Cash payment disallowance fails where each payment stays below the statutory threshold, despite split-payment allegations.

Cash expenditure was held outside the scope of disallowance where each payment in a day remained below the statutory threshold under section 40A(3) as applicable before the Finance Act, 2017 amendment. The provision applies only when payment, or aggregate payment to a person in a day, exceeds the prescribed limit and is made otherwise than by account payee cheque or bank draft. An allegation that the cash payments were split to avoid tax deduction at source did not, by itself, satisfy the statutory condition. The disallowance was therefore unsustainable and the addition was deleted.

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Issues: Whether the disallowance made under section 40A(3) of the Income-tax Act, 1961 was sustainable when the cash payments were each below the statutory threshold of Rs. 20,000/-.

Analysis: Section 40A(3), as applicable prior to the amendment by the Finance Act, 2017, disallows expenditure only where a payment or aggregate of payments made to a person in a day otherwise than by account payee cheque or bank draft exceeds the prescribed limit. On the facts recorded in the assessment order, the payments in cash were each below Rs. 20,000/-. Once the statutory condition of a payment exceeding the threshold was not met, the provision could not be invoked merely on an allegation that the payments were split to avoid tax deduction at source.

Conclusion: The disallowance under section 40A(3) was unsustainable and the addition was directed to be deleted, in favour of the assessee.

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