Whether Sec 40 a (3) applicable for only for expenses or even applicable for advances.Shiva Krishna , Hyderabad

Section 40A(3) is applicable only in case of business expenditure . Not in case of other kind of expenditure. It is equally applicable in case of advance payments which is actaully amount paid in advance prior to delivery of goods. The issue was taken up in Vijay Kumar Ajit Kumar. vs  Commissioner Of Income Tax. 191 ITR 391 , and the court held that

Sub section (3) has been enacted with a view to avoid any factual controversy with respect to the truth or otherwise of expenditure incurred by the assessee in cash. Since the payment by a crossed cheque or crossed bank draft ordinarily ensures its correctness, law insists that such payments exceeding Rs. 2,500 should be made only by way of a crossed cheque drawn on a bank or by a crossed bank draft. In the context of the language employed in the section, the Tribunal is not justified in saying that since the payment was made prior to delivery of the goods, it constitutes an advance and not an expenditure. Admittedly, the payment was made towards consideration of the goods which were supplied on the next day. We may also point out that the balance of consideration, namely, Rs. 3,800, paid by the assessee in lieu of the said transaction has been treated as expenditure by the Tribunal itself and has been disallowed, which aspect we have dealt with while dealing with the question referred at the instance of the assessee. We are, therefore, of the opinion that the distinction made by the Tribunal is without a difference. Whether the payment is made prior to delivery of goods or after delivery of the goods, it is payment in cash and it is payment of consideration for the goods. We, accordingly, hold that this payment of Rs. 25,000 in cash on December 10, 1974, is hit by sub section (3) of section 40A. This question is, therefore, answered in the affirmative, that is in favour of Revenue and against the assessee.

Similarly , in Nathalal Jethalal.vs Commissioner Of Income Tax. 99 ITR 757 , Gujarat High Court held that advance payments are covered u/s 40A(3) of the I T Act.