A later payment can create taxable income
A company that was allowed an expense deduction in an earlier year may have to recognise deemed business income if it settles the liability in a later year by a non-permitted mode and breaches the applicable daily limit without a prescribed exception. For payment in FY 2025–26, apply section 40A(3A) of the Income-tax Act, 1961 in AY 2026–27. A debit to the supplier account in the current year need not pass through the current profit and loss account.
Read the applicable text: Income-tax Act, 1961, section 40A Income Tax Department, Rule 6ABBA Income-tax Act, 1961, section 40A and Rule 6DD guidance CBDT Form 3CD, clause 21(d) CBDT Notification 49/2026, ITR-6 Schedule BP.
Start from the tax history, not the aged-payables total
Match the opening creditor to the expense and its prior-year tax treatment. Keep the filed computation and any processing or assessment changes. A provision originally added back and never allowed does not satisfy the prior-allowance condition merely because it remains in trade payables. Exclude capital items and deposits from this expense population unless the facts establish a relevant prior deduction. Review same-year expenditure separately under section 40A(3).
Apply the daily mode and limit tests
Aggregate affected payments to the same person on the same day, not just the lines against one invoice. The ordinary limit is ₹10,000; substitute ₹35,000 for payment for plying, hiring or leasing goods carriages. The test is whether the limit is exceeded. The affected payment is the starting point for deemed income, rather than the excess over the limit. Account-payee cheque or draft, bank ECS and other modes prescribed by Rule 6ABBA sit outside the non-permitted mode population. For mixed modes, reconcile each leg; for mixed expense types or exceptions retain separate attributes and review the aggregation before filing.
Prove a Rule 6DD exception if one applies
Tie the actual facts to the prescribed case. For example, where a payment is made to an agent who is required to make cash payments for goods or services on the payer's behalf, retain the appointment terms, underlying vendor receipts and settlement trace. An internal cash approval, shortage of funds or the vendor's preference does not by itself establish a Rule 6DD exception.
Report the amount once
Where tax audit applies, reconcile the deemed income detail to Form 3CD clause 21(d)(B), distinct from the current expense question at 21(d)(A). Read the form with the statute and Rules when classifying electronic modes. In notified AY 2026–27 ITR-6, Schedule BP item 21 includes deemed income under section 40A(3A). Reconcile that line to the register. Do not repeat the item under a current P&L disallowance or open the prior return just to move the payment to the deduction year.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Same payee on the same day
Two cash settlements of ₹6,000 and ₹7,000 relate to previously allowed expenses owed to one supplier. The daily ₹13,000 exceeds ₹10,000. With no exception, deemed income is ₹13,000, not ₹3,000.
Illustrative example 2: Exactly on the boundary
A single affected cash payment of ₹10,000 is the only such payment to the payee that day. The excess condition is not met and the deemed amount is nil.
Illustrative example 3: A qualifying carriage payment
A ₹34,000 cash settlement is solely for a previously allowed expense for hiring a goods carriage; it is the only payment to that payee that day. The ₹35,000 special limit applies on these facts and the deemed amount is nil. If the payment were ₹36,000 on the same facts, the whole ₹36,000 would be at issue without an exception.
Illustrative example 4: No earlier allowance
A ₹19,000 cash settlement closes a ₹19,000 provision disallowed in the earlier tax computation and never subsequently allowed. The earlier-allowed base is nil for section 40A(3A); investigate any other applicable treatment separately.
Illustrative example 5: Two modes, one settlement
A ₹31,000 allowed liability is settled with ₹23,000 through documented NEFT and ₹8,000 in cash. The non-permitted-mode total is ₹8,000, assuming no other affected payment to that payee that day, and there is no deemed amount.
Illustrative example 6: One return entry
Two independently tested supplier-day amounts are ₹14,500 and ₹17,500, with no exceptions. The deemed income is ₹32,000. Assuming neither amount has already entered the profit and loss account, include ₹32,000 once at Schedule BP item 21. Adding it again as a current-expense disallowance would incorrectly add another ₹32,000.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Extract opening expense creditors | Aged payables tied to prior financials |
| 2 | Identify prior tax deductions | Filed computations and subsequent orders |
| 3 | Mark allowances and exclusions | Invoice-level opening register |
| 4 | Match all current settlements | Cash book, bank reference and vendor account |
| 5 | Group by person and payment date | Payee identity and daily totals |
| 6 | Apply the mode and limit tests | Rule 6ABBA evidence and carriage contracts |
| 7 | Test each prescribed exception | Rule 6DD evidence file |
| 8 | Check clause 21(d)(B) where applicable | Tax audit detail and reconciled total |
| 9 | Review ITR-6 Schedule BP item 21 | Return preview and computation bridge |
| 10 | Carry unresolved liabilities forward | Closing register with prior-allowance flags |
Sixteen practitioner FAQs
1. Does the current payment need to hit P&L?
No. An ordinary creditor settlement can trigger deemed income if the statutory tests are satisfied.
2. Can the cash book alone prove the adjustment?
No. Trace the earlier allowance and prove what liability the payment discharged.
3. Which year is taxed?
The later payment year when the conditions of subsection (3A) are met.
4. Does ₹10,000 exactly trigger the ordinary limit?
No. The daily affected amount must exceed the limit.
5. What if two bills belong to one payee?
Use the payee-day aggregate rather than testing each invoice alone.
6. What if one payee trades under two names?
Check the underlying person before grouping transactions.
7. Is the charge only the excess over ₹10,000?
No. The affected payment amount is tested as deemed income.
8. Is ₹35,000 available for every logistics vendor?
No. Check whether the payment is for plying, hiring or leasing goods carriages.
9. Does NEFT qualify?
NEFT is one of the prescribed electronic modes. Retain the payment reference.
10. Does a receipt prove a Rule 6DD exception?
It helps prove payment. The prescribed circumstances need independent evidence.
11. Does the vendor's demand for cash qualify automatically?
No. Test the facts against a specific prescribed exception.
12. Which tax audit subclause addresses later settlement?
Clause 21(d)(B), where Form 3CD applies.
13. Which notified ITR-6 field carries the income?
Schedule BP item 21 for the specified deemed-income provisions.
14. What if the prior assessment changed the deduction?
Use the operative tax position and keep evidence for any disputed amount.
15. How do I handle a partial allowance?
Trace the paid amount to the allowed and disallowed portions using reliable evidence; document the allocation.
16. What about payments after 31 March 2026?
For a later tax year governed by the Income-tax Act, 2025, start with section 36(5), its exceptions and the transition in section 536. Use the form and rules for that tax year instead of reusing the AY 2026–27 mapping.
Official sources
Income-tax Act, 1961, section 40A Income Tax Department, Rule 6ABBA Income-tax Act, 1961, section 40A and Rule 6DD guidance CBDT Form 3CD, clause 21(d) CBDT Notification 49/2026, ITR-6 Schedule BP Income-tax Act, 2025, sections 36 and 536: later tax years and transition