Amounts not Deductible in respect of Payment to Relatives [Sec. 40A(2)]

Any expenditure incurred by an assessee in respect of which payment has been made to the persons is liable to be disallowed in computing business profit to the extent such expenditure is considered to be excessive or unreasonable, having regard to the fair market value of goods or services or facilities, etc.

Before, understanding the implication of section 40A(2), it is imperative to understand the meaning of terms “relative” and “persons having substantial interest”—


The term “relative” in relation to an individual, means the husband, wife, brother or sister or any lineal ascendant or descendant of that individual [sec. 2(41)].


A person is deemed to have substantial interest in the business or profession if such person is the beneficial owner of at least 20% of equity capital (in the case of a company) or if such person is entitled to 20% profits of a concern (in any other case) at any time during the previous year.


If a payment is made by a taxpayer in respect of an expenditure to the persons mentioned in column (2) of the table given below, section 40A(2) is applicable and, consequently, to the extent such expenditure is considered to be excessive or unreasonable having regard to the fair market value of goods, services, facilities, etc., it shall be disallowed.t In other words, if the following conditions are satisfied, then to the extent the payment is excessive, it will be disallowed—

Condition 1 - Expenditure is incurred for goods, services or facilities.

Condition 2- For the above expenditure, payment is made to a person mentioned in column 2 of the table infra.

Condition 3-  Such expenditure is considered as excessive or unreasonable having regard to the following—

i.          fair market value of the commodity or service or facility; or

ii.         legitimate business needs of the business of the assessee; or

iii.        benefit derived by or accruing to assessees as a result of the expenditure.

For Condition 3, the Assessing Officer is required to record a finding as to whether expenditure is excessive or unreasonable in relation to any one of the three requirements [ i.e., (i) or (i or (iii), given above], which are independent and alternative to each other. All the three requirements need not to exist simultaneously. In a given case, if any one of the requirements [i.e., (i) or (ii) or (iii), given above] along with Condition 1 and Condition 2 is satisfied, the provisions of section 40A(2) can be invoked and applied. If the Assessing Officer finds (cogent reasons should be assigned by the Assessing Officer) that a part of the expenditure (payment made to a relative or inter-connected person, given in the Table infra) is excessive having regard to the legitimate needs of the business, the disallowance provisions of section 40A(2) will be applicable, even if, the amount paid is not more than the fair market value of goods supplied, or services rendered, by the recipient

If the payer and recipient are in the same tax bracket and pays tax at the same rate, there is no question of diversion of funds to avoid tax and disallowance under section 40A(2) may not be attracted.


More Topics .... " Business or Profession"
Definition of the Head ' Business or Profession'-[Sec.-28]
Compensation Received as Business Income(Section-28(ii))]
Income of a Trade or Professional Association [Section 28(iii)]
Income from Export Incentives is chargeable to Income Tax
Any Amount Received Under certain Agreement for not to Carry on Business [Section 28(va)]
Speculation Business [Explanation to Section 28]
Profit Earned from an Illegal Business
Transfer of certain Assets Specified u/s 35AD in certain circumstances [Section 28(vii)]
Certain Incomes relating to business but not taxable under the head ‘Profits Gains of Business or Profession .
Computation of Income of Business or Profession - General Important Points
General Principles - for Deductions Allowed from Gross Income of Business and Professions
Deductions from Gross Income of Business or Profession [ Section 30 to 44DB]
Expressly Admissible Deductions from Gross Income from Business or Profession [Section 30-36]
Expenditure Incurred in the Field of Scientific Research [Section 35]
Expenses on Research Activities carried on by the assessee himself
Contribution to Approved Institutions to carry on Research is Allowed as Weighted Deductions for Calculating Profits and Gains of Business or Professions.
Expenditure incurred on the acquisition of Patents Rights or Copy Rights [Section 35A] [Applicable for expenditure incurred before 1-4-1998]
Expenditure on know-how [Section 35 AB] [Applicable for expenditure incurred before 1-4-1998]
Expenditure for obtaining License to operate Telecommunication Services [Section 35 ABB]
Expenditure on eligible projects or schemes [Section 35 AC]
Deduction in respect of expenditure incurred on setting up of a Specified Business [Sec. 35AD]
Any amount given to an institution or association [Section-35CCA]
Expenditure on Notified Agricultural Extension Project [Section-35 CCC] [w.e.f. A.Y. 2013-14]
Expenditure on Notified Skill development project [Section-35 CCD] [w.e.f. A.Y. 2013-14]
Amortisation of Certain Preliminary Expenses [Section 35D]
Expenditure on demerger or amalgamation [Section 35DD]
Amortisation of Expenditure Incurred Under Voluntary Retirement Scheme [Section 35DDA]
Expenditure on Prospecting etc., for certain Minerals [Section 35E]
Other Deductions Allowed to Compute Income from Business or Profession   [Section-36]
Interest on Borrowed Capital [Sec. 36(1)(iii)].
Deduction of discount on Zero Coupon Bond [Section 36(iiia)]
Contribution to Provident and Superannuation Fund [Sec. 36(1)(iv)].
Employee’s contribution towards staff welfare schemes [Sec. 36(1)(va)]
Bad debts [Sec. 36(1)(vii)]
Bad debts of Banks, financial institution and industrial investment corporation etc. [Section 36(1)(viia)]
Special Reserve Created and Maintained by Financial Corporation [Section 36(1)(viii)].
Expenditure on Family Planning [Section-36(1)(ix)].
General Or Allowable Deductions [Section 37]
Commission earned by the agents of Life Insurance Corporation, Unit Trust of India, Post Office or Mutual Funds
Legal Expenses in the Interest of Business are Allowable Expenses
Losses incidental to Business Allowed to be Debited.
Expenses Expressly Disallowed In the Case of any ‘Assessee’ [ Section-40a]
Expenses Expressly Disallowed In the Case of any Firm [Section 40(b)]
Expenses Expressly Disallowed In General Cases [Section 40(b)]
Disallowing of certain Expenses under certain circumstances like ‘Payments to Relatives’
Payments exceeding ` 20,000 by cash/bearer cheque [Section 40A (3)].
Provision for the Payment of Gratuity – [Section-40A(7)]
DEEMED PROFITS Under Profits and Gains of Business or Professions [Section 41]
VALUATION OF STOCK for Profit and Gains of Business or Professions
Deduction Of Certain Payments Only If Actually Paid [Section 43B]
Maintenance Of Accounts By Certain Persons Carrying On Profession Or Business. [Sec. 44AA]
Compulsory Audit For The Non-Corporate Assessees [Section-44 AB]
Computation of Income on Estimated Basis [Section 44AD]
Profit from the business of carriage of goods for truck owners [Section 44 AE]
Special provision for computation of income from royalties in case of nonresidents [Section 44DA]
Partly Agricultural and Partly Business Income
Adjustment In The Profit And Loss A/C Prepared By The Assessee
Computation of Profits and Gains of a Non-Resident from Shipping Business— [Section 44B]
Computation of Profits and Gains of business of Oil Exploration [Section 44BB]
Computation of Profits and Gains of the Business of operation of Aircrafts by Non-Resident [Section 44 BBA]
Computation of Profits of Foreign Enterprises [Section 44BBB]
Ceiling Limits in respect of Head Office Expenses [Section 440]
Special Provisions in case of Income of Public Financial Institutions etc. [Section 43D]
Get.. Tally.ERP9 Book + GST Practical Assignment @ Rs.550 Tally.ERP9 Book Online Order Tally.ERP9 Book Content
© 2018 : IncomeTaxManagement