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)

Professional Educational Trust, Palladam vs. ACIT, Coimbatore

In the result, grounds taken by the assessee are allowed for statistical purposes

ITA 2274/CHNY/2026[2018-19]Status: DisposedITAT Chennai29 Jun 2026AY 2018-19

Bench: Honourable Shri Aby T. Varkey & Shri Gagan Goyalआयकर अपील सं./Ita No. 2274/Chny/2026 ननिाारण वर्ा /Assessment Years: 2018-19 Professional Educational Trust, V. Assistant Commissioner Of No.166, 167, Professional Nagar, Income Tax, Trichy Road, K.N. Puram Post, Coimbatore. Palladam, Tamil Nadu-641 662. [Pan: Aabtp6867F] (अपीलार्थी/Appellant) (प्रत्यर्थी/Respondent) अपीलार्थी की ओर से/ Assessee By : Mr. Girish Kumar S, Advocate, Ld. Ar प्रत्यर्थी की ओर से /Revenue By : Mr. Guru Bashyam, Cit, Ld. Dr सुनवाईकीतारीख/Date Of Hearing : 18.06.2026 घोषणाकीतारीख /Date Of Pronouncement : 29.06.2026 आदेश / O R D E R Per Gagan Goyal, Am: This Is An Appeal Preferred By The Assessee Against The Order Of Ld. Commissioner Of Income Tax (A) / Nfac, (Hereinafter Referred As The ‘Ld. Cit(A)’) Dated 10.09.2025, For The Assessment Year (Hereinafter Referred As The ‘Ay’) 2018- 19. Grounds Of Appeal 1. The Order Of The Nfac, Delhi Dated 10.09.2025 Vide Din & Order No. Itba/Nfac/S/250/2025-26/1080522828(1) For The Above-Mentioned Assessment Year Is Contrary To Law, Fact & In Circumstances Of The Case. 2. The Nfac, Delhi Erred In Dismissing The Appeal Ex-Parte & Ought To Have Appreciated That Any Order Passed In Gross Violation Of Principles Of Natural Justice Should Be Reckoned As Nullity In Law. 3. The Nfac, Delhi Failed To Appreciate That The Provisions Of Section 250(6) Of The Act Were Not Followed In Passing The Impugned Order & Hence Ought To Have Appreciated That Ex-Parte

For Appellant: Mr. Girish Kumar S, AdvocateFor Respondent: Mr. Guru Bashyam, CIT
Section 11Section 147Section 147ASection 148Section 148ASection 250(6)