Section 40A(ia) of the Income Tax Act
Income-tax Act, 2025: s.36
Section 40A(ia) 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(ia) is CTO v. Swastik Roadways (3 SCC 640), cited in 36 of the 289 judgments on BharatTax that turn on this section.
Leading authorities on Section 40A(ia)
The rigours of Section 40A(3) should not be invoked without examining the genuineness of the transactions and whether they were free from tax evasion, as the consequences for non-compliance must have a nexus to the object of preventing tax evasion.
If a company has both interest-free funds and borrowed funds, a presumption arises that investments are made from interest-free funds, unless the Assessing Officer establishes a nexus between borrowed funds and the investments.
Payments made for purchasing stock-in-trade or raw materials are considered expenditure for the purposes of Section 40A(3) of the Income Tax Act. The Supreme Court has upheld the constitutional validity of Section 40A(3), stating its purpose is to curb black money, not restrict business freedom.
Where the Assessing Officer fails to establish a nexus between borrowed funds and advances made, a presumption arises that the advances were made out of the assessee's own interest-free funds.
The disallowance under Section 14A read with Rule 8D cannot exceed the exempt income earned by the assessee.
Tax is deductible at source at the time of credit to the contractor's account or payment, whichever is earlier, and section 194C(2) applies even if the sum is credited to a suspense account.
