Income Tax Query

Scope and Applicability of Section 40A(3)  

1.     Burden of Proof: A deeming provision such as Section 40A(3), has to be strictly construed. The onus to show that the requisite conditions for application of the section are met, so that disallowance is attracted, is on the revenue. (Sai Construction Vs ITO (2009) 31 DTR (Ctk) 33. 

2.     Principles of Natural Justice: The assessee has to be given opportunity to provide evidence and his version of facts. 

3.     Meaning of the word “Expenditure”: Expenditure denotes spending or paying away. Something should go out of the coffers of the assessee.  

4.     Payments on capital account not hit: Since the section 40A(3) relates to expenditure, payment for purchase of assets, like machinery, plant, furniture etc, will not attract this provision. 

5.     No disallowance where no deduction of expenditure claimed: Where there is no expenditure, there is no disallowance. Where the payment is not claimed as expenditure, there cannot be any disallowance of the same. Section 40A(3) can be invoked only where the expenditure is claimed as deduction in computing business income. 

6.     Payment for purchase of stock in trade is covered by Section 40A(3): In Attar Singh Gurmukh Singh Vs ITO (1991) 191 ITR 667 (SC), the Hon’ble Supreme Court held that the word “expenditure” has not been defined in the Act. It is word of wide import. Section 40A(3) refers to the expenditure incurred by the assessee in respect of which payment is made. It means that all the outgoings are brought under the word “expenditure” for the purpose of the section. The expenditure for purchasing stock-in-trade is one of such outgoings. The value of the stock-in-trade has to be taken into account while determining the gross profits under section 28 on principles of commercial accounting. The payments made for purchases would also be covered by the word “expenditure” and such payments can be disallowed if they are made in cash in the sums exceeding the amount specified under Section 40A(3). 

7.     Post dated bearer cheques not to be counted for cash payment: Post dated bearer cheques issued in one day, will not be considered along with cash payment for the purpose of Section 40A(3), as payments against them could be made on the future date. 

8.     Book entries: In Dy CIT Vs Kirtilal Kalidas Jewellers (P) Ltd (2012) 54 SOT 529 (Chenn ‘A’ Trib), assessee purchased old ornaments from customers and sold jewellery to them, were only exchange transactions. There was no actual cash-flow and amount was settled only for the difference. Therefore, assessing officer was not justified in invoking Section 40A(3). 

9.     Payment of in cash of exactly the limit provided under Section 40A(3): With a view to invoking section 40A(3), a clear finding with evidence is necessary that the single payment by an assessee exceeded the prescribed limit of Rs.10000, i.e., any figure starting from Rs.10001. 

10. Tax Auditor already disallowed impugned payments: Where AO had made disallowance under Section 40A(3) in relation to expenses incurred by the assessee, the same could not be justified because such expenses were already disallowed by the tax auditor and would lead to double taxation-vide Dy. ACIT Vs BKB Transport Pvt Ltd 2018 TaxPub(DT) 2984 (Ranchi-Trib).