Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

[Section 40]- Amounts Not Deductible for computing Profits & Gains of Business or Profession

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

[Section 40]- Amounts Not Deductible   for computing  Profits & Gains of Business or Profession
[Section 40]- Amounts Not Deductible for computing Profits & Gains of Business or Profession

Table of Contents

(1) [Section 40(a)]- Amounts Not Deductible – In the case of any assessee

(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).

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.

See also  [Section 23(2), (3) & (4)]- Computation of Income of a Property which is Self-Occupied for Residential purposes

(ii)   30% of any sum payable to a resident on which tax is deductible at source under sections 192  to 194LA

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,—

(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).

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.

(iii) 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.

In other words, any income tax levied and paid in India. Further, any sum paid outside  India which is eligible for relief under section 90 (double taxation relief) or deduction under  section 91 (unilateral relief), is not allowable as a deduction;

(iv) 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;

(v) (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;

(vi) 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;

(vii) 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;

(viii)         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) [Section 40(b)]- Amounts Not Deductible – In the case of a Partnership Firm: for Computing Profits and Gains of Business or Professions

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.

See also  Taxation In Companies - Company Taxation

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) [Section 40(ba)]- Amounts Not Deductible – In the case of AOP/BOI: – for Computing Profits and Gains of Business or Professions

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.

(4)  [Section 40A]- Expenses or Payments Not Deductible in certain circumstances:  – for Computing Profits and Gains of Business or Professions

The provisions, which are being discussed under various sub-sections of section 40A have  overriding effect over the provisions of any other section, because section 40A(1) clearly states that  the provision of section 40A shall have effect notwithstanding anything to the contrary contained in  any other provisions of the Act.

Therefore any expenditure or allowance, though specifically  allowable under any other provisions under the head business or profession, will not be deductible if  any of the sub-sections of section 40A are applicable.

(5)  [Section 40A(2)]- Expenses or Payments Not Deductible where such payments are made to Relatives  : – for Computing Profits and Gains of Business or Professions

An amount to be disallowed under this Section, three conditions have to be  fulfilled:

(i)            the payment is in respect of any expenditure;

(ii)           the payment has been made or is to be made to a specified person (i.e. relatives or close associates of the assessee) in respect of such  expenditure;

(iii)          the payment for the expenditure is considered excessive or unreasonable having regard to:

(a)           the fair market value of the goods, services or facilities; or

(b)          the legitimate business needs of the assessee’s business or profession; or

(c)           the benefit derived by or accruing to the assessee from the payment.

If the above conditions are fulfilled, the Assessing Officer can disallow the expenditure to the  extent he considers it excessive or unreasonable by the above objective standards or otherwise.

However no disallowance, on account of 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 section 92F(ii).

(6)  [Section 40A(3)(a)]- Amount Not Deductible in respect of Expenditure exceeding Rs.10,000: – for Computing Profits and Gains of Business or Professions

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, or use of electronic clearing  system through a bank account or such other electronic mode as may be prescribed exceeds ₹10,000,  no deduction shall be allowed in respect of such expenditure.

Prescribed electronic modes [Rule 6ABBA] 

(a) Credit Card; 

(b) Debit Card; 

(c) Net Banking; 

(d) IMPS (Immediate Payment Service); 

(e) UPI (Unified Payment Interface); 

(f) RTGS (Real Time Gross Settlement); 

(g) NEFT (National Electronic Funds Transfer), and 

(h) BHIM (Bharat Interface for Money) Aadhar Pay.

(7)  [Section 40A(7)]- Disallowance in respect of Provision For Gratuity: – for Computing Profits and Gains of Business or Professions

It has been provided under section 40A(7) that deduction on  account of provision for gratuity shall be allowed only when:—

(a)           the amount of gratuity has actually become payable during the previous year to the  employees’ (provided deduction has not been claimed under clause (b) below); or

(b)          when a provision has been made for payment of a sum by way of any contribution towards  an approved gratuity fund.

Therefore, no deduction shall be allowed in respect of any provision made for the payment of  gratuity to the employees, even though the assessee may be following the mercantile system of  accounting, unless it is a provision for the purpose of payment of a sum by way of any contribution  towards an approved gratuity fund.

(8)  [Section 40A(9)]- Disallowance in respect of Contributions to Non-Statutory Funds   – for Computing Profits and Gains of Business or Professions

No deduction shall be allowed in respect of any sum paid towards setting up or formation of any fund, trust, society,  etc. for any other purpose which is not approved or recognised.

Note :

As per provisions of various sections, only the sum contributed by the assessee as an employer  towards an approved gratuity fund, recognised provident fund or an approved superannuation fund  (for the purposes and to the extent required by law), shall be allowed as a deduction.

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