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Expenditures Not Deductible – Section 40(A)

Following expenditure shall not be deductible

  1. Payment made to relative in excess of fair value [Section 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 [Section 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 [Section 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 [Section 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)
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