Cash payment limit for director salaries and resultant tax disallowance reviewed, leading to deletion of the disallowance and taxpayer relief.

Challenge concerned disallowance of director remuneration on basis that cash payments exceeded the statutory single day cash limit under the Income tax Act; records showed monthly salary liabilities with cash components of Rs.20,000 and remaining paid by cheque, with no single day cash payment exceeding the limit. Reopening of assessment occurred via notice process but substantive question turned on applicability of the single day cash payment restriction to director salaries. Applying that factual and legal test, the earlier disallowance of Rs.4,80,000 was found unsupported and deleted, resulting in relief for the taxpayer.

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Issues: Whether the disallowance under section 40A(3) of the Income-tax Act, 1961 in respect of salary paid to directors (alleged cash payments in excess of Rs.20,000) was correctly confirmed by the authorities.

Analysis: The issue concerns whether cash salary payments to the directors exceeded the statutory single-day limit under section 40A(3) of the Income-tax Act, 1961. The books and ledger entries show monthly salary liabilities with cash components of Rs.20,000 each month to the directors and the balance paid by cheque, with no cash payment exceeding Rs.20,000 on any single day. The assessment was reopened under provisions relating to section 147/148 after issuance of notices under section 148A, but the substantive adjudication on disallowance turns on the applicability of the single-day cash payment restriction under section 40A(3).

Conclusion: In favour of Assessee. The disallowance under section 40A(3) amounting to Rs.4,80,000 is deleted and the assesee's ground challenging the disallowance is allowed.

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