Section 40A(3) Cash Freight Payments: Key Learnings from ITAT Kolkata Ruling for Delhi NCR Businesses
Understanding the Recent ITAT Kolkata Verdict on Cash Payments Section 40A(3) to Truck Drivers
In a significant judgment that provides relief to businesses making cash freight payments, the Income Tax Appellate Tribunal (ITAT) Kolkata has clarified the application of Section 40A(3) in the case of DCIT vs Greyforce Industries Limited for Assessment Year 2023-24. This ruling has important implications for businesses in Delhi NCR and across India that regularly engage in transportation and logistics operations.
Background of the Case
Greyforce Industries Limited, a cement manufacturing company, faced disallowance of ₹3.83 crores under Section 40A(3) of the Income Tax Act. The Assessing Officer (AO) alleged that the company made cash payments exceeding ₹35,000 to single transporters in a single day, violating the provisions of Section 40A(3).
During a survey conducted under Section 133A on March 16, 2023, the tax authorities scrutinized the company’s freight payment records and identified what they believed were violations of cash payment limits.
What is Section 40A(3) of the Income Tax Act?
Section 40A(3) is an anti-tax evasion provision that restricts cash transactions to prevent unaccounted money circulation. The section disallows business expenditure if payment exceeding ₹10,000 (or ₹35,000 for specific cases like transporters) is made in cash to a single person in a single day.
Key provisions:
- General limit: ₹10,000 per day to a single person
- Special limit for transporters: ₹35,000 per day
- Payments above these limits must be made through banking channels
- Violations result in disallowance of the entire expenditure
The Core Issue: Who Received the Payment?
The critical question in this case was: Were payments made to transport companies/facilitators or directly to individual truck drivers?
The Revenue’s Contention
The Assessing Officer argued that:
- Payments were made to transporters/facilitators
- Multiple payments to the same transporter in a day exceeded ₹35,000
- This violated Section 40A(3) provisions
- Total disallowance of ₹3.83 crores was justified
The Assessee’s Defense
The company maintained that:
- Cash payments were made directly to individual truck drivers
- No single driver received more than ₹35,000 in a day
- Transporters/facilitators merely coordinated trucks and earned commission from drivers
- The company had no contractual obligation to pay facilitators
ITAT’s Landmark Decision
The ITAT Kolkata ruled in favor of the assessee and deleted the entire disallowance. Here’s why:
1. Payments Made to Individual Drivers, Not Transporters
The Tribunal carefully examined the documentary evidence and found that:
- Cash vouchers clearly showed individual driver names
- Truck registration numbers were recorded for each payment
- No single driver received more than ₹35,000 in cash on any day
- Ledger accounts maintained driver-wise breakup
2. Role of Facilitators Was Limited
The ITAT accepted that transport facilitators:
- Only coordinated between truck owners and the company
- Did not receive freight payments from the company
- Earned commission directly from truck drivers
- Had no financial relationship with the assessee
This was supported by sworn affidavits from facilitators like Shri Kushal Singh Singhvi of M/s PISM Logistic Pvt. Ltd., who confirmed their limited coordinating role.
3. Business Reality Acknowledged
The Tribunal recognized the practical aspects of the transportation business:
- Cash payments to drivers are common industry practice
- Spot payments are often necessary for goods movement
- Commercial exigency justifies cash transactions
- The business model was genuine and transparent
4. AO Failed to Conduct Independent Inquiry
The ITAT criticized the Assessing Officer for:
- Not conducting independent verification
- Ignoring documentary evidence (affidavits, vouchers, builty slips)
- Mechanically applying Section 40A(3) without understanding business operations
- Failing to disprove the assessee’s claims
Secondary Issue: WhatsApp Messages and ₹10 Lakh Addition
The AO also added ₹10 lakhs under Section 69C based on WhatsApp messages allegedly showing cash payment for pasta machine installation.
ITAT’s Ruling on Digital Evidence
The Tribunal deleted this addition, holding that:
- Unverified social media messages cannot be the sole basis for additions
- No corroborative evidence was found (invoices, seized documents)
- Books of accounts were not rejected under Section 145(3)
- Statements without independent inquiry are insufficient
This sets an important precedent that uncorroborated digital messages alone cannot sustain income additions.
