Section 40A of Income-Tax Act, 1961

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HomeBrud.gifIndian LawBrud.gifActsBrud.gifIncome-Tax Act, 1961Brud.gifSection 40A of Income-Tax Act, 1961

Section 40A of Income-Tax Act, 1961 deals with Expenses or payments not deductible in certain circumstances.

Contents

From the Income-Tax Act

Section 40A(1)

  • 40A. (1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head “Profits and gains of business or profession”.

Section 40A(2)

  • (2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the [Assessing] Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.
  • [* * *]

The following proviso shall be inserted in sub-section (2)(a) of section 40A by the Finance Act, 2012, w.e.f. 1-4-2013 :

Provided that no disallowance, on account of any expenditure being excessive or unreasonable having regard to the fair market value, shall be made in respect of a specified domestic transaction referred to in section 92BA, if such transaction is at arm's length price as defined in clause (ii) of section 92F.

(b) The persons referred to in clause (a) are the following, namely :—

(i) where the assessee is an individual - any relative of the assessee;

(ii) where the assessee is a company, firm, association of persons or Hindu un-divided family - 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;

(iii) any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual;

(iv) a company, firm, association of persons or Hindu undivided family having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member 58a[or any other company carrying on business or profession in which the first mentioned company has substantial interest];

(v) a company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member;

(vi) any person who carries on a business or profession,—

(A) where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or

(B) where the assessee being a company, firm, association of persons or Hindu undivided family, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner or member, has a substantial interest in the business or profession of that person.

Explanation

For the purposes of this sub-section, a person shall be deemed to have a substantial interest in a business or profession, if,—

(a) in a case where the business or profession is carried on by a company, such person is, at any time during the previous year, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) carrying not less than twenty per cent of the voting power; and

(b) in any other case, such person is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the profits of such business or profession.

Section 40A(3)

  • [(3) Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure.
  • (3A) Where an allowance has been made in the assessment for any year in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year (hereinafter referred to as subsequent year) the assessee makes payment in respect thereof, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, the payment so made shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as income of the subsequent year if the payment or aggregate of payments made to a person in a day, exceeds twenty thousand rupees:
  • Provided that no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3) and this sub-section where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, in such cases and under such circumstances as may be prescribed , having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors :]
  • [Provided further that in the case of payment made for plying, hiring or leasing goods carriages, the provisions of sub-sections (3) and (3A) shall have effect as if for the words “twenty thousand rupees”, the words “thirty-five thousand rupees” had been substituted.]

Section 40A(4)

[(4) Notwithstanding anything contained in any other law for the time being in force or in any contract, where any payment in respect of any expenditure has to be made by [an account payee cheque drawn on a bank or account payee bank draft] in order that such expenditure may not be disallowed as a deduction under sub-section (3), then the payment may be made by such cheque or draft; and where the payment is so made or tendered, no person shall be allowed to raise, in any suit or other proceeding, a plea based on the ground that the payment was not made or tendered in cash or in any other manner.]

Section 40A(5)

  • (5) [Omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989. Original sub-section (5) was inserted by the Finance (No. 2) Act, 1971, w.e.f. 1-4-1972.]

Section 40A(6)

  • (6) [Omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989. Original sub-section (6) was inserted by the Finance (No. 2) Act, 1971, w.e.f. 1-4-1972.]

Section 40A(7)

  • [(7) (a) Subject to the provisions of clause (b), no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason.
  • (b) Nothing in clause (a) shall apply in relation to any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year.

Explanation

For the removal of doubts, it is hereby declared that where any provision made by the assessee for the payment of gratuity to his employees on their retirement or termination of their employment for any reason has been allowed as a deduction in computing the income of the assessee for any assessment year, any sum paid out of such provision by way of contribution towards an approved gratuity fund or by way of gratuity to any employee shall not be allowed as a deduction in computing the income of the assessee of the previous year in which the sum is so paid.]

Section 40A(8)

  • (8) [* * *]

Section 40A(9)

Section 40A(9) of the Income-tax Act, 1961 deals with 'Business disallowance - Contribution to employees welfare trust, etc'

  • [(9) No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act, 1860 (21 of 1860), or other institution for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under clause (iv) 58a [or clause (iva)] or clause (v) of sub-section (1) of section 36, or as required by or under any other law for the time being in force.

Section 40A(10)

  • (10) Notwithstanding anything contained in sub-section (9), where the [Assessing] Officer is satisfied that the fund, trust, company, association of persons, body of individuals, society or other institution referred to in that sub-section has, before the 1st day of March, 1984, bona fide laid out or expended any expenditure (not being in the nature of capital expenditure) wholly and exclusively for the welfare of the employees of the assessee referred to in sub-section (9) out of the sum referred to in that sub-section, the amount of such expenditure shall, in case no deduction has been allowed to the assessee in respect of such sum and subject to the other provisions of this Act, be deducted in computing the income referred to in section 28 of the assessee of the previous year in which such expenditure is so laid out or expended, as if such expenditure had been laid out or expended by the assessee.]

