To discourage the usage of cash in the economy so as to reduce the generation and circulation of black money, the Finance Act, 2018 has inserted a new explanation (Explanation 3) to Section 11 to provide that: 

“For the purposes of determining the amount of application under clause (a) or clause (b), the provisions of sub-clause (ia) of clause (a) of Section 40 and sub-sections (3) and (3A) of Section 40A, shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head, “Profits and gains of business or profession”. 

A similar proviso was inserted in Clause (23C) of Section 10, which reads as under: 

“Provided also that for the purposes of determining the amount of application under item (a) of the third proviso, the provisions of sub-clause (ia) of clause (a) of section 40 and sub-sections (3) and (3A) of section 40A, shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head, “Profits and gains of business or profession”. 

As a consequence of these amendments, the restriction on cash payments as laid down under Section 40A (3) became applicable to Charitable Trusts and Institutions. In other words, the trusts and institutions claiming exemption under Section 10(23C) and Section 11 would not be able to make any payment exceeding Rs.10,000 in cash as it will attract disallowance as it is not deductible in computation of application of income. 

Till the amendments were made in the Finance Act, 2018, the provisions of Section 40A (3) were held to be not applicable while considering application of income by trusts in institutions, which were not carrying on any business or profession. 

Hence, due to the amendment, the earlier judicial decisions were taken care and the Income Tax Act contains clear provisions to bar charitable trusts and institutions from making cash payments over and above Rs.10,000 per day per person and still claiming such expenditure as the application of income. 

Hence, as specified in Section 40A (3), the charitable trusts and institutions paying for expenditure by any mode other than an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account or through such electronic mode as may be prescribed, for an amount exceeding Rs.10,000 in a day per person, then such expenditure will be disallowed and will not be treated as application of income.