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Amounts Not Deductible in respect of Payment to Ralatives [Section 40A(2)]

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

  1. the payment is in respect of any expenditure;

  2. the payment has been made or is to be made to a specified person in respect of such expenditure;

  3. the payment for the expenditure is considered excessive or unreasonable having regard to:

    1. The fair market value of the goods, services or facilities; or

    2. the legitimate business needs of the assessee's business or profession; or

    3. 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.

Note :

Section 40A(2) is applicable in the following cases (list is not complete, only important cases are given) –

  1. Payment made by an individual to his or her relative.

  2. Payment made by a company to a director of the company or any relative of the director.

  3. Payment made by a firm/AOP/HUF to a partner/member or a relative of partner/member.

  4. Payment made to an individual who has a substantial interest in the business of the payer or a relative of such individual.

  5. Payment made to a company who has a substantial interest in the business of the payer, any director of such company or relative of such director.

  6. Payment made to a firm/AOP/HUF who has a substantial interest in the business of the payer or partner/ member of such person or relative of partner/member.

 

Topics...on ‘Profits and Gains of Business or Profession’

Define … ‘Profits and Gains of Business or Profession’ and its Computation (Section 28)
Method of Accounting for Computing Business Income (Section 145)
Principles for Allowing Business Deductions / Allowances from Profits and Gains of Business or Profession.
Expenses Allowed as Deductions against Profits and Gains of Business or Profession [Section-30-37]
[Section 37(1)] : General Or Allowable Deductions under Business or Professions
Business Losses Deductible under the head  'Profits and Gains of Business or Profession'.
Expenses Not Deductible under the head 'Profits and Gains of Business or Profession (Section 40, 40A, 43B)
DEEMED PROFITS Chargeable to Tax as Business Income Under Profits and Gains of Business or Professions [Section 41]
Taxation of Undisclosed Business Income/Investments from Undisclosed Sources
Deduction in respect of Expenditure incurred on setting up of a Specified Business [Section-35AD] :
When Maintenance of Books of Accounts becomes Compulsory (Section 44AA)
Compulsory Audit of Books of Accounts by Chartered Accountant (Section 44AB)
Computation of Income On Estimated Basis Under Sections 44AD, 44ADA and 44AE



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