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)

ITO, Ward-2(2), Kolkata vs. M/S. Kendwa Pachai Shop, Kolkata

In the result, the appeal of the revenue is dismissed

ITA 1274/KOL/2017[2012-13]Status: DisposedITAT Kolkata08 Jun 2018AY 2012-13

Bench: Shri P.M. Jagtap, Am & Shri A.T. Varkey, Jm] I.T.A. No. 1274/Kol/2017 Assessment Year: 2012-13 Income Tax Officer..............................…………………………............................................Appellant Ward 2(2), Asansol, Parmar Building, G.T. Road, Asansol – 713 304. M/S. Kendwa Pachai Shop....................……………………………………………………...Respondent Kendwa Bazar, Kulti, Burdwan – 713 343. [Pan: Aajfm 9508 Q] Appearances By: Shri G.H. Seema, Addl. Cit Appearing On Behalf Of The Revenue. None Appearing On Behalf Of The Assessee Date Of Concluding The Hearing : May 31, 2018 Date Of Pronouncing The Order : June 08, 2018 Order Per P.M. Jagtap, Am This Appeal Preferred By The Revenue Is Directed Against The Order Of Ld. Cit(A), Asansol Dated 22.03.2017 & The Solitary Issue Involved Therein Relates To The Deletion By The Ld. Cit(A) Of The Addition Of Rs. 1,07,14,621/- Made By The A.O. By Way Of Disallowance Under Section 40A(3) Of The Income Tax Act, 1961. 2. The Assessee In The Present Case Is A Partnership Firm Which Is Engaged In Running A Country Spirit Shop. The Return Of Income For The Year Under Consideration Was Filed By It On 30.09.2012. As Noticed By The A.O. During The Course Of Assessment Proceedings, The Assessee Firm Had Made Purchases From M/S. Asansol Bottling & Packaging Co. Ltd. During The Year Under Consideration & Payments Against The Same Were Made By Depositing Cash Directly In The Bank Account Of M/S. Asansol Bottling & Packaging Co. Ltd. Aggregating To Rs.

Section 22Section 40A(3)