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)

M/S Asmi Construction Company, Siliguri vs. JCIT, RG-1, Siliguri

In the result, appeal filed by the assessee is allowed

ITA 1256/KOL/2015[2011-2012]Status: DisposedITAT Kolkata21 Oct 2016AY 2011-2012

Bench: Shri K. Narasimha Chary, Jm & Dr. A.L.Saini, Am आयकर अपील सं./Ita No.1256/Kol/2015 ("नधा"रण वष" / Assessment Year :2011-2012) M/S Asmi Construction Vs. Jcit, Range-1, Aayakar Company, Ground Floor, Bhawan, Matigara, Silguri- Gulmohar Apartment, 734010 (Wb) Gurunanak Sarani, Punjabipara, Near Shiv Mandir, Siliguri-734001, District Darjeeling (Wb) "थायी लेखा सं./जीआइआर सं./Pan/Gir No. : Aalfa 6864 H .. (अपीलाथ" /Appellant) (""यथ" / Respondent) "नधा"रती क" ओर से /Assessee By : Shri Subash Agarwal, Advocate राज"व क" ओर से /Revenue By : Shri Subhra Das, Jcit सुनवाई क" तार"ख / Date Of Hearing : 07/10/2016 घोषणा क" तार"ख/Date Of Pronouncement 21/10/2016 आदेश / O R D E R Per Dr. Arjun Lal Saini, Am: The Captioned Appeal Filed By The Assessee, Pertaining To The Assessment Year 2011-2012, Is Directed Against An Order Passed By Ld. Commissioner Of Income Tax (Appeals)-Siliguri, In Appeal No.45/Cit(A)/Slg/2014-2015, Dated 05.08.2015, 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 25.03.2014. 2. The Facts Of The Case Qua The Assessee Are That The Assessee Filed Its Return Of Income On 28.03.2012 Declaring Total Income Of Rs.2,91,670/- . The Return Of Income Of The Assessee Was Processed U/S.143(1) Of The I.T.Act. Subsequently, Assessee’S Case Was Selected For Scrutiny U/S.143(3) Of The Act & The Ao Has Completed The Assessment By Observing That Assessee Has Violated The Provisions Of Section 40A(3) Of The Act. Ld. Ao Observed That Assessee Has Paid Cash Of Rs.37,07,000/-

For Appellant: Shri Subash Agarwal, AdvocateFor Respondent: Shri Subhra Das, JCIT
Section 143(1)Section 143(3)Section 40ASection 40A(3)