18.1 Under the current provisions of ITA, if any payment for revenue expenditure to a person in one day is in excess of Rs. 20,000/-; and payment is not made by account payee cheque / draft, the same is disallowed as an expense.
Similarly, disallowance also applies to expenses incurred in one year and paid in subsequent year.
Finance Bill has reduced this limit to Rs. 10,000/-.
18.2 It has also been clarified that apart from payment by cheque / draft, payment can be made by any electronic clearing system through a bank.
18.3 Currently under ITA, the restriction on cash expenses is only for “revenue expenses” and not “capital expenses”. Revenue expenses are allowed in the year of incurring the same as they pertain to the year itself. Capital expenses result in purchase of an asset on which depreciation is available. Courts have held that the restriction on revenue expenditure does not apply to capital expenditure.
18.4 It has now been provided that if a capital expenditure of more than Rs. 10,000/- is not through banking system, then the entire expenditure above Rs. 10,000 will be ignored. The consequence is that depreciation will not be allowed. It can become a very heavy cost.
Similarly for some capital expenditure in case of some businesses like storage of natural gas, specified hotels, and some other businesses, the entire amount is available as a deduction (Investment-linked deduction). This deduction will not be available over and above Rs. 10,000 if expenditure is not incurred through banking system.
18.5 It should also be noted that in case of revenue expenses, the rules provide for certain exceptional situations where there will be no disallowance even if cash payment is above Rs. 20,000 (e.g. purchase of goods from a village where there is no banking facility). (Rule 6DD). There is no such relief for capital expenditure.
An illustration of some consequences– in case a factory is being constructed in a remote area, payment has to be made to labourers on a daily basis in cash. This payment is not revenue expenses. The entire cost of labour is a part of capital asset (factory). All such expenses will be disallowed. One can of course make a payment to a labour contractor by cheque. The labour contractor can make payment to the labourers in cash. For the labour contractor, the payment is revenue expenditure. If the payment is less than Rs. 10,000 per day per labour, it should be allowed. We are not recommending this. However people will attempt to find ways. It will be better that for capital expenditure also, appropriate relief should be available in case of bonafide difficulties.
18.6 It should also be noted that making payment in cash is not illegal. It however leads to high tax cost. In case of personal expenses, where there is no issue of any disallowance of expenses (e.g. buying personal furniture), these provisions do not apply. There are however restrictions on recipient of income. (see next para).