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S&A Knowledge Series - Important Disallowances under sec 40A income tax

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S&A Knowledge Series - Important Disallowances under sec 40A income tax

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Please find attached a writeup on disallowances under Sec 40A of the Income Tax Act.

Under this section two of the most violated provisions of the law have been explained in simple terms for easy reading. We believe this would help you with tertiary knowledge to avoid making these common errors.

Transactions with related parties.
Cash Transactions.

Please find attached a writeup on disallowances under Sec 40A of the Income Tax Act.

Under this section two of the most violated provisions of the law have been explained in simple terms for easy reading. We believe this would help you with tertiary knowledge to avoid making these common errors.

Transactions with related parties.
Cash Transactions.

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S&A Knowledge Series - Important Disallowances under sec 40A income tax

  1. 1. Page | 1 ` Important Disallowances under Income Tax Act (Sec 40A) <<<<<< S&A Knowledge Series Prepared by Harsh Kapoor Article Assistant Vetted by Aswani Kumar Partner (Direct Taxes) www.sethspro.com info@sethspro.com New Delhi | Lucknow | Coimbatore
  2. 2. Page | 2 WHAT IS SEC 40A Under the Income tax Act,1961 profit or gain from business or profession is considered income and such income is chargeable to tax. The expenses incurred in relation to business can be deducted from revenue from business or profession. However, there are certain restrictions on such deduction of expenses and payments. Certain expenses or payments cannot be allowed as deduction. Section 40A specifies the expenses or payments not deductible. Below are the two most important sub sections out of the section. EXPENSES DISALLOWED 1. Excessive or unreasonable expenses paid to relatives Sub Section 2(a) deals with the disallowance of excessive or unreasonable expenses paid to relatives of assessee. Where payment has been or is to be made to any person referred to in clause (b) of this sub-section and Assessing officer is of the view that expenditure incurred is excessive or unreasonable keeping in view the fair market value of goods and legitimate needs of the business, he can disallow the unreasonable portion of such expenses. However, the AO would need to establish that the payments made are excessive and merely on his hunch it cannot be said so. Relatives for the purpose of this section are defined as I. where the assessee is an individual, any relative of the assessee. II. where the assessee is a company, firm, association of persons or HUF, any director of the company, partner of the firm, member of association or family, or any relative of such director, partner or member. III. any individual holding substantial interest in assessee’s business, or any relative of such individual. IV. a company, firm, AOP or HUF holding substantial interest in the assessee’s business or any director, partner or member of such co., firm, AOP or HUF or any relative of such director, partner or member or any other company in which the first mentioned co. has a substantial interest. V. a Co, firm, AOP or HUF of which a director, partner or member has a substantial interest in the business of the assessee.
  3. 3. Page | 3 2. Cash Payments Payments or aggregate of payments in respect of expenditure made to a person in a single day, otherwise than by an account payee cheque, bank draft or use of any electronic mode, exceeds Rs. 10,000, the same shall not be allowed as deduction. Please note that any creditor standing in your books is also paid in excess of the stipulated amount would be liable for disallowance. In case of payment made for plying, hiring, or leasing goods carriages, the limit is Rs. 35,000. Exceptions to the rule are (i) Payment to any bank/RBI/LIC/Agricultural credit society. (ii) Payment made to govt in legal tender. (iii) Payment for agricultural purposes. (iv) Payment to be made in a village or to a person who resides in such village which is not served by any of the banks. (v) Payment to cottage industry which is working without power. (vi) Payment made during a bank holiday or bank strike. (vii) Money changer can make payments in cash in exchange of foreign currency. (viii) Payment to agent when agent has to make payment in cash on behalf of the person. (ix) Any salary paid to an employee who is: (a) temporarily posted in a place other than normal place & (b) does not maintain any bank account at such place. (x) Any payment made on retirement/retrenchment/ resignation/death of employee, if such payment does not exceed Rs. 50,000. Seth & Associates was established in 1975 and since then it has been providing unparalleled value addition to its client. We are a firm with diverse and rich exposure in various fields. All our partners are full time active working partners looking into specific sector domains such as Corporate Law, Direct Tax, Indirect Taxes, Raising Capital (Bank and Equity), Business Advisory solutions, Forensic and Information Technology audit and many other core sectors relevant to overall growth of the clients. The information herein contained is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endevour to provide accurate and timely information, there can be no gurantee that such information is very accurate and considers the latest amendment in laws which are very frequent. The above is purely for academic reading and general awareness of the law. No one should act on this information without appropriate professional guidance which requires a thorough exemation of a particular situation. This content is owned by Seth & Associates, Chartered Accountants and is not be reproduced without our explicit permission. www.sethspro.com | info@sethspro.com New Delhi | Lucknow | Coimbatore

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