Introduction
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As a taxpayer, it’s important to understand the rules and regulations surrounding income tax. The Income Tax Act of 1961 lays out the guidelines for filing taxes and provides information about deductions, exemptions, and other tax-related matters. One of the sections of this act that taxpayers need to be aware of is Section 40A, which deals with expenses or payments not deductible in certain circumstances.
Section 40A of the Income Tax Act, 1961, was introduced to ensure that taxpayers do not claim any expenses or payments that are not genuine or that have not been incurred for business purposes. This section deals with expenses that are not deductible in certain circumstances, and it specifies the conditions under which expenses can be claimed as deductions.
Expenses or payments not deductible in certain circumstances Section 40A of Income Tax Act 1961 is an important section that every taxpayer should be aware of. Let’s take a closer look at what this section entails and how it can affect your taxes.
What are Expenses or Payments Not Deductible in Certain Circumstances Section 40A of Income Tax Act 1961?
Expenses or payments not deductible in certain circumstances Section 40A of Income Tax Act 1961 refers to the expenses that are not allowed as deductions in certain circumstances. The expenses that fall under this category include:
Cash payments exceeding Rs. 10,000: As per Section 40A(3) of the Income Tax Act, cash payments exceeding Rs. 10,000 made for business purposes are not allowed as deductions. This is to ensure that taxpayers do not use cash to evade taxes.
Cash payments to relatives: Any cash payments made to relatives for business purposes are not allowed as deductions. This is to prevent taxpayers from using their relatives to evade taxes.
Cash payments for capital expenses: Any cash payments made for capital expenses such as buying property or machinery are not allowed as deductions.
Cash payments for expenses exceeding Rs. 10,000: Any cash payments made for expenses exceeding Rs. 10,000 are not allowed as deductions. This is to ensure that taxpayers do not use cash to evade taxes.
Expenses incurred for non-business purposes: Expenses incurred for non-business purposes are not allowed as deductions.
How does it affect your taxes?
Expenses or payments not deductible in certain circumstances Section 40A of Income Tax Act 1961 can affect your taxes in the following ways:
Penalties: If you claim any expenses that fall under this category, you will be liable to pay penalties. The penalty amount is equal to the amount of expenses claimed.
Disallowance of deductions: If you claim any expenses that are not allowed as deductions, the Income Tax Department can disallow the deductions claimed and add the amount to your taxable income.
Scrutiny of returns: If you claim any expenses that are not allowed as deductions, your tax returns may be scrutinized by the Income Tax Department.
How to avoid penalties and disallowance of deductions?
To avoid penalties and disallowance of deductions, it’s important to follow the rules and regulations laid out in the Income Tax Act. Here are a few tips:
- Avoid cash payments: Try to avoid making cash payments exceeding Rs. 10,000. If you need to make a payment, use a cheque, demand draft,
credit card, or online payment modes.
Keep proper documentation: Keep proper documentation of all your expenses, including bills, invoices, and receipts. This will help you in case your tax returns are scrutinized by the Income Tax Department.
Avoid claiming non-business expenses: Make sure that you only claim expenses that are incurred for business purposes. Expenses incurred for personal purposes are not allowed as deductions.
Consult a tax professional: If you are not sure about the expenses that are allowed as deductions, consult a tax professional. They can guide you on what expenses can be claimed as deductions and what expenses cannot.
FAQs
- Can I claim cash payments as deductions?
No, cash payments exceeding Rs. 10,000 made for business purposes are not allowed as deductions.
- Can I claim expenses incurred for personal purposes as deductions?
No, expenses incurred for personal purposes are not allowed as deductions.
- What happens if I claim expenses that are not allowed as deductions?
If you claim expenses that are not allowed as deductions, you will be liable to pay penalties and the Income Tax Department can disallow the deductions claimed and add the amount to your taxable income.
- Can I avoid penalties and disallowance of deductions?
Yes, you can avoid penalties and disallowance of deductions by following the rules and regulations laid out in the Income Tax Act.
Conclusion
Expenses or payments not deductible in certain circumstances Section 40A of Income Tax Act 1961 is an important section that every taxpayer should be aware of. It specifies the conditions under which expenses can be claimed as deductions and the expenses that are not allowed as deductions. To avoid penalties and disallowance of deductions, it’s important to follow the rules and regulations laid out in the Income Tax Act, keep proper documentation of all your expenses, and consult a tax professional if needed. By doing so, you can ensure that you file your taxes correctly and avoid any penalties or fines.
Section 40A, of Income Tax Act, 1961
Section 40A, of Income Tax Act, 1961 states that
(1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head “Profits and gains of business or profession”.
(2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction :
Provided that for an assessment year commencing on or before the 1st day of April, 2016 no disallowance, on account of any expenditure being excessive or unreasonable having regard to the fair market value, shall be made in respect of a specified domestic transaction referred to in section 92BA, if such transaction is at arm’s length price as defined in clause (ii) of section 92F.
