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)

DCIT, New Delhi vs. Sh. Vipin Kumar Agarwal, New Delhi

In the result, the appeal filed by the Revenue is dismissed

ITA 4255/DEL/2014[2006-07]Status: DisposedITAT Delhi17 Oct 2017AY 2006-07

Bench: Sh.R.K.Panda & Sh.K.N.Charydcit, Vs Vipin Kumar Agarwal, Central Circle- 240, Okhla Industrial Estate, 2, New Delhi. Phase-Iii, New Delhi-110020. Pan-Aaepa5202G (Appellant) (Respondent) Appellant By None Respondent By Sh. Amit Jain, Sr.Dr Date Of Hearing 16.10.2017 Date Of Pronouncement 17.10.2017 Order Per K.N.Charythis Appeal Of The Revenue, Being Aggrieved By The Order Dated 23.05.2014 In Appeal No.137/2013-14 Passing By The Commissioner Of Income Tax (Appeal) [In Short “Cit(A)”]-Iii, New Delhi For Assessment Year 2006-07, Is On The Following Grounds:- 1. “On The Facts & In The Circumstances Of The Case, The Cit(A) Has Erred In Law & On Facts In Deleting The Penalty Of Rs.4,68,190/- Imposed By The Ao U/S 271(1)(C) Of The Income Tax Act, 1961. 2. On The Facts & In The Circumstances Of The Case, The Cit(A Has Erred In Law & On Facts In Relying Upon The Judgement In The Case Of Commissioner Of Income Tax Vs Reliance Petroproducts Pvt. Ltd. In 322 Itr 158 (Sc) As The Facts Of The Case Are Totally Different From The Instant Case. 3. The Order Of The Cit(A) Is Erroneous & Is Not Tenable On Facts In Law. 4. The Appellant Craves Leave To Add, Alter Or Amend Any/All Of The Grounds Of Appeal Before Or During The Course Of The Hearing Of The Appeal.” 2. Briefly Stated Facts Are That Scrutiny Of The Return Of Income Of The Assessee Under Section 143(3) Of The Income Tax Act, 1961 (In Short “Act”), The Ao Made Certain Additions. In Appeal, Ld.Cit(A) Sustained The Addition Of Rs.13,90,937/-

Section 143(3)Section 271(1)(c)Section 40(1)(i)Section 40A(3)

Deputy Commissioner of Income-Tax, Circle-11(5), Bangalore vs. M/S Kamalam Handlooms Pvt Ltd, Bangalore

In the result, the appeal filed by the assessee is partly allowed for statistical purposes

ITA 1056/BANG/2014[2006-07]Status: DisposedITAT Bangalore13 Oct 2017AY 2006-07

Bench: Shri Inturi Rama Rao & Shri Laliet Kumarkamalam Handlooms (P) Ltd., No.22, Doraiswamy Complex, Kenchanayakanagalli, Nagarathpet, Bengaluru-560002. Pan:Aabck 6325 Q … Appellant Vs. Assistant Commissioner Of Income-Tax, Circle-11(5), Bengaluru. … Respondent & (By The Revenue) Assessee By : Shri V.Chandrashekar, Advocate. Revenue By : Shri P.Dhivahar, Jcit(Dr) Date Of Hearing : 03/08/2017 Date Of Pronouncement : 13/10/2017 O R D E R Per Inturi Rama Rao, Am : These Two Cross Appeals Filed By The Assessee-Company As Well As The Revenue Are Directed Against The Order Of The Cit(A)-1, Bangalore, Dated 28/03/2014 For The Assessment Year 2006-07. 2. Brief Facts Of The Case Are As Under: The Assessee Is A Company Duly Incorporated Under The Provisions Of The Companies Act, 1956. It Is Engaged In The Business Of Manufacture & Trading In All Kinds Of Man-Made Filament Yarns. Return Of Income For The Assessment Year 2006-07 Was Filed On 29/11/2006 Declaring Total Income Of Rs.23,28,840/-. After Processing The Said Return Of Income, The Case Was Selected For Scrutiny Assessment As Per The Guidelines Issued By

For Appellant: Shri V.Chandrashekar, AdvocateFor Respondent: Shri P.Dhivahar, JCIT(DR)
Section 143(2)Section 143(3)Section 36(1)(iii)

DCIT, Bhubaneswar vs. Orissa Order Suppliers Pvt. Ltd., Bhubaneswar

In the result, appeal of the revenue is dismissed

ITA 304/CTK/2015[2010-11]Status: DisposedITAT Cuttack12 Oct 2017AY 2010-11

Bench: Shri N.S.Saini, Am & Shri Pavan Kumar Gadale, Jm आयकर अपील सं./Ita No.304/Ctk/2015 (धनधाारण वषा / Assessment Year :2010-2011) Dcit, Corporate Circle-1(2), Vs. Orissa Order Suppliers Bhubaneswar Private Limited, C-112, Barmunda Housing Board Colony, Bhubaneswar स्थायी लेखा सं./जीआइआर सं./ Pan/Gir No. : Aabco 1458 J (अपीलाथी /Appellant) .. (प्रत्यथी / Respondent) राजस्व की ओर से /Revenue By : Shri D.K.Pradhan, Dr निर्ााररती की ओर से /Assessee By : Shri P.S.Panda/K.Agarwalla, Ar सुनवाई की तारीख / Date Of Hearing : 18/09/2017 घोषणा की तारीख/Date Of Pronouncement 22/09/2017 आदेश / O R D E R Per Shri Pavan Kumar Gadale, Jm: The Revenue Has Filed An Appeal Against The Order Of Cit(A)-1, Cuttack, In Appeal No.0494/2014-15, Dated 10.03.2015, Passed U/S.143(3) Of The Income Tax Act, 1961 For The Assessment Year 2010- 2011, Wherein The Revenue Has Raised The Following Grounds :- 1. On The Facts & In The Circumstances Of The Case, The Ld. Cit(A) Is Not Justified In Law As Well As On Facts In Deleting Addition Of Rs.19,02,085/- Without Appreciating The Fact That The Assessee Had Been Paying Interest On The Huge Amount Of Loan Taken From Bank & Other Parties. 2. On The Facts & In The Circumstances Of The Case, The Ld. Cit(A) Is Not Justified In Law As On Facts In Deleting Addition Of Rs.9,24,450/- Without Appreciating The Fact That The Assessee Had Made Payments In Cash In Violation Of Section 40A(3), The Details Of Which Have Been Given In The Body Of The Assessment Order. 3. On The Facts & In The Circumstances Of The Case, The Ld. Cit(A) Is Not Justified In Law As On Facts By Deleting Addition Of Rs.2,25,136/- Ignoring The Fact That The Expenses Claimed By The Assessee Were Not For Any Business Purposes. 4. On The Facts & In The Circumstances Of The Case, The Ld. Cit(A) Has Erred In Law In Not Accepting The Examination Of Findings Made By The Ao On The Issues.

For Appellant: Shri P.S.Panda/K.Agarwalla, ARFor Respondent: Shri D.K.Pradhan, DR
Section 143(1)Section 143(2)Section 143(3)Section 40A(3)