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. Dharti Engineers, Amreli vs. The Pr. CIT-1, Rajkot

In the result, assessee’s appeal is allowed

ITA 198/RJT/2022[2017-18]Status: DisposedITAT Rajkot29 Aug 2023AY 2017-18

Bench: Smt.Annapurna Gupta & Ms. Madhumita Royआयकर अपील सं./I.T.A. No. 198/Rjt/2022 ("नधा"रण वष" / Assessment Year : 2017-18) M/S. Dharti Engineers The Pcit-1 बनाम/ Sardar Nagar Street No.1, Rajkot Vs. Chakkargadh Road,Amreli - 365601 "थायी लेखा सं./जीआइआर सं./Pan/Gir No. : Aadfd8555E .. (अपीलाथ" /Appellant) (""यथ" / Respondent) Appellant By : Shri D. M. Rindani, A.R. Respondent By : Shri Shramdeep Sinha, Cit.D.R. सुनवाई क" तार"ख /Date Of Hearing 22/08/2023 घोषणा क" तार"ख /Date Of 29/08/2023 Pronouncement O R D E R Per Ms. Madhumita Roy - Jm: The Instant Appeal At The Instance Of The Assessee Is Directed Against The Order Dated 21.01.2022 Passed By The Principal Commissioner Of Income Tax-3, Rajkot (In Short ‘The Pcit’) Holding The Assessment Order Dated 10.12.2019 Passed By The Dc/Acit, Cir-3(1), Rkt Under Section 143(3) Of The Income Tax Act, 1961 (Hereinafter Referred As To ‘The Act’) Erroneous & Prejudicial To The Interest Of Revenue & Setting Aside The Issue To The File Of The Ld. Ao With A Direction Upon Him To Pass A Fresh Assessment Only To The Extent Of The Issues In Respect Of The Provision Of Section 40A(3) Of The Act With Proper Enquiry & Verification Of The Claim & Its Genuineness For A.Y. 2017-18. Ita No. 198/Rjt/2022 (M/S. Dharti. Engineers Vs. Pcit) A. Y. 2017-18 - 2- 2. The Short Fact Leading To The Case Is This That The Assessee By Paying Huge Cash In Excess Of Rs.20,000/- Alleged To Have Violated The Provision Of Section 40A(3) Of The Act. The Details Whereof Has Been Reproduced In The Order Passed By The Ld. Cit(A) In The Following Manner:

For Appellant: Shri D. M. Rindani, A.RFor Respondent: Shri Shramdeep Sinha, CIT.D.R
Section 143(3)Section 263Section 40A(3)