(b) The persons referred to in clause (a) are the following, namely :—
(i) | where the assessee is an individual | any relative of the assessee; |
| (ii) | where the assessee is a company, firm, association of persons or Hindu un-divided family | any director of the company, partner of the firm, or member of the association or family, or any relative of such director, partner or member; |
| (iii) | any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual; | |
| (iv) | a company, firm, association of persons or Hindu undivided family having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member or any other company carrying on business or profession in which the first mentioned company has substantial interest; | |
| (v) | a company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member; | |
| (vi) | any person who carries on a business or profession,— | |
(A) where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or
(B) where the assessee being a company, firm, association of persons or Hindu undivided family, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner or member, has a substantial interest in the business or profession of that person.
Explanation.—For the purposes of this sub-section, a person shall be deemed to have a substantial interest in a business or profession, if,—
(a) in a case where the business or profession is carried on by a company, such person is, at any time during the previous year, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) carrying not less than twenty per cent of the voting power; and
(b) in any other case, such person is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the profits of such business or profession.
(3) Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed88-89, exceeds ten thousand rupees, no deduction shall be allowed in respect of such expenditure.
(3A) Where an allowance has been made in the assessment for any year in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year (hereinafter referred to as subsequent year) the assessee makes payment in respect thereof, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed88-89, the payment so made shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as income of the subsequent year if the payment or aggregate of payments made to a person in a day, exceeds ten thousand rupees:
Provided that no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3) and this sub-section where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed90, exceeds ten thousand rupees, in such cases and under such circumstances as may be prescribed91, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors :
Provided further that in the case of payment made for plying, hiring or leasing goods carriages, the provisions of sub-sections (3) and (3A) shall have effect as if for the words “ten thousand rupees”, the words “thirty-five thousand rupees” had been substituted.
(4) Notwithstanding anything contained in any other law for the time being in force or in any contract, where any payment in respect of any expenditure has to be made by an account payee cheque drawn on a bank or account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed92 in order that such expenditure may not be disallowed as a deduction under sub-section (3), then the payment may be made by such cheque or draft or electronic clearing system or such other electronic mode as may be prescribed; and where the payment is so made or tendered, no person shall be allowed to raise, in any suit or other proceeding, a plea based on the ground that the payment was not made or tendered in cash or in any other manner.
(5) [Omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989. Original sub-section (5) was inserted by the Finance (No. 2) Act, 1971, w.e.f. 1-4-1972.]
(6) [Omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989. Original sub-section (6) was inserted by the Finance (No. 2) Act, 1971, w.e.f. 1-4-1972.]
(7) (a) Subject to the provisions of clause (b), no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason.
(b) Nothing in clause (a) shall apply in relation to any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year.
Explanation.—For the removal of doubts, it is hereby declared that where any provision made by the assessee for the payment of gratuity to his employees on their retirement or termination of their employment for any reason has been allowed as a deduction in computing the income of the assessee for any assessment year, any sum paid out of such provision by way of contribution towards an approved gratuity fund or by way of gratuity to any employee shall not be allowed as a deduction in computing the income of the assessee of the previous year in which the sum is so paid.
(8) [***]
(9) No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act, 1860 (21 of 1860), or other institution for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under clause (iv) or clause (iva) or clause (v) of sub-section (1) of section 36, or as required by or under any other law for the time being in force.
(10) Notwithstanding anything contained in sub-section (9), where the Assessing Officer is satisfied that the fund, trust, company, association of persons, body of individuals, society or other institution referred to in that sub-section has, before the 1st day of March, 1984, bona fide laid out or expended any expenditure (not being in the nature of capital expenditure) wholly and exclusively for the welfare of the employees of the assessee referred to in sub-section (9) out of the sum referred to in that sub-section, the amount of such expenditure shall, in case no deduction has been allowed to the assessee in respect of such sum and subject to the other provisions of this Act, be deducted in computing the income referred to in section 28 of the assessee of the previous year in which such expenditure is so laid out or expended, as if such expenditure had been laid out or expended by the assessee.
(11) Where the assessee has, before the 1st day of March, 1984, paid any sum to any fund, trust, company, association of persons, body of individuals, society or other institution referred to in sub-section (9), then, notwithstanding anything contained in any other law or in any instrument, he shall be entitled—
(i) to claim that so much of the amount paid by him as has not been laid out or expended by such fund, trust, company, association of persons, body of individuals, society or other institution (such amount being hereinafter referred to as the unutilised amount) be repaid to him, and where any claim is so made, the unutilised amount shall be repaid, as soon as may be, to him;
(ii) to claim that any asset, being land, building, machinery, plant or furniture acquired or constructed by the fund, trust, company, association of persons, body of individuals, society or other institution out of the sum paid by the assessee, be transferred to him, and where any claim is so made, such asset shall be transferred, as soon as may be, to him.
(12) [Omitted by the Finance Act, 1992, w.e.f. 1-4-1993.]
(13) No deduction or allowance shall be allowed in respect of any marked to market loss or other expected loss, except as allowable under clause (xviii) of sub-section (1) of section 36.