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)

Joseph Jose, Patna vs. ACIT, Circle-4, Patna

The appeal of the assessee is allowed for statistical purposes

ITA 45/PAT/2020[2015-16]Status: DisposedITAT Patna18 Dec 2024AY 2015-16

Bench: Shri Sonjoy Sarma & Shri Sanjay Awasthii.T.A. No.45/Pat/2020 Assessment Year: 2015-16 Joseph Jose…………………….……………………………………….…..……Appellant House Of Dr. Sudhir Kumar, Opposite Loyala High School, Sadakat Ashram Kurji, Patna-800010, Bihar. [Pan: Ajlpj6722E] Vs. Acit, Circle-4, Patna…….............…..….…..….........……........……...…..…..Respondent Appearances By: Shri Ms Ahmed Appeared On Behalf Of The Appellant. Shri Ashwani Kumar, Sr. Dr, Appeared On Behalf Of The Respondent. Date Of Concluding The Hearing : December 17, 2024 Date Of Pronouncing The Order : December 18, 2024 Order Per Sonjoy Sarma: The Present Appeal Has Been Preferred By The Assessee Against The Order Dated 23.01.2020 Of The Commissioner Of Income Tax (Appeals)-2, Patna [Hereinafter Referred To As ‘Cit(A)’] Passed U/S 250 Of The Income Tax Act (Hereinafter Referred To As The ‘Act’). 2. Brief Facts Of The Case Are That The Assessee Is An Individual & Filed His Return Of Income For The Assessment Year 2015-16 Declaring Total Income Of Rs.13,25,260/- & The Main Source Of Income Was Civil Contractor. The Case Of The Assessee Was Selected For Scrutiny Under Cass & Accordingly, Notice U/S 143(2) Of The Act Was Issued. Later On, The Case Of The Assessee Was Transferred On Pecuniary Jurisdiction & Notice U/S 142(1) R.W.S. 129 Of The Act Was Issued To The Assessee. In

Section 142(1)Section 143(2)Section 250Section 40A(3)

Narayan Das Talreja, N.S.M., Azadpur, Delhi vs. ITO Ward 36(1), New Delhi

In the result, appeal of the assessee is partly allowed

ITA 2564/DEL/2023[2018-2019]Status: DisposedITAT Delhi18 Dec 2024AY 2018-2019

Bench: Shri Vikas Awasthyआअसं.2564/िद"ी/2023(िन.व. 2018-19) Narain Dass Talreja, (Through Kishore Talreja Lr) B-206, New Subzi Mandi, Azad Pur, Delhi-110033 ...... अपीलाथ"/Appellant Pan: Acspt-4460-B बनाम Vs. Income Tax Officer, Income Tax Department, ..... "ितवादी/Respondent National E-Assessment Centre, Delhi अपीलाथ" "ारा/ Appellant By : S/Shri K.P Ganguly & Narender Kumar, Advocate "ितवादी"ारा/Respondent By : Shri Sanjay Tripathi, Sr. Dr सुनवाई क" ितिथ/ Date Of Hearing : 19/09/2024 घोषणा क" ितिथ/ Date Of Pronouncement : : 18/12/2024 आदेश/Order Per Vikas Awasthy, Jm: This Appeal By The Assessee Is Directed Against The Order Of Commissioner Of Income Tax (Appeals), National Faceless Appeal Centre, Delhi (Hereinafter Referred To As 'The Cit(A)') Dated 19.07.2023, For Assessment Year 2018-19. 2. The Facts Of The Case In Brief As Emanating From Records Are: The Assessee Is A Commission Agent & Is Engaged In Trading Of Fresh Fruits. The Assessee Filed Its Return Of Income For The Impugned Assessment Year Declaring Income Of Rs.9,30,120/-. In The Course Of Assessment Proceedings The Assessing Officer (Ao) Found That In Violation Of Provisions Of U/S. 40A(3) Of The Income Tax Act, 1961(Hereinafter Referred To As ‘The Act’) The Assessee Has Made Payment In Cash In Excess Of Rs.10,000/- To A Single Person & There Are Several Such Payments. Hence, He Made Disallowance U/S. 40A(3) Of The Act On Following Transactions:

For Appellant: S/Shri K.P Ganguly, & Narender Kumar, AdvocateFor Respondent: Shri Sanjay Tripathi, Sr. DR
Section 40A(2)Section 40A(3)