Section 40A(3) - Scope
This query is : Resolved
13 October 2010
If an assessee makes a contribution under section 35(1)(ii)/(iia)/(iii) of an amount exceeding Rs. 20,000 in cash, will it attract disallowance under section 40A(3).
Can a contribution be considered to be an expenditure within the meaning of section 40A(3), since section 40A(3) provides for disallowance in respect of the expenditure which is otherwise deductible u/s 30 to 37.
What constitutes "Expenditure" within the meaning of sec 40A(3). Kindly explain the scope of sec 40A(3)(i.e., to which sections/provisions of the ACT does the abovesaid section apply and what are the sections/provisions which are not covered within the ambit of the abovesaid section.
Detailed explanation (quoting the relevant sections/rules) is requested.
If an assessee makes a contribution under section 35(1)(ii)/(iia)/(iii) of an amount exceeding Rs. 20,000 in cash, will it attract disallowance under section 40A(3).
Can a contribution be considered to be an expenditure within the meaning of section 40A(3), since section 40A(3) provides for disallowance in respect of the expenditure which is otherwise deductible u/s 30 to 37.
What constitutes "Expenditure" within the meaning of sec 40A(3). Kindly explain the scope of sec 40A(3)(i.e., to which sections/provisions of the ACT does the abovesaid section apply and what are the sections/provisions which are not covered within the ambit of the abovesaid section.
Detailed explanation (quoting the relevant sections/rules) is requested.
14 October 2010
First it is to be understood that sec 40 A (3) does not over ride sec 30 to 37. Its vice versa any ways. In case an amount exceeding Rs. 20000.00 is incurred in cash then the 100% of expenses are disallowed. For expenses disallowed u/s 30 to 37 sec 40 A(3) does not apply itself.
15 October 2010
Mr. Manish
Thank you for replying.
But I am not quite clear with your answer.
Do you mean to say that a contribution u/s 35 in excess of Rs.20,000 will be disallowed.
Kindly go through each part of my query again and reply explaining in detail.
Thanks again.
Thank you for replying.
But I am not quite clear with your answer.
Do you mean to say that a contribution u/s 35 in excess of Rs.20,000 will be disallowed.
Kindly go through each part of my query again and reply explaining in detail.
Thanks again.
23 July 2025
Your question deals with the **scope and applicability of Section 40A(3)** of the Income-tax Act, 1961 — particularly whether it applies to **deductions under Section 35**, such as contributions to scientific research.
Let's go through your query **systematically and in detail**, supported by relevant statutory references and judicial interpretations.
---
## 🔷 1. **Section 40A(3) – What It Says**
**Section 40A(3)** of the Income-tax Act reads:
> *“Where the assessee incurs any **expenditure** in respect of which payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque/draft or use of electronic clearing system, exceeds ₹10,000 (earlier ₹20,000), such expenditure shall not be allowed as a deduction.”*
📌 **Key Points:**
* Applies only to **"expenditure"**.
* Applies only where **payment is made in cash** exceeding the limit.
* It **disallows** deduction **otherwise allowable under Sections 30 to 37**.
> ⚖️ **CBDT Circular No. 34 \[dated 05.03.1970]** clarifies that **Section 40A(3)** is intended to curb tax evasion and applies only to **expenditures** deductible under **Sections 30 to 37**.
---
## 🔷 2. **Scope: Which Sections Does 40A(3) Apply To?**
Section 40A(3) **only applies to deductions claimed under Sections 30 to 37**, i.e.:
| Section | Nature of Expenditure |
| ------- | ----------------------------------------------------------------------- |
| 30 | Rent, rates, taxes, repairs, insurance of buildings |
| 31 | Repairs and insurance of machinery, plant, furniture |
| 32 | Depreciation |
| 33 | Development rebate |
| 35 | Scientific research expenditure ✅ (but with a nuance — explained below) |
| 36 | Other specific deductions (e.g., insurance, bonus, interest) |
| 37 | General business expenditure |
So yes, **Section 35** is within the range of sections **covered by Section 40A(3)**.
---
## 🔷 3. **Can Contribution under Section 35(1)(ii)/(iia)/(iii) be considered "Expenditure"?**
Let’s analyze:
### ➤ What does **Section 35(1)(ii)/(iia)/(iii)** say?
* **35(1)(ii)**: Deduction for sums paid to an approved scientific research association.
* **35(1)(iia)**: Deduction for sums paid to an approved company for scientific research.
* **35(1)(iii)**: Deduction for sums paid to an approved institution for social science or statistical research.
These are **capital or revenue contributions**, made **voluntarily** — not against any goods or services.
---
### 🔍 Case Law Insight:
#### ✅ **CIT v. Mudra Offset Pvt. Ltd.** (2011) 10 taxmann.com 255 (Gujarat HC):
> **Held**: *Contribution made under Section 35(1)(ii) is not in the nature of "expenditure" covered under Section 40A(3).*
The Court reasoned that:
* A donation to an approved research institution **is not in the nature of expenditure incurred for business operations**.
* It is a **statutory deduction**, not a business expenditure in the ordinary sense.
#### ✅ **CIT v. Excell Books Pvt. Ltd.** (2011) 12 taxmann.com 25 (Delhi HC):
> Similarly, held that **Section 40A(3)** would **not apply** to payments under Section 35(1)(ii) as it is **not an expenditure for goods/services**.
