💸 Section 40A(3) of the Income Tax Act: Disallowance of Cash Payments – And the Lifeline Rule 6DD

Bhagya Lakshmi
May 28
3 min read

In today’s digital economy, the government has put a strong emphasis on curbing cash transactions. One of the key sections enforcing this objective is Section 40A(3) of the Income Tax Act, 1961. It disallows any business expenditure made in cash exceeding ₹10,000 per day to a single person (₹35,000 in the case of transporters). However, there’s a critical safeguard for genuine business transactions: Rule 6DD.

Let’s dive into both the restriction and the rescue, with real case laws to guide us.

In today’s digital economy, the government has put a strong emphasis on curbing cash transactions. One of the key sections enforcing this objective is Section 40A(3) of the Income Tax Act, 1961. It disallows any business expenditure made in cash exceeding ₹10,000 per day to a single person (₹35,000 in the case of transporters). However, there’s a critical safeguard for genuine business transactions: Rule 6DD.

📘 Rule 6DD – The Exceptions to Section 40A(3)

Rule 6DD of the Income Tax Rules lists circumstances under which cash payments are allowed, even above ₹10,000. These include:

Payments made to government agencies, banks, or on bank holidays/strikes.
Payments to parties in remote areas without banking access.
Payments to transporters up to ₹35,000.
Payments on retirement or retrenchment of employees.
Payments made under court orders or legal obligations.
Payments for agricultural produce in APMC markets.
Payments to agents where direct payment to the principal is impractical.
Payments made through prescribed banking channels (NEFT, RTGS, UPI, etc.).

📚 Key Judicial Precedents

🧾 1. Devcare Solutions vs. ITO – ITAT Chennai (May 2025)

Facts: The assessee made cash payments above the limit without any business justification.
Held: ITAT upheld the disallowance under Section 40A(3) as there was no evidence of business exigency or applicability of Rule 6DD.
Takeaway: Absence of valid reasons or evidence invites disallowance even if the transactions are genuine.

🧾 2. Monika Chitrasen Patil vs. ITO – ITAT Pune (2023)

Facts: Payments made in cash for land purchase at the seller’s insistence were disallowed.
Held: As the cash payments were part of a legally registered document and supported by business need, ITAT allowed the deduction.
Takeaway: Genuineness of transaction and identity of recipient can override cash limit restrictions in exceptional cases.

🧾 3. Shashikala Ram Kumar vs. ACIT – ITAT Hyderabad (2023)

Facts: Assessee’s bank accounts were frozen by government agencies, forcing cash payments.
Held: Disallowance under Section 40A(3) was deleted as the payments were made due to compulsion beyond control.
Takeaway: Force majeure conditions like freezing of bank accounts can provide relief.

🧾 4. Surbhi Agarwal vs. ITO – ITAT Jaipur (2025)

Facts: Cash payments were disallowed despite being genuine and fully recorded.
Held: ITAT allowed the claim since identity of the payee and genuineness of the transactions were not in doubt.
Takeaway: Documentation and transparency are key in avoiding disallowance.

🧾 5. PCIT vs. Sumukha Synthetics – Madras High Court (2020)

Facts: Cash payments were made as the supplier’s bank account was under government attachment.
Held: The High Court ruled that such unavoidable situations qualify under exceptions.
Takeaway: When circumstances are justified and unavoidable, courts have sided with taxpayers.

🚨 Practical Implications

Maintain Documentation: Always retain proof like invoices, declarations, and payment justifications.
Check Exceptions (Rule 6DD): Payments in rural areas, emergencies, or where banking facilities are absent may be allowed.
Audit Trail: Ensure every expense has an audit trail to establish identity and genuineness.
Avoid Regular Cash Practices: Habitual cash dealings invite scrutiny, especially during assessments.

✍️ Conclusion

Section 40A(3) intends to promote transparency and accountability in business transactions. However, it is not blind to ground realities. That’s where Rule 6DD offers a relief mechanism for those who operate under constraints or genuine business needs.

But remember—Rule 6DD is not a shortcut, it is a shield, and must be backed with clear, credible documentation.