The Central Board of Direct Taxes (CBDT) has now spelt out the circumstances in which disallowance cannot be made by the assessing officer under Section 40A (3) of the income-tax law. This provision relates to expenses or payments not deductible in certain circumstances.

After the Budget 2007-08, the income-tax law provides for 100 per cent disallowance of expenditure incurred if the payment were to exceed Rs 20,000 and made otherwise than by an account payee cheque or account payee draft. Prior to this change, the extent of disallowance by a tax officer was only 20 per cent of the expenditure in case the payment exceeded Rs 20,000 and made otherwise than by an account payee cheque.

The income-tax departments latest move has brought clarity that such card-based payments would not attract disallowance under Section 40A(3). The inclusion of credit card, debit card, ECS as a medium of payment in the exempted category depicts departments resolve to discourage cash-based transactions, Mr Aseem Chawla, Tax Partner, Amarchand & Mangaldas, told Business Line.

The increase in the level of disallowance from 20 per cent to 100 per cent of the expenditure in Budget 2007-08 has been prompted by the need to discourage high value cash-based transactions.

The other circumstances in which no disallowance can be made under Section 40A(3) include payments made to the Reserve Bank of India, State Bank of India, Life Insurance Corporation, any cooperative bank or land mortgage bank and any primary agricultural credit society.

Payments made by any letter of credit arrangement through a bank, a mail or telegraph transfer through a bank and a book adjustment from any account in a bank to any other account in that or any other bank would also be outside the purview of expenditure disallowance.