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)

Wilh Loesch India P.Ltd, Mumbai vs. DCIT RG 8(3), Mumbai

ITA 6761/MUM/2014[2009-10]Status: DisposedITAT Mumbai04 Jan 2017AY 2009-10

Bench: S/Shri Rajendra & Saktijit Deyआयकर आयकर आयकर अपील आयकर अपील अपील संसंसंसं/ Ita No.6761/Mum/2014 : िनधा"रण अपील िनधा"रण िनधा"रण वष" िनधा"रण वष" वष"/Assessment Year-2009-10 वष" Wilh Loesch India Private Limited Dcit,Range-8(3) Town Centre, Unit No.202, Mumbai. 2Nd Floor, Marol, Opp. Mitsubishi Motors, Vs. Andheri (E),Mumbai-400 059. Pan:Aaacw 3303 R Revenue By: Shri Shiddaramappa Kappattanavar-Dr Assessee By: Shri Chetan Karia सुनवाई क" तारीख / Date Of Hearing: 06.10.2016 घोषणा क" तारीख / Date Of Pronouncement: 04.01.2017 आयकर अिधिनयम,1961 की धारा 254(1)के अ"ग"त आदेश Order U/S.254(1)Of The Income-Tax Act,1961(Act) लेखा सद", राजे" के अनुसार/ Per Rajendra A.M.- Challenging The Orders Dated 07.08.2014 Of The Cit(A)- 15,Mumbai,The Assessee Has Filed Present Appeal.Assessee-Company,Engaged In Providing Project & Freight Forwarding Business,Filed Its Return Of Income On 29.09.2009,Declaring Total Income At Rs.99.52Lakhs.The Assessing Officer(Ao)Completed The Assessment U/S.143(3) Of The Act,On 12.04.2013, Determining Its Income At Rs.3.43 Crores.

For Appellant: Shri Chetan KariaFor Respondent: Shri Shiddaramappa Kappattanavar-DR
Section 143(3)Section 254(1)

ITO, WD-2(3), Durgapur vs. Amzad Ali Khan, Burdwan

In the result, appeal filed by the revenue on all the grounds is dismissed

ITA 460/KOL/2015[2010-2011]Status: DisposedITAT Kolkata25 Nov 2016AY 2010-2011

Bench: Shri S.S.Viswanethra Ravi, Jm & Dr. A.L.Saini, Am आयकर अपील सं./Ita No.460/Kol/2015 ("नधा"रण वष" /Assessment Year:2010-2011) Ito Ward-2(3), Durgapur, Vs. Amzad Ali Khan, Mayabazar Aaykar Bahwan Annexe, C.S.Shop, Durgapur, Burdwan- City Centre,Durgapur-16 713207 "थायी लेखा सं./जीआइआर सं./Pan/Gir No. : Aetpk 7846 K .. (अपीलाथ" /Appellant) (""यथ" / Respondent) Revenue By : Shri Pinaki Mukherjee, Jcit Assessee By : Shri Somnath Ghosh, Advocate सुनवाई क" तार"ख / Date Of Hearing : 10/11/2016 घोषणा क" तार"ख/Date Of Pronouncement 25/11/2016 आदेश / O R D E R Per Dr. Arjun Lal Saini, Am: The Captioned Appeal Filed By The Revenue, Pertaining To The Assessment Year 2010-2011, Is Directed Against An Order Passed By Ld. Commissioner Of Income Tax (Appeals), Durgapur In Appeal No.322/Cit(A)/Dgp/2013-14, Dated 30.01.2015, Which In Turn Arises Out Of An Order Passed By The Assessing Officer (Ao) Under Section 143(3) Of The Income Tax Act 1961, (In Short The ‘Act’), Dated 29.03.2013. 2. Brief Facts Of The Case Qua The Assessee Are That The Assessee Is A Reseller Of The Country Spirit. The Assessee Filed His Return Of Income For Assessment Year 2010-2011 On 6-10-2010 Showing Total Income Of Rs.5,49,543/-. Later On, The Case Was Selected For Scrutiny U/S.143(3) Of The Act & The Ao Has Completed The Assessment By Making Addition Of Rs.2,00,55,106/- U/S.40A(3) Of The Act. The Ao Observed That The Assessee Has Violated The Provisions Of Section 40A(3) Of The Act. Therefore, The Addition Of Rs.2,00,55,106/- Was Made By The Ao. As The Ao Noted That All Payments Against Purchases, Exceeding Rs.20000/-

For Appellant: Shri Somnath Ghosh, AdvocateFor Respondent: Shri Pinaki Mukherjee, JCIT
Section 143(3)Section 40A(3)