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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Direct Tax Laws & International Taxation

Kaveri Textiles Ltd bought raw cotton from a local trader in a single day and paid ₹35,000 in cash. The trader is not in a place without banking facilities. No exception in the rules applies, and the payment appears in the tax audit report as a cash payment above the prescribed limit. How much of this expenditure is disallowed in computing business income?

The whole ₹35,000 is disallowed. Under section 40A(3), a cash payment above ₹10,000 to one person in a day, with no exception applying, is disallowed in full, not merely the excess. Purchases of raw material are not exempt from this rule.

  1. ANil, because purchases of raw material are exempt from the cash-payment rule
  2. B₹25,000, being the amount above ₹10,000
  3. C₹17,500, being 50% of the payment
  4. D₹35,000, being the whole paymentCorrect

Explanation

Under section 40A(3), a single-day cash payment to one person above ₹10,000 for an expense is disallowed in full, not just the excess. The disallowance is 100% of the amount. Because no exception applies, all ₹35,000 is added back. The ₹25,000 option wrongly disallows only the excess over the limit. The ₹17,500 option applies an outdated 50% rate.

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