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Restriction to Deductions [ Sec. 40 to 43B]

 


STRUCTURE :

3.5.1.   Expenses Or Payments Not Deductible In Certain Circumstances [Sec.40a]

3.5.2.   Payment Made to Relatives Allowed as Deduction. Subject to Certain Conditions  [Sec.40A(2)(a)]

3.5.3.   Cash Expenditure  [Sec.40A(3)]

3.5.4.   Certain Expenses Allowed as Deduction only on Payment  [Sec.43B]


 

3.5.1.   Expenses Or Payments Not Deductible In Certain Circumstances [Sec.40a]

A.  [SECTION 40(a)(i)] : PAYMENT MADE BY WAY OF INTEREST , ROYALTY, TECHNICAL FEES TO A NON-RESIDENT WITHOUT DEDUCTING TAX AT SOURCE.

Any Interest, Royalty, Fees for Technical Services or other sum chargeable under this Act, which is payable:

(A)       Outside India ( to a Resident or Non-Resident )

(B)       In India to a Non-Resident not being a company or to a foreign Company on which Tax is deductible at source and on which tax has not been deducted or, after deduction, has not been paid before the expiry of the time prescribed u/s 200(1), then above said payment is not allowed as deduction.

Note :
>> However, where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous years but paid in any subsequent year after the expiry of the time prescribed u/s 200(1), such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.

B.   [SECTION 40(a)(ia)] : PAYMENT MADE BY WAY OF INTEREST , COMMISION ETC.  TO A  RESIDENT WITHOUT DEDUCTING TAX AT SOURCE.

Any interest, commission or brokerage, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work ( including supply of labour for carrying out any work) on which Tax is deductible at source and such tax has not been deducted, or after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed u/s 200(1).

Note :
>>   However, where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous years but paid in any subsequent year after the expiry of the time prescribed u/s 200(1), such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.

C.  [SECTION 40(a)(iii)] : PAYMENT MADE BY WAY SALARY.

Any payment which is chargeable under the head “Salaries” , if it is payable ;

(A) Outside India ; or

(B) to a Non-Resident,

And if the tax has not been paid thereon nor deducted there from, then deduction shall never be allowed.


3.5.2.   Payment Made to Relatives Allowed as Deduction. Subject to Certain Conditions  [Sec.40A(2)(a)]

Where any payment is made to the relative of any person or person having substantial interest, and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods or services for which the payment is made, so much of the expenditure as is so considered by him to be excessive or unreasonable, shall not be allowed as a deduction.


3.5.3.   Cash Expenditure  [Sec.40A(3)]

(A) CONDITIONS

Section 40A(3) gets arrracted if following three conditions are satisfied :

  1. In case of any expenditure for which deduction is Claimed ; and

  2. Where the payment is made in Cash or through Bearer Cheque ;

  3. in excess of Rs.20,000

then 0% os such payment shall not be allow as deduction.

(B)       RULE 6DD. EXPENDITURE IN CASE FO FOLLOWING CASH PAYMENT – SECTION 40A(3) IS NOT APPLICABLE

  1. Payment made to Financial Institution or Banks

  2. Payment of Sale Tax, Custom, Excise, Income Tax etc.

  3. 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.

  4. Where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike.

  5. Where the payment is made for the purchase of

(i) agriculture or forest produce ; or
(ii) the produce of animal husbandry  ( including hides and skins) or diary or poultry farming ; or
(iii) Fish or Fish products ; or
(iv) the products of horticulture or apiculture, to the cultivator, grower or producer of such articles, produce or products.

  1. Payment made by a Book Adjustment.

  2. Where the payment is made for the purchase of the products manufacture or processed without the aid of power ina cottage industry, to the producer of such products.

  3. Where any payment by way of gratuity, retrenchment compensation or similar terminal benefits , is made to an employee of the assessee or the beirs of any such employee on or in connection with the retrenchment, resignation, discharge or death of such employee, if the income chargeable under the head “Salaries” of the employee in respect of the financial year in which such retirement , resignation, discharge or death took place or the immediately preceding financial year did not exceed Rs.50,000.

  4. Where the payment is made the assesssee by way of salr to his employee after deducting the income tax from salary in accordance with the provisions of Sec.192 of the Act, and then such employee

(A)       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

(B)       does not maintain any account in any bank at such place or ship

  1. Where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person.

  2. Where the payment is made by an authorized dealer or a money changer against purchase of foreign currency or traveler’s  cheques in the normal course his business

3.5.4.   Certain Expenses Allowed as Deduction only on Payment  [Sec.43B]

Where the assessee maintains account on mercantile basis, the assessee can claim deduction on accrual basis even if actual payment is not made. But under sec. 43B certain expenses like interest, bonus etc. are allowed as deduction only when actual payment is made.

(A)       [ SECTION 43B ] IS APPLICABLE ONLY TO FOLLOWING ACTUAL PAYMENNT

1.         Indirect Tax Payment :

Any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law i.e. Sales Tax, Excise Duty, Custom duty etc. Municipal Tax , Land Revenue , or

2.         Interest payment by way of following :

(a)        any sum payable by the assessee as interest on any Loan or Borrowing  from
-           a Public Financial Institution ( IDBI, ICICI, IFCI etc. ) or
-           a State Financial Corporation ( UPSIDC, DFC, PICUP, HSFC etc.) or
-           a State industrial investment corporation, or

(b)        any sum payable by the assessee as interest on any term loan or advance from a scheduled bank ( SBI, CANARA BANK, PNB etc.)

3.         Certain Payment made to Employee :

(a)        Employer’s contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employee, or

(b)        Bonus or Commission payable to employees.

(c)        any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee. ( Lave Salary)

(B)       IN WHICH YEAR DEDUCTION IS ALLOWED ?

Deduction is allowed in the previous year if payments of the above said amount are made on or before the due date of furnishing of Return of the Previous year in which such liability has accrued.

But where the payment is made after the due date of furnishing of return, then deduction is allowed in the year of payment.

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