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)

Rajendra Kumar Sahoo, Keonjhar vs. ACIT, Circle-1(1), Cuttack

In the result, appeal of the assessee is dismissed

ITA 53/CTK/2018[2012-13]Status: DisposedITAT Cuttack16 Mar 2020AY 2012-13

Bench: Shri C.M. Garg, Jm & Shri L.P. Sahu, Am आयकर अपीऱ सं./Ita No.53/Ctk/2018 (नििाारण वषा / Assessment Year : 2012 - 2013) Mr. Rajendra Kumar Sahoo, Vs. Acit, Circle-1(1), Cuttack Prop. Of New Kanak Jewellery & Kanak Transport, At/Po: New Market, Keonjhar-758001 स्थायी ऱेखा सं./Pan No. : Arkps 2114 G (अऩीऱाथी /Appellant) (प्रत्यथी / Respondent) .. यनधागररती की ओर से /Assessee By Shri B.R.Panda/Satyajit Nanda, Advs. : राजस्व की ओर से /Revenue By : Shri Subhendu Dutta, Dr सुनवाई की तारीख / Date Of Hearing : 22/01/2020 घोषणा की तारीख/Date Of Pronouncement : 16/03/2020 आदेश / O R D E R Per L.P.Sahu, Am : This Is An Appeal Filed By The Assessee Against Order Of Cit(A), Cuttack, Dated 18.10.2017 For The Assessment Year 2012-2013. 2. As Per The Office Note/Order Sheet Entry, The Appeal Of The Assessee Is Barred By 48 Days. In This Regard, The Ld. Ar Of The Assessee Has Filed An Application For Condonation Of Delay Along With An Affidavit. Considering The Application Along With The Affidavit Of The Assessee For Condonation Of Delay, To Which Ld. Dr Did Not Object To The Same, We Condone The Delay In Filing The Appeal & The Appeal Is Heard Finally.

For Respondent: Shri Subhendu Dutta, DR
Section 40A(3)

M/S Barnala Steel Industries Ltd., Muzaffarnagar vs. JCIT, Muzaffarnagar

In the result, the appeal filed by the assessees is partly allowed for statistical purposes

ITA 341/DEL/2016[2010-11]Status: DisposedITAT Delhi17 Feb 2020AY 2010-11

Bench: Shri Bhavnesh Saini & Shri R.K. Pandaassessment Year: 2010-11 Barnala Steel Industries Ltd., Vs Jcit, Village Vehlana, Range-2, Meerut Road, Muzaffarnagar. Muzaffarnagar. Pan: Aabcb2772Q (Appellant) (Respondent) Assessee By : Shri Ankit Gupta, Advocate Revenue By : Shri S.L. Anuragi, Sr. Dr Date Of Hearing : 04.02.2020 Date Of Pronouncement : 17.02.2020 Order Per R.K. Panda, Am: This Appeal Filed By The Assessee Is Directed Against The Order Dated 23Rd November, 2015 Of The Cit(A)-Muzaffarnagar, Relating To Assessment Year 2010- 11. 2. The First Issue Raised By The Assessee In The Grounds Of Appeal Relates To The Addition Of Rs.3,52,799/- Made By The Ao U/S 40A(3) Of The It Act. 3. Facts Of The Case, In Brief, Are That The Assessee Is A Company Engaged In The Business Of Manufacturing Of Ms Bar & Tmt. It Filed Its Return Of Income On 13Th October, 2010 Declaring The Total Income At Rs.1,48,33,980/- & An Amount Of Rs.2,22,85,162/- As Book Profit U/S 115Jb Of The Act. During The Course Of Assessment Proceedings, The Ao Observed From The Various Details Filed By The Assessee That The Assessee Has Violated The Provisions Of Section 40A(3) Of The Act For The Purchases From The Above Parties:- Date Of Payment Name Of Supplier Amount 03.11.2009 Mishra Coal Traders 76107/- 05.11.2009 Khan Coal Traders 92950/- 10.11.2009 Khan Coal Traders 91182/- 10.11.2009 Vikas Distributors 92560/-

For Appellant: Shri Ankit Gupta, AdvocateFor Respondent: Shri S.L. Anuragi, Sr. DR
Section 115JSection 194ASection 201Section 40Section 40A(3)