Section 40A(3) Addition Quashed as Department Failed to Prove Single-Day Violation

Maya Devi Suhalka Vs ITO (ITAT Jodhpur)

The appeal before the ITAT Jodhpur arose from the order of the National Faceless Appeal Centre dated 30.10.2025 for AY 2020-21, wherein the addition of ₹2,40,000 under Section 40A(3) of the Income Tax Act was confirmed on account of alleged cash payment of rent.

The assessee, an individual engaged in the retail sale of IMFL and beer, had obtained a liquor licence from the Rajasthan State Excise Department for FY 2019-20. The rented premises used for the business were taken on monthly rent of ₹10,000. The assessee furnished the rent ledger showing that cash payments of ₹10,000 were made on different dates throughout the financial year, aggregating to ₹2,40,000. According to the assessee, no payment exceeding ₹10,000 was made to the landlord on any single day, and therefore Section 40A(3) was not attracted.

The Department, however, alleged that the entire rent amount of ₹2,40,000 had been paid in one instance in violation of Section 40A(3). The Tribunal noted that no corroborative documentary evidence had been produced by the Department to establish that any cash payment exceeding ₹10,000 had been made on a single day. It further observed that the assessee had maintained regular books of account and cash books, which were subject to mandatory audit, and no discrepancy or defect had been pointed out in those records.

After examining the material on record, the Tribunal held that each rent payment made by the assessee was below ₹10,000 per day during the relevant financial year. It found that the addition had been sustained merely on suspicion without disproving the assessee’s claim through evidence. Consequently, the Tribunal held that the order of the CIT(A) was contrary to the facts on record and deleted the addition of ₹2,40,000 made under Section 40A(3). The assessee’s appeal was accordingly allowed.

FULL TEXT OF THE ORDER OF ITAT JODHPUR

This appeal is filed by the assessee against the order of the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as the NFAC/CIT(A)] dated 30.10.2025 with respect to assessment year 2020-21, challenging therein confirmation of addition of Rs. 2,40,000/-by the CIT(A) under Section 40A(3) on account of cash payment of rent.

2. At the outset the Ld. AR submitted that the AO has disallowed Rs. 2,40,000/- under Section 40A(3) of the Act without considering the material filed on record in true perspective. The AR submitted that the assessee is an individual and engaged in business of retail sale of liquor i.e. IMFL and Beer. That the assessee has obtained the licence for the shop from Rajasthan State Excise Department for the financial year 2019­20 for the shop at Udaipur. The shop is allotted by the government on the payment of license fee. The AR contended that the appellant has paid rent per month to Prem Kumar in cash on different dates throughout the year. In support, the appellant has filed a copy of the rent account, as under:-

Maya Devi Suhalka
Rent A/C
Ledger Account
1 Apr 2019 to 31-Mar-2020

3. From the rent account, it is evident that no payments on a single day has been made by the assessee of amount of more than Rs. 10,000/-. Thus, all the payments are being made on different dates and the said amount being less than Rs. 10,000/- on a single day, the assessee has not violated the violated the provisions of Section 40A(3) of the Act. Thus, the AR pleaded that addition made by the AO and confirmed by the Ld. CIT(A) merely based on suspicion without bringing any cogent material evidence on record to controvert the claim of the assessee deserves to be deleted. In support he placed reliance on the judgment of Dhakeshwari Cotton Mills 26 ITR 775 (SC) and also referred to R.B.N.J. Naidu Vs. CIT 29 ITR 194 (Nag), Kanpur Steel Co. Ltd. Vs. CIT 32 ITR 56 (All.), where it has been held that addition made by the AO merely based on suspicion was not desirable in the eyes of law. Accordingly, he pleaded that the addition made by the AO may be deleted.

4. On the other hand the Ld. DR relied on the impugned order.

5. Heard both the sides and perused the material on record. Admittedly, the appellant assessee was allotted a liquor license/shop by the Excise (Abkari) Department of Rajasthan and for that inspection of shop was made by the District Excise Officer (APB Page No. 3). It is an undisputed fact on record that the shop was taken on rent at the rate of 10,000/- per month. However, the department alleged that the assessee has paid the rent of Rs. 2,40,000/- in one go in violation of provision of Section 40A(3) of the Income Tax Act, 1961 as against Rs. 10,000/- each day claimed to be paid by the assessee. However, the department did not bring on record any corroborative documentary evidence that the assessee has made payment of any rent of more than Rs. 10,000/- in cash in a single day in the whole of the financial year under consideration. The appellant assessee has maintained cash book as he was required to mandatorily maintain books of accounts and these books of account are also be required to be audited by qualified chartered accountant.

6. From the record it is evident that assessee has made payment of rent in cash, however, the each cash payment made towards the rent payment has never been more than Rs. 10,000/- in a day for the entire financial year under consideration.

7. The department did not point out any discrepancy either in the cash book or the books of accounts maintained by the assessee which are duly audited. In our view, without pointing out any defect or discrepancy in the books of accounts and disproving the claim of the assessee that none of the cash was more than Rs. 10,000/- each day during the year. The addition made by the AO merely based on suspicion alleging violation of provision of Section 40A(3) of the Income Tax Act is unwarranted. The Section 40A(3) of the Income Tax are reproduced for ready reference herein:-

(3) Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft exceeds twenty thousand rupees no deduction shall be allowed in respect of such expenditure.

8. From the plain reading of the provisions of Section 40A(3) of the Income Tax Act, 1961, it is apparently clear that only an expenditure of Rs. 10,000/- or more is paid to a person in cash or other than account payee cheque or bank draft in a day is held in violation of Section 40A(3) of the Income Tax Act, 1961. In the present case, there is no such payment of cash of more than Rs. 10,000/- on a specific day has been established by the department.

9. We, therefore, hold that the order of the Ld. CIT(A) is perverse to the facts on record and as such, addition of Rs. 2,40,000/- confirmed by the Ld. CIT(A) under Section 40A(3) of the Act, is deleted.

10. In the result, the appeal of the assessee is allowed. Order pronounced on 03 / 06 / 2026 in the open court.