Section 40A(3) not applicable in respect of expenditure on fuel (petrol/diesel) – ITAT

Section 40A(3) not applicable in respect of expenditure on fuel petrol paid to dealers of Petroleum companies. Directors remuneration also allowed as genuineness was not in question.

In a recent judgment, ITAT Cochin has held that section 40A(3) of the Act has no application in respect of cash expenditure on fuel paid to dealers of Petroleum companies and also allowed remuneration paid to the Directors as the genuineness of the expenditure was not in question.

ABCAUS Case Law Citation:
4457 (2025) (03) abcaus.in ITAT

In the instant case, the assessee had challenged the order passed by the CIT(A) National Faceless Appeal Centre (NFAC) in confirming disallowance u/s 40A(3) of the Income Tax Act, 1961 (the Act).

The appellant was a company engaged in the business of mining. Against the income returned, the assessment was completed by the by Assessing Officer (AO) by making disallowance of the expenditure incurred in cash on fuel u/s 40A(3) of the Income Tax Act, 1961 (the Act) and remuneration paid to the Directors was also disallowed invoking provisions of section 40(a)(ia) & 40A(3) of the Act.

Being aggrieved by the assessment order, an appeal was filed before the CIT(A) contending that provisions of section 40A(3) of the Act had no application, inasmuch as, the genuineness of the transactions were not in doubt and the cash payments were made on account of business exigencies. The appellant also relied on the few judgements.

However, the CIT(A) confirmed the additions under section 40A(3), while holding that section 40(a)(ia) had no application in respect of Directors’ remuneration. 

Before the Tribunal the assessee contended that provisions of section 40A(3) of the Act has no application in respect of fuel expenditure as well as remuneration paid to the Directors as the genuineness of the expenditure was not in question. The assessee in support of its contentions relied upon the judgement of the Hon’ble Supreme Court and Allahabad High Court and Rajasthan High Court.

The Tribunal observed that provisions of section 40A(3) of the Act empowers the AO to disallow any deduction claim as expenditure in respect of which the payment was not made by cross cheques of bank drafts.

The Tribunal opined that the provisions of section 40A(3) are not absolute, as evident from rule 6DD of Income Tax Rules. These provisions of section 40A(3) cannot be read in isolation. This section must be read along with rule 6DD enumerating the exception circumstances under which the provisions of section 40A(3) has no application, which included, inter alia, payments made to the agencies for procuring material could not be disallowed.

The Tribunal observed that the press note issued by the Ministry of Finance clarified that the provisions of section 40A(3) has no application in respect of payments made to agents who solely acting as commission agent. The dealers of petroleum products only acts only as commission agents of petroleum companies.

Further, the Tribunal noted that the genuineness of the expenditure was not in question and, therefore, the ratio of the judgements of the Hon’ble Andhra Pradesh High Court was clearly applicable where in the Hon’ble High Courts took the view that when the genuineness of the expenditure is not in question, provisions of section 40A(3) has no application.

Similarly with regard to the Directors’ remuneration, the Tribunal observed that The Directors have offered the remuneration in their respective hands and it was tax neutral transaction and the payees were identified and genuineness of the expenditure was also not in doubt. Therefore, the reasoning adopted in respect of expenditure incurred on fuel, equally hold, good in respect of Directors’ remuneration.

In the light of the above, the Tribunal opined that having due regard to the circumstances under which the cash payments exceeding Rs. 20,000/- were made, the claim for allowance on expenditure was not hit by section 40A(3) of the Act.

Accordingly, the AO was directed to allow the deduction.

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