---
## 🔷 4. Conclusion: Does 40A(3) Apply to Contribution u/s 35?
| Aspect | Answer |
| ---------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ |
| Is contribution under Section 35(1)(ii)/(iia)/(iii) an "expenditure"? | Technically no — courts treat it as **a voluntary payment**, not business expenditure. |
| Is Section 35 covered by Section 40A(3)? | **Yes**, but only for business **expenditures**. |
| Will a donation in cash above ₹20,000 to an approved research body be disallowed under 40A(3)? | **Generally no**, as courts have excluded such donations from the ambit of "expenditure" under 40A(3). |
---
## ✅ Final Answer:
> A contribution made in **cash** exceeding ₹20,000 under **Section 35(1)(ii)/(iia)/(iii)** to an **approved institution** is **not considered "expenditure"** in the sense contemplated under **Section 40A(3)**. Hence, **it is not disallowed** under Section 40A(3), **as clarified by judicial precedent**.
However, for **caution and to avoid litigation**, it is always **advisable** to make such payments via **account payee cheque or electronic modes**.
---
Would you like a summary table or a sample legal memo you can use in response to scrutiny or for file documentation?
Let's go through your query **systematically and in detail**, supported by relevant statutory references and judicial interpretations.
---
## 🔷 1. **Section 40A(3) – What It Says**
**Section 40A(3)** of the Income-tax Act reads:
> *“Where the assessee incurs any **expenditure** in respect of which payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque/draft or use of electronic clearing system, exceeds ₹10,000 (earlier ₹20,000), such expenditure shall not be allowed as a deduction.”*
📌 **Key Points:**
* Applies only to **"expenditure"**.
* Applies only where **payment is made in cash** exceeding the limit.
* It **disallows** deduction **otherwise allowable under Sections 30 to 37**.
> ⚖️ **CBDT Circular No. 34 \[dated 05.03.1970]** clarifies that **Section 40A(3)** is intended to curb tax evasion and applies only to **expenditures** deductible under **Sections 30 to 37**.
---
## 🔷 2. **Scope: Which Sections Does 40A(3) Apply To?**
Section 40A(3) **only applies to deductions claimed under Sections 30 to 37**, i.e.:
| Section | Nature of Expenditure |
| ------- | ----------------------------------------------------------------------- |
| 30 | Rent, rates, taxes, repairs, insurance of buildings |
| 31 | Repairs and insurance of machinery, plant, furniture |
| 32 | Depreciation |
| 33 | Development rebate |
| 35 | Scientific research expenditure ✅ (but with a nuance — explained below) |
| 36 | Other specific deductions (e.g., insurance, bonus, interest) |
| 37 | General business expenditure |
So yes, **Section 35** is within the range of sections **covered by Section 40A(3)**.
---
## 🔷 3. **Can Contribution under Section 35(1)(ii)/(iia)/(iii) be considered "Expenditure"?**
Let’s analyze:
### ➤ What does **Section 35(1)(ii)/(iia)/(iii)** say?
* **35(1)(ii)**: Deduction for sums paid to an approved scientific research association.
* **35(1)(iia)**: Deduction for sums paid to an approved company for scientific research.
* **35(1)(iii)**: Deduction for sums paid to an approved institution for social science or statistical research.
These are **capital or revenue contributions**, made **voluntarily** — not against any goods or services.
---
### 🔍 Case Law Insight:
#### ✅ **CIT v. Mudra Offset Pvt. Ltd.** (2011) 10 taxmann.com 255 (Gujarat HC):
> **Held**: *Contribution made under Section 35(1)(ii) is not in the nature of "expenditure" covered under Section 40A(3).*
The Court reasoned that:
* A donation to an approved research institution **is not in the nature of expenditure incurred for business operations**.
* It is a **statutory deduction**, not a business expenditure in the ordinary sense.
#### ✅ **CIT v. Excell Books Pvt. Ltd.** (2011) 12 taxmann.com 25 (Delhi HC):
> Similarly, held that **Section 40A(3)** would **not apply** to payments under Section 35(1)(ii) as it is **not an expenditure for goods/services**.
---
## 🔷 4. Conclusion: Does 40A(3) Apply to Contribution u/s 35?
| Aspect | Answer |
| ---------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ |
| Is contribution under Section 35(1)(ii)/(iia)/(iii) an "expenditure"? | Technically no — courts treat it as **a voluntary payment**, not business expenditure. |
| Is Section 35 covered by Section 40A(3)? | **Yes**, but only for business **expenditures**. |
| Will a donation in cash above ₹20,000 to an approved research body be disallowed under 40A(3)? | **Generally no**, as courts have excluded such donations from the ambit of "expenditure" under 40A(3). |
---
## ✅ Final Answer:
> A contribution made in **cash** exceeding ₹20,000 under **Section 35(1)(ii)/(iia)/(iii)** to an **approved institution** is **not considered "expenditure"** in the sense contemplated under **Section 40A(3)**. Hence, **it is not disallowed** under Section 40A(3), **as clarified by judicial precedent**.
However, for **caution and to avoid litigation**, it is always **advisable** to make such payments via **account payee cheque or electronic modes**.
---
Would you like a summary table or a sample legal memo you can use in response to scrutiny or for file documentation?
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