Amounts Not Deductible [Section 40(a), 40(b), 40(ba)] -Profits and Gains of Business or Profession

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Notwithstanding anything contained in sections 30 to 38, the following amounts shall not be deducted under section 40(a), 40(b), 40(ba) in  computing the income chargeable under the head profits and gains of business or profession.

1.  Disallowance In the case of any assessee [Section 40(a)]

(i)         Any interest, royalty, fees for technical services, or other sum chargeable under Income-tax Act which is  payable –

(a)        outside India; or

(b)        in India to a non-resident, not being a company or to a foreign company  on which tax has not been deducted before the end of the previous year or, after deduction, has not been  paid before the due date specified under section 139(1).

However, where in respect of any such sum,

(a)        tax has been deducted in any subsequent previous year, or

(b)        has been deducted during the previous year but paid after the due date specified u/s 139(1),

then such sum shall be allowed as deduction in computing the income of the previous year in which such  tax has been paid.

Chargeable under the Income-tax Act means that receipt of such income must be taxable in India.

Circumstances under which tax shall be deemed to have been deducted and paid 

Where an assessee makes the payment of an expense mentioned in clause (a) above to a non-resident  payee without deduction of tax and is not deemed to be an assessee in default under section 201(1)  because the payee and the payer have satisfied conditions mentioned therein then it shall be deemed that  the assessee has deducted & paid the tax on such sum on the date of furnishing of return of income by the  resident payee.

Conditions to be satisfied by the non-resident payee 

  1. he has furnished his return of income under section 139;
  2. he has taken into account such sum for computing income in such return of income; and
  3. he has paid the tax due on the income declared by him in such return of income.

Condition to be satisfied by the payer (i.e. the assessee) 

The payer furnishes a certificate to this effect from a chartered accountant in such form as may be  prescribed.

(ii)        30% of any sum payable to a resident on which tax is deductible at source under sections 192 to 194LA  (See chapter on Deduction of Tax at Source) shall not be allowed as deduction in the previous year in  which the expense is incurred, while computing the income chargeable under the head ‘Profits and gains  of business or profession’, if in respect of such expense,—

See also  Compulsory Tax Audit of Accounts [Section 44AB] – Profits and Gains of Business and Profession

(a)        tax has not been deducted during the previous year or

(b)        after deduction has not been paid on or before the due date mentioned under section 139(1).

However, where in respect of any such sum,—

(a)        tax has been deducted in any subsequent year, or

(b)        has been deducted during the previous year but paid after the due date specified under section 139(1),

30% of such sum shall be allowed as a deduction in computing the income of the previous year in which  such tax has been paid.

Circumstances under which tax shall be deemed to have been deducted and paid 

Where an assessee makes the payment of an expense mentioned in clause (b) above to a resident payee  without deduction of tax and is not deemed to be an assessee in default under section 201(1) because the  payee and the payer have satisfied conditions mentioned therein then it shall be deemed that the assessee  has deducted & paid the tax on such sum on the date of furnishing of return of income by the resident  payee.

Conditions to be satisfied by the resident payee 

  1. he has furnished his return of income under section 139;
  2. he has taken into account such sum for computing income in such return of income; and
  3. he has paid the tax due on the income declared by him in such return of income.

Condition to be satisfied by the payer (i.e. the assessee) 

The payer furnishes a certificate to this effect from a chartered accountant in such form as may be  prescribed.

(iii)       Expenses incurred by the assessee towards specified services shall be disallowed if the equalization levy has not been deducted and paid [Section 40(a)(ib)]

Any consideration paid or payable to a non-resident for a specified service on which equalisation levy is deductible under the provisions of Chapter Viii of the Finance Act, 2016 shall not be allowed as deduction if such levy has not been deducted or after deduction, has not been paid on or before the due date specified in section 139(1).

See also  Expenses or Payments Not Deductible: [Section 40A] --Profits and Gains of Business or Profession

However, where in respect of any such consideration., the equalisation levy has been deducted in any subsequent year or has been deducted during the previous year but paid after the due date specified in section 139(1), such sum shall be allowed as a deduction in computing the income of the previous year in which such levy has been paid.

(iv)       Tax levied on profits or gains [Section 40(a)(ii)]:

Any sum paid on account of any rate or ‘tax’ levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains shall not be eligible for deduction;

Tax which are not deductible

(i)         Indian income-tax

(ii)        Agricultural income-tax

(iii)       Interest payment in relation to income-tax

(iv)       Foreign income-tax.

Education cess and secondary and higher education cess are part of income tax and is thus not allowable as deduction by virtue of section 40(a)(ii).

Education cess incurred by asscssec is to be allowed as revenue expenditure under section 37(1)

Taxes paid on income earned outside India [Explanation 1 to section 40(a)(ii)][W.e.f. assessment year 2006-07]:

Any sum paid outside India and eligible for relief of tax under section 90 or deduction from the income-tax payable under section 91 is not allowable, and is deemed to have never been allowable, as a deduction under section 40 of the Income-tax Act. However, the tax payers will continue to be eligible for tax credit in respect of income-tax paid in a foreign country in accordance with the provisions of section 90 or section 91, as the case may be.

Further Explanation 2 has been inserted w.e.f. 1.6.2006 to provide that any sum paid outside India arid eligible for relief of tax under newly inserted section 90A will not be allowed as a deduction in the computation of profits and gains from business or profession.

(v)        any sum paid on account of wealth tax under the Wealth Tax Act and any tax of a similar character  chargeable under any law in force in any country outside India;

(vi)       (a) any amount paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other  fee or charge, by whatever name called, which is levied exclusively on, or

(b)        any amount appropriated, directly or indirectly, from,  a State Government undertaking, by the State Government;

(vii)      any payment which is chargeable under the head “Salaries”, if it is payable:

(a)        outside India, or

(b)        to a non-resident

and if the tax has not been paid thereon nor deducted therefrom under Chapter XVII-B;

(viii)     any payment to provident fund or other fund established for the benefit of employees of the assessee,  unless the assessee has made effective arrangements to secure that tax shall be deducted at source from  any payments made from the funds which are chargeable to tax under the head Salaries;

(ix)       any tax actually paid by any employer on the perquisites not provided by way of monetary payment shall  not be eligible for deduction while computing the business income of the employer.

2.  Disallowances in case of a Partnership Firm [Section 40(b)]:

Interest on capital/loans of the partners is  allowed as deduction only when payment of interest is mentioned in the partnership deed. Further the amount of  interest allowed as deduction shall be either the amount mentioned in the partnership deed or 12% p.a. whichever  is less.

Similarly any salary, bonus commission or any other remuneration is a allowable deduction only when it is  prescribed in the partnership deed and only when it is paid to a working partner.

Further, the quantum of deduction payable to all working partners shall be the minimum of the following two  limits:

(a)        Amount paid or payable to working partners as authorised in partnership deed.

(b)        Maximum amount specified under section 40(b).

Maximum amount specified under section 40(b).

On the first ₹3,00,000 of book profit or in case of a loss 90% of book profit or ₹1,50,000 whichever is more
On the balance book profit 60% of the book profit

 

Salary paid to non-working partner shall not be eligible for any deduction.

3.  Disallowance in case of AOP/BOI [Section 40(ba)]:

Any payment of interest, salary, bonus or  commission or remuneration, by whatever name called, made by an AOP or BOI to its member shall not be  allowed as deduction.

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