The Indian Income Tax Act restricts business entities from making cash payments exceeding Rs. 10,000 in a day to a single person. This rule, outlined under Section 40A(3), aims to curb tax evasion and promote transparency in financial transactions. However, Rule 6DD of the Income Tax Rules provides certain exceptions where such payments are permissible. This blog explores these exemptions in detail to help businesses comply with income tax law while ensuring smooth operations.
Understanding Section 40A(3) and Rule 6DD
Section 40A(3) disallows business expenses if payments exceeding Rs. 10,000 are made in cash. However, Rule 6DD specifies cases where these cash payments are allowed and will not be disallowed for tax purposes. Let’s examine these exceptions.
Exemptions Under Rule 6DD
1. Payments Made to Certain Institutions
Cash payments exceeding Rs. 10,000 per day are allowed when made to the following entities:
The Reserve Bank of India (RBI)
Any banking company as per the Banking Regulation Act, 1949
The State Bank of India and its subsidiaries
Any cooperative bank or land mortgage bank
Any primary agricultural credit society or primary credit society
The Life Insurance Corporation of India (LIC)
2. Payments to Government in Legal Tender
If government rules mandate payment in legal tender (cash), it is exempt from the restrictions of Section 40A(3).
3. Bank Transaction Adjustments
Cash payment restrictions do not apply when payments are made through:
Letter of credit arrangements via a bank
Mail or telegraphic transfer via a bank
Book adjustments between bank accounts
Bills of exchange payable only to a bank
4. Adjustment Against Business Liabilities
Payments made by adjusting against outstanding liabilities for goods supplied or services rendered are allowed.
5. Payments for Specific Purchases
Cash payments are allowed for purchasing the following directly from cultivators, growers, or producers:
Agricultural or forest produce
Animal husbandry products (livestock, meat, hides, skins)
Dairy or poultry products
Fish or fish products
Horticulture or apiculture products
6. Payments to Cottage Industry Producers
Cash payments exceeding Rs. 10,000 are permissible when purchasing goods from cottage industries where production is done without the aid of power.
7. Payments in Remote Areas Without Banking Facilities
If payments are made in villages or towns that lack banking services, and the recipient resides or conducts business there, cash payments are allowed.
8. Employee Payments in Specific Cases
Cash payments can be made to employees in the following cases:
Retirement, retrenchment, resignation, discharge, or death benefits (up to Rs. 50,000)
Salary payments where:
The employee is temporarily posted for 15 days or more at a remote location or on a ship
The employee does not maintain a bank account at that location
9. Payments to Agents for Business Transactions
If an agent is required to make cash payments for goods or services on behalf of a business, the restriction does not apply.
10. Foreign Currency Purchases
Authorized dealers or money changers can make cash payments when purchasing foreign currency or traveler’s cheques in the regular course of business.
Conclusion
While the Income Tax Act discourages cash payments above Rs. 10,000, Rule 6DD provides necessary exemptions to facilitate practical business transactions. Understanding these cases helps businesses ensure compliance while managing operational challenges effectively.
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