1. Where an assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, or use of electronic clearing system through a bank account [or through such other electronic mode as may be prescribed], exceeds Rs. 10,000 , no deduction shall be allowed in respect of such expenditure. [40A (3)]
2. Where an allowance has been made in the assessment for any year in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year (hereinafter referred to as subsequent year) the assessee makes payment in respect thereof, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, or use of electronic clearing system through a bank account [or through such other electronic mode as may be prescribed], the payment so made shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as income of the subsequent year if the payment or aggregate of payments made to a person in a day, exceeds ten thousand rupees. [40A (3A)]
Provided that the provisions of section 40A(3A) shall not be applicable in case where there is restrictions in regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors.
Earlier this section was not applicable for trusts and hence trusts were availing benefits even in respect of the application of income by way of cash payments. Finance act 2018 made an amendment under section 40A(3) and 40A(3A), and made it applicable for trusts also. Thus, payment exceeding Rs. 10,000 in cash will not be considered as the application of income and the same will be taxable in the hands of trusts.
Restrictions have been imposed on cash donations of the charitable trusts under section 80G by reducing the capping from Rs. 10,000 to Rs. 2,000. This is to ensure that unaccounted money does not flow into the charitable institutions in the form of anonymous donations.