Section 40A(11)

  • [(11) Where the assessee has, before the 1st day of March, 1984, paid any sum to any fund, trust, company, association of persons, body of individuals, society or other institution referred to in sub-section (9), then, notwithstanding anything contained in any other law or in any instrument, he shall be entitled—
  • (i) to claim that so much of the amount paid by him as has not been laid out or expended by such fund, trust, company, association of persons, body of individuals, society or other institution (such amount being hereinafter referred to as the unutilised amount) be repaid to him, and where any claim is so made, the unutilised amount shall be repaid, as soon as may be, to him;
  • (ii) to claim that any asset, being land, building, machinery, plant or furniture acquired or constructed by the fund, trust, company, association of persons, body of individuals, society or other institution out of the sum paid by the assessee, be transferred to him, and where any claim is so made, such asset shall be transferred, as soon as may be, to him.]

Section 40A(12)

  • (12) [Omitted by the Finance Act, 1992, w.e.f. 1-4-1993.]

Related Cases / Recent Cases / Case Law

  • CIT v Green City Manufacturing Co (2013) 351 ITR 156 (All): Allahabad High Court held that the remuneration paid to working partners within the limits specified under Section 40(b)(v) cannot be disallowed by invoking the provisions of Section 40A(2)(a).
  • Since the salary paid to non-residents for services rendered in Netherland is not chargeable to tax in India, provisions of section 40(a)(iii) will not be applicable and accordingly disallowance under section 40(a)(iii) cannot be made in respect of salary paid to non-residents for the services rendered abroad; [2011] 10 131 (Delhi - ITAT)
  • April 2011: ITAT, Delhi: Only when claim of assessee for deduction is under section 32 to section 38, provisions of section 40(a)(ia) can be pressed into service to disallow such claims for deduction. Where the assessee has nowhere claimed a payment as deduction, there is no question of deduction of tax at source and consequently no question of making any disallowance by invoking the provisions of section 40(a)(ia) - [2011] 10 - 181
  • May 2011: Mad.: Payment of bonus into an employees bonus trust is hit by section 40A(9)
    • Section 40A(9) is an overriding section to section 43B; when no deduction in respect of payment of bonus to workers is allowable u/s. 40A(9) how the assessee can claim deduction of said payment u/s. 43B(c) - [2011] 11-41 (Mad.)
  • May 2011: Delhi: Income-tax authorities can validly go into the reasonableness & genuineness of an expenditure by way of royalty/commission to overseas companies despite RBI's permission to the same
    • However, once it is held that expenditure was neither excessive nor unreasonable, the same could not be disallowed under section 40A(2) - [2011] 11-106
    • Expenditure must be revenue in nature, at least partly - Section 40(a)(ii) comes into play only if a part of the expenditure is otherwise held to be revenue expenditure under section 37. Where the expenditure is itself capital in nature (like tax liability of transferor-firm), it is not allowable under section 37(1) itself, and hence the question of applying section 40(a)(ii) cannot arise - CIT v. Plasmac Machine Mfg. Co. Ltd. [1993] 201 ITR 650 (Bom.).
    • ‘Any’ will qualify both rate and tax - The words ‘any rates or taxes levied’ in section 40(a)(ii) must be read as ‘any rate or any tax levied’, and the word ‘any’ will qualify both rate and tax. Accordingly, the taxes other than the tax under the Income-tax Act will also be covered by section 40(a)(ii) - Sundaram Industries Ltd. v. CIT [1986] 159 ITR 646 (Mad.).
    • Interest payable under the provisions of the Act is also covered - Payment of income-tax is not deductible as per section 40(a)(ii); hence, interest under sections 139, Section 215 of Income-Tax Act, 1961|215]] and 217 which is to be regarded as accretion to tax, cannot also be allowed to be deducted - Assam Forest Products (P.) Ltd. v. CIT [1989] 180 ITR 478 (Gauhati).
    • Surtax is not deductible - The surtax levied under the Surtax Act squarely falls within the mischief of sub-clause (ii) of clause (a) of section 40 and cannot be allowed as a deduction while computing the business income of the assessee under the provi­sions of the Act - Smith Kline & French (India) Ltd. v. CIT [1996] 85 LNIN 683/219 ITR 581 (SC).
    • Business tax paid in foreign country - Section 40(a)(ii) has no application to business tax paid by assessee in Thailand, as it is not on income but on turnover - CIT v. K.E.C International Ltd. [2003] 127 LNIN 519 (Bom.).
    • Income-tax dues of predecessor-firm paid by assessee cannot be allowed as deduction - Section 40(a)(ii) does not make any distinction between the income-tax paid by the assessee on its own income and the income-tax paid by the assessee on the income of its predecessor; where assessee-company was one of partners of the erstwhile firm and assessee had agreed to take-over tax liabilities of erstwhile firm at time of dissolution, income-tax dues of predecessor-firm paid by assessee could not be allowed as deduction - Himson Textile Engg. Industries (P.) Ltd. v. CIT [2004] 137 LNIN 432/267 ITR 612 (Guj.).

Other sections from the Act

  • Section 2: Definitions
  • Section 12: Income of trusts or institutions from contributions
  • Section 40: Amounts not deductible
  • Section 41: Profits chargeable to tax
  • Section 42: Special provision for deductions in the case of business for prospecting, etc., for mineral oil
  • Section 13A: Special provision relating to incomes of political parties
  • Section 43: Definitions of certain terms relevant to income from profits and gains of business or profession
  • Section 43A: Special provisions consequential to changes in rate of exchange of currency
  • Section 43B: Certain deductions to be only on actual payment
  • Section 43C: Special provision for computation of cost of acquisition of certain assets
  • Section 43D: Special provision in case of income of public financial institutions, public companies, etc.

Other related Acts


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