Key Takeaways for Delhi NCR Businesses
✓ Documentation is Crucial
Maintain comprehensive records:
- Individual payment vouchers with driver names
- Vehicle registration numbers
- Builty slips/transport documents
- Driver-wise ledger accounts
- Affidavits from facilitators if needed
✓ Understand the Payment Recipient
Ensure clarity on:
- Who actually receives the payment (driver vs transporter)
- Whether facilitators are paid separately
- The nature of the relationship with intermediaries
✓ Commercial Exigency is a Valid Defense
Business necessity for cash payments can be justified if:
- Payments are within prescribed limits per person per day
- Transactions are properly documented
- Identity of payees is established
- Genuineness is not in doubt
✓ Digital Messages Alone Are Insufficient
Tax additions cannot be sustained based solely on:
- WhatsApp chats
- Unverified statements
- Assumptions without independent inquiry
Compliance Checklist for Transportation Businesses
| Requirement | Action Item | Status |
|---|---|---|
| Payment Limit | Ensure no driver receives >₹35,000 cash/day | ☐ |
| Documentation | Maintain vouchers with driver details | ☐ |
| Vehicle Records | Record truck numbers for all payments | ☐ |
| Ledger Maintenance | Keep driver-wise payment ledgers | ☐ |
| Affidavits | Obtain from facilitators if payments routed through them | ☐ |
| Builty Slips | Preserve all transport documents | ☐ |
| Banking Compliance | Use banking channels for payments >₹35,000 | ☐ |
Legal Precedents Cited
The ITAT relied on several important judgments:
- Bhandari Construction Company vs Narayan Gopal Upadhye (2007) 3 SCC 163: Mere suspicion cannot substitute evidence
- Mehta Parikh & Co. vs CIT [1956] 30 ITR 181 (SC): Affidavit averments assumed correct unless proven otherwise
- Smt. Harshila Chordia (298 ITR 349): Section 40A(3) should not disallow genuine expenses
- Goenka Agencies (263 ITR 145): Commercial exigencies justify cash payments where identity and genuineness established
Practical Recommendations for Delhi NCR Businesses
For Manufacturing Companies
If you procure raw materials regularly:
- Document the supply chain clearly
- Distinguish between suppliers, transporters, and drivers
- Maintain payment trails showing individual recipients
- Ensure compliance with daily cash limits per driver
For Transport & Logistics Companies
- Clarify your role (principal vs facilitator)
- Document commission arrangements with drivers
- Maintain separate accounts for coordination fees vs freight payments
- Provide clients with proper documentation to support their claims
For All Business Owners
- Review cash payment policies immediately
- Train accounts team on Section 40A(3) compliance
- Implement robust documentation systems
- Consult chartered accountants before survey/assessment proceedings
Common Mistakes to Avoid
❌ Clubbing multiple driver payments under one transporter name ❌ Inadequate documentation of individual transactions ❌ Failing to obtain affidavits from facilitators ❌ Not maintaining vehicle-wise records ❌ Assuming all cash payments are disallowed ❌ Neglecting to explain business model to tax authorities
FAQs on Section 40A(3) and Cash Freight Payments
Q1: Can I pay ₹50,000 to a truck driver in cash in one day? A: No. The limit for cash payment to any transporter (including individual truck drivers) is ₹35,000 per day. Payments exceeding this must be made through banking channels.
Q2: What if a transporter sends 5 trucks in one day? A: If you pay each driver separately and no individual driver receives more than ₹35,000, Section 40A(3) is not violated. Maintain separate vouchers for each driver.
Q3: Are WhatsApp messages enough to prove cash payments? A: No. As this judgment shows, uncorroborated digital messages without supporting evidence cannot sustain income additions.
Q4: What documents should I maintain for cash freight payments? A: Cash vouchers, driver acknowledgments, truck numbers, builty slips, ledger accounts, and affidavits from facilitators if payments are coordinated through them.
Q5: Can the AO disallow expenses just based on suspicion? A: No. The AO must conduct independent inquiry and cannot make additions based solely on presumptions or unverified allegations.
Impact on Delhi NCR Business Community
This judgment provides significant relief to businesses in Delhi NCR’s industrial hubs like:
- Gurgaon/Gurugram: Manufacturing and logistics companies
- Noida/Greater Noida: Export-oriented units and warehousing
- Faridabad: Heavy industries and automotive sector
- Sonipat & Kundli: Industrial estates
- Delhi: Trading and distribution businesses
These areas have high volumes of goods movement requiring daily freight payments, making this ruling particularly relevant.
Action Steps for Businesses Under Scrutiny
If you’re facing Section 40A(3) disallowance:
- Gather Documentation: Compile all payment vouchers, ledgers, and transport documents
- Obtain Affidavits: Get sworn statements from transporters/facilitators clarifying their role
- Prepare Analysis: Show driver-wise breakup proving no individual exceeded limits
- Cite Precedents: Reference this ITAT Kolkata judgment and supporting case laws
- Professional Representation: Engage experienced chartered accountants for assessment/appellate proceedings
Conclusion
The ITAT Kolkata judgment in DCIT vs Greyforce Industries Limited reinforces that Section 40A(3) must be applied reasonably, not mechanically. Tax authorities cannot disallow genuine business expenditure simply because cash was used, provided:
- Payments are within prescribed limits per individual
- Proper documentation exists
- Identity of recipients is clear
- Business necessity is established
For businesses in Delhi NCR dealing with regular transportation needs, this judgment provides a strong precedent to defend legitimate cash payments to truck drivers, as long as compliance and documentation standards are maintained.
Need Expert Guidance on Section 40A(3) Compliance?
Navigating income tax regulations, especially provisions like Section 40A(3), requires expertise and up-to-date knowledge of recent judgments. Our chartered accountants in Delhi NCR specialize in:
✅ Tax compliance and advisory ✅ Assessment representation ✅ Appellate proceedings support ✅ Documentation and record-keeping systems ✅ Survey and search proceedings assistance
Contact us today for a comprehensive review of your cash payment policies and ensure full compliance with Income Tax regulations while optimizing your tax position.
Disclaimer: This article is for informational purposes only and should not be construed as legal or professional advice. Tax laws and their interpretations are subject to change. Consult with qualified chartered accountants for advice specific to your situation.
