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Expenditures Not Deductible – Section 40(A)

Following expenditure shall not be deductible

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

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.

There are also some other cases in which cash transactions lead to disallowance/penalty.

This section 40(A)(3) doesn’t apply in certain cases given in Rule 6DD of Income Tax rules. Those cases are

(a) where the payment is made to—

  • the Reserve Bank of India or any banking company
  • the State Bank of India or any subsidiary bank
  • any co-operative bank or land mortgage bank
  • any primary agricultural credit society or any primary credit society
  • the Life Insurance Corporation of India

(b) where the payment is made to the Government and, under the rules framed by it, such payment is required to be made in legal tender

(c) where the payment is made by—

  • any letter of credit arrangements through a bank
  • a mail or telegraphic transfer through a bank
  • a book adjustment from any account in a bank to any other account in that or any other bank
  • a bill of exchange made payable only to a bank
  • the use of electronic clearing system through a bank account
  • a credit card
  • a debit card

(d) where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee

(e) where the payment is made for the purchase of—

  • agricultural or forest produce or
  • the produce of animal husbandry (including livestock, meat, hides, and skins) or dairy or poultry farming or
  • fish or fish products or
  • the products of horticulture or apiculture, to the cultivator, grower or producer of such articles, produce or products;

(f) where the payment is made for the purchase of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such products

(g) where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town

(h) where any payment is made to an employee of the assessee or the heir of any such employee, on or in connection with the retirement, retrenchment, resignation, discharge or death of such employee, on account of gratuity, retrenchment compensation or similar terminal benefit and the aggregate of such sums payable to the employee or his heir does not exceed Rs. 50,000

(i) where the payment is made by an assessee by way of salary to his employee after deducting the income-tax from salary in accordance with the provisions of section 192 of the Act, and when such employee—

  • is temporarily posted for a continuous period of fifteen days or more in a place other than his normal place of duty or on a ship and
  • does not maintain any account in any bank at such place or ship

(j)where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike;

(k) where the payment is made by any person to his agent71 who is required to make payment in cash for goods or services on behalf of such person;

(l) where the payment is made by an authorised dealer or a money changer against purchase of foreign currency or travellers’ cheques in the normal course of his business.

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.

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)

Also Read – Amounts not allowed as Deductions as per Section 40a (Section 40a and 40A are different sections)

About Rohit Pithisaria

Rohit Pithisaria is a Practicing Chartered Accountant from Jaipur and been in practice for more than 7 years. He is actively writing from very beginning of his professional career and is author of various tax articles and blogs.

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