Change in IT Act likely to curb misuse of crossed cheques

The finance ministry is considering an amendment to Section 40A of the Income Tax Act to check unaccounted transactions by business assessees through crossed cheques and demand drafts.

Section 40A stipulates that a business assessee would not be allowed tax deduction for payments exceeding Rs 20,000 unless the payment is made through a crossed cheque or a crossed bank draft.

Tax experts said Section 40A had been introduced after some firms in the unorganised sector were found to be claiming tax benefits on payments of Rs 50,000 and above in cash by showing such payments as a business expense.

Officials said it had been brought to the notice of the income tax department that even crossed cheques and bank drafts were being used to settle temporary outstanding dues as most cheques and drafts had a 90-day validity.

"The validity period of a cheque or a draft is used to settle transactions which are unaccounted for and do not get captured in the system. Hence, a proposal is being considered to see if the cheques and drafts can also be stamped as non-endorsable," an official said.