Amounts not deductible in respect of expenditure exceeding Rs. 20,000 (Section 40A (3))

A. Nature of Expenditure: If an assessee incurs any expenditure in respect of which payment in excess of Rs.35, 000 in case of payment for plying, hiring or leasing goods carriages and Rs. 20,000 in any other case, is made otherwise than by an account payee cheque or an account payee bank draft, 100% of such expenditure will not be allowable as deduction.

B. Payment of outstanding liabilities: If an expenditure is allowed as a deduction on due basis and the liability is settled after the end of previous year otherwise than by way of account payee cheque or draft, by payment or aggregate of payments in excess of Rs.20,000 to a single person on a day, then the expenditure so allowed shall be treated as business income of the previous year in which such payment is made.

C.  Applicability:

• This rule does not apply in respect of an expenditure, which is not claimed as deduction u/s 30 to 37.
• This rule is not applicable for purchase of a capital asset not meant for resale.
• This rule is applicable even in respect of advance for an expenditure covered u/s 30 to 37.

D. Exceptions as per Rule 6DD:

1. Payment made to RBI, Banking Company, SBI and its subsidiaries, any Co-operative bank or Land Mortgage Bank, any primary agricultural credit society or any primary credit society and LIC of India.
2. Payment made to Government and as per rules such payment is required to be made in legal tender.
3. Payment through banking system-
   1. Any letter of credit arrangement through a bank
   2. A mail or telegraphic transfer through a bank
   3. Book adjustment from any account in a bank to any other account in that or any other bank
   4. Bill of exchange made payable only to a bank
   5. Use of electronic clearing system through a bank account
   6. Credit card
   7. Debit card
4. Payment by book adjustment against a liability
5. Payment made for agricultural or forest produce or produce of animal husbandry or diary or poultry or fish or fish products or products of horticulture or apiculture to cultivator, grower or producer of such products.
6. Payment to producers of goods in cottage industry without the aid of power
7. Payment made in a place which on the date of such payment is not served by any bank
8. Any terminal retirement or gratuity payment to an employee or his legal heirs provided that aggregate of the sum payable does not exceed Rs.50,000
9. Payment to employees on temporary posting if such payment is made after deduction of tax at source and such employee does not maintain any bank account at such place
10. Payment made on a day on which banks were closed due to holiday or strike
11. Payment made through agents
12. Payment through authorized dealer or money changer against purchase of foreign currency