act 1968 which was designed for countering tax evasion through claims as expenditure incurred in cash with a view to infuriate investigation by Income Tax Department as to the identity of payee and reasonableness of such payment. The provisions of this law are attracted when the payment in excess of INR 10,000, is made at a time otherwise than an account-payee draft/ check.

However, where a number of cash payments are made to the same party within a single day, this limit of INR 10,000 is applicable to the aggregate value of the cash payments made to such party in the entire day. By necessitating the payments to be done through account payee instruments or electronic form, it’s possible to validate the authenticity of transactions thus mitigating the risk of tax evasion. However, there are certain exceptions to this law which listed below.

Exceptions to Rule 6DD

The following categories of payments exceeding INR 10,000 are permitted to be done through cash:

• Where the payment is made to:
  • Reserve Bank of India (RBI) or any other bank
  • State Bank of India (SBI) and its subsidiaries
  •   Co-operative bank or Land mortgage bank
  •   Life Insurance Corporation of India (LIC)
  •   Primary agricultural society or Primary credit society
• When any payment is made to the government which is required to make in cash under the specified rules.
• When a payment is made in specific modes like
  • Letter of credit (LC) issued by a bank,
  • Mail or telegraphic transfer originated through a bank,
  • Bills of exchange payable to bank only,
  • Electronic clearing system made through the bank account
  • Payment made using credit/debit card.
• The adjustment made in books of account where payment is the adjustment which is made for offsetting liability incurred by an assessee to the payee for the goods or services.
• When payments are made for procuring products produced by cottage industries without the aid of electrical power.
• When payments are made to an individual who is carrying on business or residing in a village or town which doesn’t have facilities of a bank. Such payee should be carrying out his business or profession in a place without access to any banking facilities.
• When payments are made by an assessee with respect to salary. Such employee must be temporarily posted for a period of 15 days or more, outside the normal place of duty. The employee shouldn’t have any active bank account which is serviceable at such place of posting.
• When payments are made on a banking holiday.
• When payments are made by an assessee to his agent who in turn makes payment for procurement of goods or services on behalf of such assessee.
• When payments are made by an assessee for purchasing traveller’s cheques or foreign currency. Such payments must be made only to the authorized money changers.