100% disallowance of expenditure in excess of Rs.20,000 made in Cash.
KSMK MURTY, a practicing CA from Visakhapatnam draws our attention to an important amendment to the Income Tax Act proposed in the Union Budget 2007.
Under the head income from business and profession, the FM has proposed 100% disallowance of expenditure made in cash (amendment to sec 40A(3)) as against the existing 20% disallowance.
This is a harsh provision as even genuine expenditure, if it does not fall under few exceptions provided, will get disallowed. This provision is introduced to discourage dishonest taxpayers from boosting up their expenditure to reduce taxable profits. As the disallowance is increased to 100%, exceptions could have been given for genuine expenditure where the assessee makes purchases from registered dealers and had to pay cash. Now the businessman has to be more cautious in spending as he has to issue only account payee cheques or bank drafts for all expenditure above Rs.20, 000. The limit of Rs.20,000 is very small and could have been increased to at least Rs.50,000. This provision should reduce the habit of handling cash by small and medium businessmen.