Expenses Disallowed Under Section 40A

Expenditures Not Deductable Section 40A, 40A(3) and 40A(3A) of Income Tax Act

January 23, 2024 / Income Tax / By

Expenses Disallowed Under Section 40A: There are several expenses that are not allowed while calculating profit and earnings from a business or profession. This means that the income tax officials do not allow the advantage of such expenditures, and assessees must pay taxes on them by adding them back to net earnings.

Reason for Disallowance Under Section 40(A)(ii)

Any expenditure may be disallowed for one of two reasons:

  1. While making the payment, the tax amount that must be deducted on certain expenditures is not deducted.
  2. The expenditure has nothing to do with the operation of such a business or profession.

Expenses Not Deductible Under Section 40A

The list of expenses that are not deductible under Section 40A are explained below:

Disallowance Under Section 40(A)(i) of Income Tax Act

If payment is paid to Non-Resident Disallowance u/s 40(a)(i), non-compliance with TDS provisions would be attracted.

  • Interest, royalties, fees for technical services, or any other sum chargeable under the Income Tax Act is paid or payable. Under the I.T. Act, the aforementioned sums must be taxable in the hands of the beneficiary.
  • The aforementioned sum has been paid or is due:
    • To a non-resident or a foreign entity outside of India
    • To a non-resident or a foreign firm in India
  • The aforementioned payments are tax-deductible at the source.
  • And one of the defaults listed below occurs.
    • Tax has not been deducted at source, or
    • Tax has been deducted but not paid on or before the due date provided in section 139 (1).

Disallowance Under Section 40(A)(iA) of Income Tax Act

Non-Compliance of provisions of TDS where payment is made to a Resident. Disallowance u/s 40(a)(ia) shall be attracted if an assessee:

  • A. fails to deduct TDS;
  • B. fails to pay TDS after deduction, he will be held to be an assessee in default under sections 220 and 221. As a result, he/she must pay the following:
    • Section 221 penalty, which can be as much as the amount of TDS not deducted/not paid.
    • Interest u/s 220 @ 1% p.m. from the date the tax was deductible/payable until the date the order u/s 201 was passed.

Section 40(A)(ii) of Income Tax Act

  • A. Income tax paid under the Income Tax Act of India of 1961 is not deductible.
  • B. Tax paid in a foreign country for which relief or credit is provided under Section 90 of the Internal Revenue Code.
  • C. Tax paid in a foreign country with which India does not have a Double Taxation Avoidance Agreement (DTAA), but which is allowable as a deduction from Indian income tax payable u/s 91.
  • D. Service tax is deductible as a business expense under section 37(1), subject to section 43B.

Disallowance Under Section 40(A)(iib) of Income Tax Act

Fee or charges paid by State Government Undertaking

  • A. Any money paid as a royalty, licence fee, service fee, privilege fee, service charge, or any other fee or charge, by whatever name called, that is levied exclusively on
  • B. any amount appropriated, directly or indirectly, by the State Government from a state government undertaking.

Disallowance Under Section 40(A)(iii) of the Income Tax Act

TDS on salary payable outside India or to a Non-Resident

  • A. Salary paid outside India or to a Non-Resident Indian is deductible only if TDS has been deducted and TDS has been paid within the time limits set out in the Income Tax Act.
  • B. The salary paid outside India or to a Non-Resident in India would not be accepted as a deduction if TDS is deposited late by even one day.
  • C. If TDS is not deducted but paid out of pocket by the assessee, then salary paid outside India or to a Non-Resident in India is not allowable as a deduction.

Section 40A: Expenditures Disallowed for Payment in Cash

There are some transactions in which the assesses pay for services or commodities in cash rather than via cheque or bank transfer, for example. The expenditure is forbidden in all such circumstances where the payment exceeds Rs. 20,000. Such payments can be made using an account payee cheque, account payee bank draught, or bank transfer, among other options.

Although the provision prohibits payments in cash for costs above Rs. 20,000, there are several circumstances in which payments in cash in excess of Rs. 20,000 are permitted, and allowances are provided for such expenditures. Rule 6DD requires such a list of expenses.

Some of the examples are:

  • Banks, financial institutions, and other financial entities get paid.
  • Government payment
  • Book adjustments were used to make the payment.
  • Payment for agricultural products purchased
  • Payments offered to cottage industries that produce without the use of electricity.
  • Payment to a person living in a village without access to a bank
  • Payment of post-employment benefits
    (Up to 50,000 rupees)
  • Salary is paid once TDS has been deducted correctly.
  • On a day when banks are closed, a payment is made.
  • The currency trader makes the payment.

Other defaults include non-deduction of securities transaction tax, fringe benefits tax, wealth tax for earlier years and income tax, and provident fund payments without tax deduction. The expenditure is disallowed for the assessee in such circumstances where the default is as described above.

However, all payments on which an amount is required to be deducted and lodged with the government but is not deducted or stays underpaid are subject to disallowance. Although the allowance for the spending can be received at a later point when the money is deducted or deposited.

FAQ’s on Expenses Disallowed Under Section 40A

Question 1.
What is Section 40A (3)(b)?

Answer:
Section 40A (3)(b) states that considering a payment as profits and gains of a business if the expenditure was incurred in one assessment year and payment was received in the following year in excess of 10,000.

Question 2.
What is Rule 6DD?

Answer:
The income tax regulation 6DD, which governs scenarios and circumstances in which a payment or series of payments totalling more than Rs 20,000 may be paid to a person in a single day other than via account payee cheque or account payee cheque, has been revised.

Question 3.
What is Section 40A(2) of Income Tax Act?

Answer:
Section 40A(2) gives the Income Tax Officer the authority to disallow any expenditure incurred and payment made or to be made to certain specified persons if he believes the expenditure is excessive or unreasonable in comparison to the fair market value of the goods, services, or facilities provided.

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