Section 40A(3) of the Income Tax Act
The decision most relied on for Section 40A(3) is Godhra Electricity Co. Ltd. v. CIT (225 ITR 746), cited in 511 of the 700 judgments on BharatTax that turn on this section.
Leading authorities on Section 40A(3)
The principle of real income dictates that only actual income, and not hypothetical or notional income, is subject to taxation under the Income-tax Act. Income that has not genuinely accrued or been received cannot be brought to tax merely on an assumption.
Disallowance under Section 14A of the Income-tax Act cannot exceed the exempt income earned during the relevant period. If no exempt income is earned by the assessee in the relevant year, no disallowance under Section 14A is warranted.
The necessity and reasonableness of business expenditure, including the utilization of borrowed funds, must be judged from the perspective of a businessman based on commercial expediency, and cannot be dictated by revenue authorities. The onus is on the assessee to demonstrate the business purpose and commercial expediency.
Section 40A(3) is not absolute, and its application considers business expediency, practical difficulties, and other relevant factors, while keeping in mind its objective to curb the practice of ploughing unaccounted money into the system.
Cash receipts from customers against genuine delivery of goods or services cannot be added as unexplained cash credits under Section 68. The case also provides guidance on non-disallowance under Section 40A(3) for business payments made in specific contexts like agricultural markets.
When the income of an assessee is determined by applying a Gross Profit (GP) rate after rejecting the books of account, this estimated assessment comprehensively covers all discrepancies, and no further specific additions are generally warranted.
The Income Tax Appellate Tribunal (ITAT) cannot permit a new ground requiring fresh investigation of facts unless it remands the matter or requests a report from the lower appellate authority. The ITAT possesses the power to remand or remit cases back to the authorities below in appropriate circumstances.
The limitation period for initiating revision proceedings under Section 263 concerning matters not subject to reassessment begins from the date of the original assessment order, not the reassessment order. The doctrine of merger does not apply to issues not examined during reassessment proceedings.
Section 40A(3) disallowances are not absolute; genuine and bonafide cash payments, where the payee's identity is established and business expediency is proven, fall outside its scope, as the section's purpose is to curb unaccounted money, not disallow genuine expenditure.
Disallowance under Section 40(a)(ia) for non-deduction of TDS is mandatory, applying even to amounts already paid and not merely 'payable', based on a purposive construction of the provision, irrespective of the timing of payment or liability.
Judgments on Section 40A(3)
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