No disallowance u/s 40A(3) as business nature and cash withdrawals patterns remained same

ITAT upheld deletion of disallowance u/s 40A(3) where the nature of business remained the same and the patterns of cash withdrawals were also similar all through the years.

In a recent judgment, ITAT Guwahati affirms deletion of disallowance u/s 40A(3) in respect of cash purchase where the nature of business remained the same and the patterns of bank deposits and cash withdrawals were also similar all through the years.

ABCAUS Case Law Citation:
4716 (2025) (08) abcaus.in ITAT

In the instant case, the Revenue had challenged the order passed by the CIT(A) in deleting the addition made under section 40A(3) of the Income Tax Act, 1961 (the Act) by the Assessing Officer (AO).

The only issue raised by the Revenue was against the deletion of disallowance made by the AO in respect of cash purchase out of withdrawals despite the fact that the assessee failed to furnish even the evidences qua the said purchases and also the fact that the payments were made in violation of Section 40A(3) of the Act.

The respondent assessee was engaged in the business of purchase and sale of betel nuts. The case of the assessee was reopened under Section 147 of the Act after recording reasons under Section 148(2) of the Act that assessee has made huge withdrawals from the bank accounts and that considering the said facts in the report/ dissemination notes from the DDIT (Inv), Guwahati through insight portal.

The AO observed that assessee incurred huge expenditure in cash exceeding of ₹20,000 on various occasions which was in contravention of Section 40A(3) of the Act and the said expenditure was not allowable in terms of said provisions.

Thereafter, the AO issued show cause notice along with the Draft Assessment Order, which was replied by the assessee requesting for a personal hearing, which was accordingly granted and held.

However, the AO stated that the assessee had not furnished any evidences and only submitted that the bank withdrawals were genuine. The AO finally held that section 40A(3) was clearly applicable. He added the same to the income of the assessee in the assessment framed u/s 147 read with section 143(3) of the Act.

However, the CIT(A) in the appellate proceedings, allowed the appeal of the assessee after taking into consideration the submissions and contentions of the assessee.

The Tribunal observed that the CIT (A) referred to the Rule 6DD of the Rules, which provides exceptions to Section 40A(3) of the Act wherein it is stated that cash payments made to cultivators /agriculturists for produce are exempt from the limit of ₹20,000/-.

The Tribunal noted that the assessee furnished the party-wise details of deposits made in five bank accounts and explained the source of funds from whom the money /deposits were received. The CIT (A) recorded the findings on the basis of said documents that assessee had proved the source of deposits into the bank accounts adequately.

The Tribunal further noted that the CIT(A) had noted that the assessee furnished the summary of financial transactions for last five years, where the nature of business remained the same and the patterns of bank deposits and cash withdrawals were also similar all through the years. Even the assessment was framed u/s 143(3) of the Act but there was no addition on account of cash expenditure.

The Tribunal also observed that the CIT(A) had noted that even a survey under section 133A of the Act was conducted on the appellant in the following Assessment Year and despite being surveyed, there was no addition. Therefore, the CIT(A) recorded the finding that it is a normal business activity to make such deposits and withdrawals from the banks.

Considering the findings recorded by the CIT(A) the Tribunal declined to interfere with the Appellate Order, being a very detailed and reasoned order, passed after taking into account all the submissions and arguments and facts on records.

Accordingly, the ITAT dismissed the appeal of the Revenue.

Download Full Judgment Click Here >>

• Andhra Pradesh High Court struck down Section 147A of the Income Tax Act, 1961 as unconstitutional
• Compensation to borrower upheld as bank did not verify construction progress before loan disbursals to builder
• No timeline mentioned in PMLA to forward arrest order & material in possession to Adjudicating Authority
• Release of seized assets if mandatory on completion of 120 days? Question referred to Larger Bench
• EPFO Extends date of filing of new ECR for the wage month September to 31/10/2026