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)

Satyaprakash Maruti Prasad Sharma, Mumbai vs. ACIT-20(3), Mumbai

In the result, the appeal of the assessee is partly allowed

ITA 298/MUM/2023[2010-11]Status: DisposedITAT Mumbai29 May 2023AY 2010-11

Bench: Shri Aby T. Varkey, Jm & Shri Om Prakash Kant, Am आयकर अपील सं/ I.T.A. No.298/Mum/2023 (निर्धारण वर्ा / Assessment Year: 2010-11) Satyaprakash Maruti Prasad बिधम/ Acit-20(3) Sharma R. No. 615, 6Th Floor, Vs. 55/4, Rishikesh Bhawan, Piramal Chambers, Aai Mai Merwanji Street, Lalbaug, Mumbai- Parel, Mumbai-400012. 400012. स्थधयी लेखध सं./जीआइआर सं./Pan/Gir No. : Aljps5054L (अपीलार्थी /Appellant) .. (प्रत्यर्थी / Respondent) Assessee By: Shri Vimal Punamiya Revenue By: Ms. Mahita Nair (Sr. Ar) सुनवाई की तारीख / Date Of Hearing: 12/04/2023 घोषणा की तारीख /Date Of Pronouncement: 29/05/2023 आदेश / O R D E R Per Aby T. Varkey, Jm: This Is An Appeal Preferred By The Assessee Against The Order Of The Ld. Commissioner Of Income Tax (Appeals)/Nfac, Delhi Dated 10.01.2023 Passed For Ay 2010-11. 2. The Main Grievance Of The Assessee Is Against The Action Of The Ld. Cit(A) Confirming The Addition Of Rs.41,79,889/- On Account Of Bogus Purchases. 3. Brief Facts As Noted By The Ao Are That The Assessee Is An Individual Engaged In The Business As Works Contractor (For Supply Of Display Counters By Making It At The Site Of Customer). The Assessee Had Filed Return Of Income On 12.10.2010 Declaring Total Income Of Rs.34,12,777/- Which Was Processed U/S 143(1) Of The Income Tax Act, 1961 (Hereinafter “The Act”). Later, An Information Was Received From The Office Of Dgit(Inv.), Mumbai That The Assessee Was Engaged In Showing Bogus Purchases & Is A Beneficiary Of Such Transaction. The Ao Has Taken Note Of Fifteen (15) Parties From Whom It Was Alleged

For Appellant: Shri Vimal PunamiyaFor Respondent: Ms. Mahita Nair (Sr. AR)
Section 133(6)Section 143(1)Section 147