Section 40A(3) of the Income Tax Act

Income-tax Act, 2025: s.36

Section 40A(3) falls under section 40A of the Income-tax Act, 1961, which corresponds to section 36 (Expenses or payments not deductible in certain circumstances) of the Income-tax Act, 2025.

Read section 36 of the 2025 Act

Correspondence checked against the ICAI tabular mapping of the two Acts and the BharatTax.co section commentary.

The decision most relied on for Section 40A(3) is Godhra Electricity Co. Ltd. v. CIT (225 ITR 746), cited in 514 of the 3,278 judgments on BharatTax that turn on this section.

Leading authorities on Section 40A(3)

Godhra Electricity Co. Ltd. v. CIT
225 ITR 746 · 1997 · Supreme Court
514
citing judgments

Income is not taxable until it actually accrues or is received; hypothetical income, based on a mere claim not yet settled, is not chargeable to tax.

CIT v. Winsome Textile Industries Ltd.
319 ITR 204 · 2009 · High Court
378
citing judgments

Section 14A of the Income-tax Act, 1961, which disallows expenditure incurred in relation to exempt income, is not applicable if the assessee has not earned any exempt income in the relevant assessment year.

CIT v. Walchand & Co.
65 ITR 381 · 1967 · Supreme Court
314
citing judgments

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.

Attar Singh Gurmukh Singh v. ITO
191 ITR 667 · 1991 · Supreme Court
254
citing judgments

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.

Smt. Harshila Chordia v. ITO
298 ITR 349 · 2008 · High Court
187
citing judgments

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.

CIT v. Banwari Lal Banshidhar
229 ITR 229 · 1998 · High Court
162
citing judgments

When the Assessing Officer rejects the books of account and computes income by applying a net profit rate, a separate disallowance under section 40A(3) for cash payments cannot be made.

Hukumchand Mills Ltd. v. CIT
63 ITR 232 · 1967 · Supreme Court
142
citing judgments

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.

CIT v. Alagendran Finance Ltd.
293 ITR 1 · 2007 · Supreme Court
129
citing judgments

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.

Anupam Tele Services v. ITO
366 ITR 122 · 2014 · High Court
124
citing judgments

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.

Palam Gas Service v. CIT
394 ITR 300 · 2017 · Supreme Court
110
citing judgments

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)

ACIT, Cir-27, Haldia, Purba Medinipur vs. Shri Sujoy Krishna Jana, Purba Medinipur

In the result, the appeal of the revenue is dismissed and cross-objection of the assessee is partly allowed statistical purposes

ITA 1253/KOL/2016[2012-2013]Status: DisposedITAT Kolkata31 Oct 2018AY 2012-2013

Bench: Shri J. Sudhakar Reddy, Am & Shri S.S.Viswanethra Ravi, Jm I.T.A. No. 1253/Kol/2016 Assessment Year: 2012-13 Acit, Circle 27 Haldia..………………………………………………………….............................Appellant Dubey House, Basudevpur, Khanjanchak, Haldia, Purba Medinipur – 721 602. Shri Sujoy Krishna Jana.................................…...........................................................Respondent Jasora, Panskura, Purba Medinipur – 721 636. [Pan: Acipj 7166 J] C.O. No. 47/Kol/2016 (Arising Out Of Ita No. 1253/Kol/2016) Assessment Year: 2012-13 Shri Sujoy Krishna Jana.................................…....................................................Cross-Objector Jasora, Panskura, Purba Medinipur – 721 636. [Pan: Acipj 7166 J] Acit, Circle 27 Haldia..………………………………………………………….......................Respondent Dubey House, Basudevpur, Khanjanchak, Haldia, Purba Medinipur – 721 602. Appearances By: Shri C.J. Singh, Addl. Cit, Sr. Dr Appearing On Behalf Of The Revenue. Shri Udyan Dasgupta, Advocate Appearing On Behalf Of The Assessee. Date Of Concluding The Hearing : October 9Th, 2018 Date Of Pronouncing The Order : October 31, 2018 Order

Section 194CSection 195CSection 40Section 40a

Ma Parameshwari Agro Pvt. Ltd., Burdwan vs. ACIT, Cir-2, Burdwan

Appeal is allowed

ITA 1027/KOL/2016[2010-2011]Status: DisposedITAT Kolkata31 Oct 2018AY 2010-2011

Bench: Shri S.S.Godara & Shri, M. Balaganeshassessment Year :2010-11 Ma Parameswari Agro V/S. Acit, Circle-2, Aayakar Pvt. Ltd. Vill Bhawan, Kachari Road, Chotoposhla, P.O. Corut Compound, Dist. Baroposhla, P.S. Burdwan-713101 Mangalkote, Dist. Burdwan, Pin-713125 [Pan No.Aadcm5950F] .. अपीलाथ" /Appellant ""यथ"/Respondent Shir Sanjay Bhattacharya, Fca अपीलाथ" क" ओर से/By Appellant Shri Robn Choudhury, Addl. Cit-Sr-Dr ""यथ" क" ओर से/By Respondent 04-10-2018 सुनवाई क" तार"ख/Date Of Hearing 31-10-2018 घोषणा क" तार"ख/Date Of Pronouncement आदेश /O R D E R Per S.S.Godara:- This Assessee’S Appeal For Assessment Year 2010-11 Arises Against The Commissioner Of Income Tax (Appeals)-Burdwan’S Order Dated 29.03.2016 In Case No.115/Cit(A)/Asl/Acit/Cir-2/Bwn/2013-14 In Proceedings U/S 143(3) Of The Income Tax Act, 1961; In Short ‘The Act’. Heard Both The Parties. Case File Perused. 2. We Come To Assessee’S Former Substantive Ground Challenging Correctness Of Both The Lower Authorities’ Action Disallowing Its Cash Payment Of ₹74,59,954/- U/S40A(3) Of The Act. The Cit(A)’S Findings Under Challenge After Considering The Assessing Officer’S Observations Both In Assessment As Well As Remand Report & Assessee’S Contentions Are Reproduced As Follows:-

Section 131Section 143(3)Section 40A(3)