SECTION 40A(3) OF THE INCOME-TAX ACT, 1961, READ WITH RULE 6DD OF THE INCOME-TAX RULES, 1962 – BUSINESS DISALLOWANCE – CASH PAYMENT EXCEEDING PRESCRIBED LIMITS – CLARIFICATION ON CASH SALE OF AGRICULTURAL PRODUCE BY CULTIVATORS/AGRICULTURIST

CIRCULAR NO.27/2017 [F.NO.370149/213/2017-TPL], DATED 3-11-2017

Representations have been received from the stakeholders regarding applicability of income-tax provision to cash sale of agricultural produce by cultivators/agriculturists to traders.

2. In this context, it is stated that the provisions of section 40A(3) of the Income-tax Act, 1961 (‘the Act’) provides for the disallowances of expenditure exceeding Rs. 10000 made otherwise than by an account payee cheque/draft or use of electronic clearing system through a bank account. However, rule 60DD of the Income-tax Rules, 1962 (‘IT Rules’) carves out certain exceptions from application of the provisions of section 40A (3) in some specific cases and circumstances, which inter alia include payments made for purchase of agricultural produce to the cultivators of such produce. Therefore, no disallowance under section 40A(3) of the Act can be made if the trader makes cash purchases of agricultural produce from the cultivator.

3. Further, section 269ST, subject to certain exceptions, prohibits receipt of Rs. 2 lakh or more otherwise than by an account payee cheque/draft or by use of electronic clearing system through a bank account from a person in a day or in respect of a single transaction or in respect of transactions relating to an event or occasion from a person. Therefore, any cash sale of an amount of Rs. 2 lakh or more by a cultivator of agricultural produce is prohibited under section 269ST of the Act.

4. Further also the provisions relating to quoting of PAN or furnishing of Form No.60 under rule 114B of the IT Rules do not apply to the sale transaction of Rs. 2 Lakh or less.

5. In view of the above, it is clarified that cash sale of the agricultural produce by its cultivator to the trader for an amount less than Rs 2 Lakh will not:-

(a)		result in any disallowance of expenditure under section 40A(3) of the Act in the case of trader.
(b)		attract prohibition under section 269ST of the Act in the case of the cultivator; and
(c)		require the cultivator to quote his PAN/ or furnish Form No.60.