The expenses which are mentioned in the below Sections are disallowed by the Income Tax Act while calculating income chargeable under head “Profits and Gains of Business or Profession“. Only the mentioned amounts are allowed as deductions, but no other amounts are not permissible.
Section 40A – Any Sum other than Salary Payable outside India or payable to Non-Resident or Foreign Company
These are the following expenses that are not deductible at source under Section 40:
- The amount but not salary payable is interest, technical fees, royalty or any other sum.
- In the hands of the recipient, it is chargeable to tax in India.
- The aforesaid sum is payable outside India or to a non-resident or foreign company.
If these conditions are satisfied, then the tax is deductible under the Act. These are provisions given below:
|TDS Default||Is such Expenditure Deductible in the current, previous year||Is such expenditure deductible in any subsequent previous year|
|Tax is deductible but not deducted||11% of such expenditure is disallowed in the current year||If the tax is deducted in any subsequent year the expenditure will be deposited by the assessee with the government.|
|Tax is deductible during the current financial year, but it is not deposited on or before the due date of submission of return of income under Section 139(1).||11% of such expenditure is disallowed in the current year||If the tax is deposited with the government after the due date of submission of return of income the expenditure will be deductible in that year on which tax will be deposited.|
Section 40A(2)(b) – Amounts not deductible in respect of payment to Relatives
Any expenditure incurred by the Assessee in respect of which payment has been made to persons covered by Section 40A(2)(b) is liable to be disallowed in computing business profit to extent such expenditure is considered to be excessive or unregionable, having regard to the fair market value of Goods or Services or Facilities, etc. Here the following definitions need to be considered for better understanding:
“Relative” means a person in relation as husband or wife, brother or sister or any linear ascendant or descendant of the individual.
“Substantial Interest” is defined as a situation wherein a person is the beneficial owner of at least 20% or more Equity Voting Power in case of Company. In any other case, it is entitled to 20% or more of the profits.
If the given following conditions are satisfied then to the extent the payment is excessive it will be disallowed:
- Expenditure is incurred for goods, services or facility.
- For the above expenditure, the payment is made to a person.
- Such expenditure is considered as excessive or unreasonable if:
- Fair market value of the commodity or service or facility.
- Legitimate business needs of the business of the assessee.
- The benefit derived by or accruing to assessees as a result of the expenditure.
The specified persons for different categories of taxpayers under Section 40A(2)(b) are:
|1. Individual||a. Any Relative that is Spouse, Brother, Sister, Lineal Ascendant or Descendant of such individual.
b. Any person in whose business or profession, the individual himself or his
relative has a substantial interest.
|2.Company, Firm, AOP/ HUF||a. Any Director of the Company, Partner of the firm, or member of the
association, or family or any relative of such director, partner or member.
b. Any Person in whose business or profession the assessee or director or partner or member of the assessee or any relative of such person has a substantial interest.
|3. For all
|a. Any Individual, who has a substantial interest in the business or profession of the Assessee.
b. A Firm, Company, AOP/ HUF having a substantial interest in business or profession of the assessee or any director, partner or member of any such person or any relative of any such director, partner or member.
c. A firm, Company, AOP/ HUF of which a director, partner or member has a substantial interest in the business or profession of the assessee or any director, partner, or member of any such person or any relative of any such director partner or member
Section 43B – Deduction allowed on actual payment
The following expenses are deductible on payment basis if:
- Any sum payable by way of Tax, Duty, Cess or fee under the law for any time being in force.
- Any sum payable by an employer by way of contribution to a provident fund or superannuation fund or any other fund for the welfare of employees.
- Any sum payable as bonus or commission to employees for service rendered.
- Any sum payable as interest on any loan or borrowing from a public financial institution that is IFCL, ICICI, LIC, IDBI, UTI, etc. or a state financial corporation or a state industrial investment corporation.
- Interest on any term loan or advance taken from a scheduled bank including a co-operative bank.
- Any sum payable by an employer instead of leave at the credit of his employee.