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Expenditures Not Deductible – Sec 40(A)

U.C Date : 25 Feb 2015

Following expenditure shall not be deductible

  1. Payment made to relative in excess of fair value [Sec 40(A)(2)]

If

  1. the assessee incurs any expenditure for which payment is made to the specified persons and
  2. the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to
  1. fair market value of the goods, services or facilities for which payment has been made; or
  2. the legitimate needs of the business or profession of the assessee; or
  3. the benefit derived by or accruing to the assessee therefrom,

then, such excessive/unreasonable part of the expenditure will not be allowed as deduction.

Disallowance = Expenditure incurred – FMV of good, services, facilities, benefits etc received by the assessee.

Meaning of Specified Person

  1. Expenditure in excess of Rs 20,000 in aggregate in a day otherwise than by account payee cheque or account payee bank draft [Sec 40(A)(3)]
  1. Assessee incurs an expenditure, which is allowable and claimed as deduction
  2. The payment or aggregate of payment made to a person in a day in respect of such expenditure, otherwise than by an account payee cheque drawn on a bank or account payee bank draft exceeds Rs 20,000

Then no deduction shall be allowed in respect of such expenditure.

Payment made for the expenditure that was claimed as deduction in previous year in contravention of above section shall be deemed to be the profit and gains of the business or profession and accordingly chargeable to income tax as income of the year in which such payment is made.

In case of good transport agencies – The aforesaid limit shall be Rs 35,000 in case of assessee is engaged in the business of plying, hiring or leasing goods carriage.

This section 40(A)(3) doesn’t apply in certain cases – Rule 6DD

  1. Provision for gratuity [Sec 40(A)(7)]

Provision for payment of gratuity to employee is not allowed as deduction. It is noted that contribution for approved gratuity fund shall be allowed as per section 43B.

  1. Contribution to non-statutory fund [Sec 40(A)(9)]

Any sum including contribution paid to Non statutory/Unrecognised welfare fund is not deductible except where such sum is paid for

  1. contribution towards a recognised provident fund or an approved superannuation fund (Section 36(1)(iv)or
  2. pension scheme (Section 36(1)(iva) (Section 80CCD)
  3. contribution towards an approved gratuity fund created by him for the exclusive benefits of his employee under an irrevocable trust(Section 36(1)(v)

Bare Act for Sec 40(A)

Bare Act for Sec 40(A)

(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 :

[Providedthat 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 [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.

(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.

(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.]

(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) [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.

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