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)

Sri. Pavan Kandkur, Hubballi vs. Principal Commissioner of Income Tax, Hubballi

In the result, the appeal filed by the assessee is allowed

ITA 522/BANG/2022[2017-18]Status: DisposedITAT Bangalore17 Nov 2022AY 2017-18

Bench: Shri N.V. Vasudevan & Ms. Padmavathy S.Shri Pavan Kandkur Vs Principle Commissioner Of Cts No. 3046, Hirepeth Nagar Income Tax Near Akkikonda Aayakar Bhavan Hubballi 580020 Navanagar Pan – Anipk4256B Hubballi 580025 (Appellant) (Respondent) Assessee By: Shri Balram R. Rao, Adv. Revenue By: Ms. Neera Malmotra, Cit-Dr Date Of Hearing: 15/11/2022 Date Of Pronouncement: 17/11/2022 O R D E R Per: Padmavathy, A.M. This Is An Appeal Filed By The Assessee Against The Order Of The Learned Cit, Hubali Passed Under Section 263 Of The Income Tax Act, 1961 (The Act) Dated 23.03.2022 For Ay 2017-18. 2. The Assessee Raised The Following Grounds Of Appeal: - On The Facts & In The Circumstances Of The Case, The Conditions 1. Precedent Being Absent The Proceedings-Initiated U/S.263 Of The Act Was Opposed To Law & The Order Passed U/S.263 Is Liable To Be Cancelled. On The Facts There Being No Error Much Less An Error Prejudicial To The 2. Interest Of Revenue, The Learned Commissioner Of Income-Tax Ought To Have Refrained From Invoking The Provisions Of Sec.263 Of The Act. The Learned Commissioner Ought To Have Considered The Submissions 3. Made By The Appellant & Ought Not To Have Invoked The Proceedings U/S.263 Of The Act.

For Appellant: Shri Balram R. Rao, AdvFor Respondent: Ms. Neera Malmotra, CIT-DR
Section 133(6)Section 142(1)Section 143(2)Section 143(3)Section 263Section 40A(3)Section 5(3)Section 8

Assistant Commissioner of Income Tax, Circle - Agartala, Agartala vs. Kalika Jewellers, Agartala

In the result, appeal of the revenue is partly allowed for statistical purposes

ITA 85/GTY/2016[2010-11]Status: DisposedITAT Guwahati09 Nov 2022AY 2010-11

Bench: Shri Rajpal Yadav, Hon’Ble & Shri Manish Borad, Hon’Blei.T.A. No. 85/Gty/2016 Assessment Year: 2010-11 Asstt. Commissioner Of Income M/S. Kalika Jewellers Tax, Circle-Agartala Vs H.G.B. Road Agartala Tripura (W) - 799001 [Pan: Aafj5678K] अपीलाथ"/ (Appellant) "" यथ"/ (Respondent) Assessee By : Shri Sanjay Modi, Fca Revenue By : Shri N.T. Sherpa, Jcit सुनवाई क" तारीख/Date Of Hearing : 06/09/2022 घोषणा क" तारीख /Date Of Pronouncement: 09/11/2022 आदेश/O R D E R Per Manish Borad: The Present Appeal Is Directed At The Instance Of The Revenue Against The Order Of The Learned Commissioner Of Income Tax (Appeals) - Shillong, (Hereinafter The “Ld. Cit(A)”) Dt. 03/06/2016, Passed U/S 250 Of The Income Tax Act, 1961 (“The Act’) For The Assessment Year 2010-11, On The Following Grounds:- “1. For That The Ld. Cit(A) Has Erred In Deleting The Addition Made By A.O. Of Rs.8,81,708/- On Account Of Unexplained Expenditure. 2. For That The Ld. Cit(A) Has Erred In Deleting The Addition Of Rs.4,02,36,806/- Made By A.O. On Account Of Undisclosed Stock. 3. For That The Ld. Cit(A) Has Erred In Deleting The Disallowance Of Rs.16,20,750/- Made By A.O. On Account Of Making Charges U/S 40(A)(Ia). 4. For That The Ld. Cit(A) Has Erred In Deleting The Disallowance Of Rs.1,34,640/- & Rs.83,385/- Made By A.O. On Account Of Advertisement Expense U/S 40(A)(Ia).” 2. Brief Facts Of The Case Are That The Assessee Is A Partnership Firm Engaged In Jewellery Business. Income Of Rs.56,80,854/- Was Declared In The Return Filed On 23/09/2010. The Case Was Manually Selected For Scrutiny Followed By Service Of Notice U/S 143(2) & 143(1) Of The Act. The Ld. Assessing Officer Called For Various

For Appellant: Shri Sanjay Modi, FCAFor Respondent: Shri N.T. Sherpa, JCIT
Section 131Section 143(2)Section 250Section 40

Emkey Cold Storage, Kheda vs. The DCIT, Kheda Circle, Nadiad

In the result, assessee’s appeal is allowed

ITA 80/AHD/2021[2012-13]Status: DisposedITAT Ahmedabad02 Nov 2022AY 2012-13

Bench: Shri Pramod M. Jagtap & Ms. Madhumita Royआयकर अपील सं./I.T.A. No. 80/Ahd/2021 ("नधा"रण वष" / Assessment Year : 2012-13) Emkey Cold Storage D.C.I.T. बनाम/ Kheda Circle, National High Way No.-8, Vs. Village-Gutal, Nadiad, Nadiad Dist.-Kheda "थायी लेखा सं./जीआइआर सं./Pan/Gir No. : Aabfe5635Q .. (अपीलाथ" /Appellant) (""यथ" / Respondent) Shri S. N. Divatia, A.R. अपीलाथ" ओर से /Appellant By : ""यथ" क" ओर से/Respondent By : Shri Rakesh Jha, Sr. D.R. सुनवाई क" तार"ख / Date Of 14/10/2022 Hearing घोषणा क" तार"ख /Date Of 02/11/2022 Pronouncement O R D E R Per Ms. Madhumita Roy - Jm: The Instant Appeal Filed By The Assessee Is Directed Against The Order Dated 05.03.2021 Passed By The National Faceless Appeal Centre (Nfac), Delhi Arising Out Of The Order Dated 27.12.2019 Passed By The Dcit, Kheda Circle, Nadiad Under Section 143(3) R.W.S. 147 Of The Income Tax Act, 1961 (Hereinafter Referred As To ‘The Act’) For Assessment Year 2012-13. Ita No. 80/Ahd/2021 (Kheda Cold Storage Vs. Dcit) A.Y.– 2012-13 - 2 - 2. The Issue Involved In This Particular Matter Is This As To Whether The Disallowance Of Rs.8,09,287/- Invoking The Provision Of Section 40A(3) Of The Act Is Justified In Regard To The Payment Of Electricity Charges Made To The Gujarat Electricity Board.

For Respondent: Shri Rakesh Jha, Sr. D.R
Section 143(3)Section 40A(3)Section 5