Cash Payments Exceeding Rs. 20,000 and Rule 6DD: Madras High Court Clarification

Cash payments above Rs. 20,000 may be exempt under Rule 6DD if they are properly documented and proved. The Madras High Court explained this in the case of Abiram Agency vs ITO. The Court clarified how Section 40A(3) of the Income Tax Act, 1961 and Rule 6DD work together for large cash payments.​

The judgment says that the Income Tax Act tries to reduce cash payments. This is to increase transparency and prevent tax evasion. At the same time, it accepts that some genuine business payments in cash may be allowed if they are well-documented and fall under specific exceptions.

Case background: Abiram Agency vs ITO

M/s Abiram Agency is a partnership firm. It sells building materials like asbestos, cement sheets, ceramic items, and sanitary ware. The firm faced tax disputes for three assessment years: 2006‑07, 2007‑08, and 2008‑09.​

On 27 February 2008, the Assessing Officer (AO) surveyed the firm’s premises. After this, the AO reopened the assessments. During reassessment, the AO checked the books of account. He found many cash payments above Rs. 20,000 made to suppliers. For AY 2006‑- 07 alone, such cash payments amounted to Rs. 46,96,275.​

The AO applied Section 40A(3). He disallowed 20% of these cash payments. The disallowed amount was Rs. 10,26,675.

Section 40A(3): cash payment limits and objective

Section 40A(3) is intended to curb large cash payments. It pushes businesses to use banking channels such as cheques, drafts, or electronic transfers. This creates a clear money trail and reduces the chances of tax evasion.​

After the Finance Act, 2017, any cash payment above Rs. 10,000 to a person in a day is usually not allowed as a deduction. Earlier, the limit was Rs. 20,000. That older limit applied in the Abiram Agency years.​

For payments related to hiring or leasing of goods carriages, the limit is higher at Rs. 35,000. This is because the transport sector often needs on-the-spot cash payments.

Proviso to Section 40A(3) and Rule 6DD exceptions

Section 40A(3) is strict, but it does not ignore real business needs. Its proviso states that no disallowance will be made in certain instances. These must take into account banking facilities, business urgency, and other relevant factors.​

Rule 6DD gives these exceptions in detail. It lists when cash payments above the limit can still be allowed. Examples include:

• Cash paid to Central or State Governments or local bodies for taxes, duties, railway charges, and similar official payments.​
• Cash paid to RBI, SBI, other scheduled or cooperative banks, LIC, agricultural credit societies, and land mortgage banks.
• Cash paid to authorized money changers or dealers for traveller’s cheques or foreign currency.
• Cash paid to employees as retrenchment compensation, gratuity, or other terminal dues, up to Rs. 50,000 in a day.
• Cash paid to employees who work in remote areas without banking access.
• Cash is paid directly to farmers or producers for agricultural and primary produce such as dairy, poultry, fisheries, or horticulture.
• Cash is paid to cottage industries that make products without using power.
• Cash paid to an agent who, in turn, must pay cash for goods or services on behalf of the principal.
• Cash is paid in genuine emergencies, such as bank strikes, holidays, or urgent business needs.​

These cases show that the law allows some flexibility where cash is truly unavoidable.

Tribunal’s view and Revenue’s stand

Abiram Agency appealed before the Commissioner of Income Tax (Appeals) [CIT(A)]. The firm said the payments were genuine. It produced invoices, books of account, and other documents. It also claimed the payments were due to business urgency and were covered by Rule 6DD.​

CIT(A) accepted the explanation. The disallowance under Section 40A(3) was deleted. The Revenue then filed an appeal with the Income Tax Appellate Tribunal (ITAT). The Revenue argued that the assessee did not explain why it did not use cheques or electronic modes, especially for regular suppliers.

The ITAT agreed with the Revenue. It held that the assessee had not given enough justification for using cash. It restored the disallowance made by the AO.

Madras High Court’s analysis and findings

The assessee then approached the Madras High Court. The Court admitted the appeal on two key legal questions:

• Did the Tribunal make an error by not applying the second proviso to Section 40A(3)?
• Did the Tribunal fail to see that the second proviso also covers Rule 6DD cases and broader business needs and other factors?​

The assessee’s counsel argued that Rule 6DD and CBDT circulars only give examples. They are not a closed list. The words “in such cases” and “other relevant factors” show that some flexibility is built into the law.

The Court noted that the assessee had maintained proper books of account, bills, vouchers, and letters from suppliers. These documents supported the transactions. There was nothing suspicious about them. The genuineness of the payments was well proved.

Final directions of the Court

In its judgment dated 22 September 2025, the Madras High Court took a practical view. It made three essential points:​

• On Section 40A(3): The Court saw that CIT(A) accepted the assessee’s version, but the Tribunal did not. To give a fair chance, the Court sent the issue back to the AO for fresh examination under the proviso to Section 40A(3) and Rule 6DD. It answered the legal questions in favour of the assessee and set aside the Tribunal’s order on this issue.​
• On Section 40(a)(ia): This section deals with TDS defaults. No legal question had been raised about this part. So, the Court did not interfere with the Tribunal’s findings here.
• On Section 68: For AY 2008‑09, an addition of Rs. 14,24,300 was made as unexplained cash credits in the partners’ current accounts. The Tribunal had already remitted this matter to the AO for verification of the partners’ capital accounts and sources of funds. The High Court noted this and did not change it.

Key compliance lessons for businesses

The Abiram Agency case gives some clear lessons:

• Genuineness is not enough: Proving that a payment is genuine and recorded in the books is only the first step. The assessee must also show why the cash payment fits into Rule 6DD or into the scope of the proviso to Section 40A(3).​
• Rule 6DD is flexible: the list it contains is neither complete nor final. Courts can consider other business situations as well, based on facts and “other relevant factors”.
• Keep strong records: Proper documentation is critical. Taxpayers should keep invoices, receipts, vouchers, supplier confirmations, statements about banking limits, and a written note on why cash was used.
• The burden is on the assessee: The taxpayer must prove that the cash payment was necessary and lawful. This needs planning and clear evidence before the AO and appellate bodies.
• Fair chance to explain: If different authorities reach different findings, it is fair to send the matter back for a fresh look. This gives the assessee another opportunity to explain and support the claim.
• Business urgency must be real: Claims of business exigency must be backed by real facts, such as time pressure, banking issues, or supplier demands. Mere statements will not work.

Broader policy: discouraging the cash economy

Sections 40A(3) and subsequent changes reflect the government’s push to reduce cash use and promote digital payments. Cutting the limit from Rs. 20,000 to Rs. 10,000 in 2017 was a significant move.​

These rules help to:

• Curb tax evasion.
• Create audit trails.
• Increase the use of banking channels.
• Improve transparency in business.

At the same time, the law accepts that cash is still needed in some sectors and areas. Reasons include poor banking access, local business practices, and genuine emergencies.

Conclusion: How the Abiram Agency ruling helps taxpayers

The Madras High Court’s judgment in Abiram Agency vs ITO strikes a balance between strict law and business reality. It supports the aim of Section 40A(3) to reduce big cash payments. But it also confirms that genuine, well-recorded cash transactions can obtain relief under the proviso and Rule 6DD in appropriate cases.​

For businesses, the message is clear. If they make cash payments above the limit, they must:

• Keep detailed records.
• Note the exact reason for using cash.
• Show real business need or other valid grounds.
• Be ready to explain everything with documents before the tax officer.

The remand to the AO gives Abiram Agency another chance to prove its case under Rule 6DD. More broadly, this case shows that while the main rule is to avoid cash, genuine and properly supported exceptions can still be accepted by tax authorities and courts.