Section 40 of Income Tax Act "Amounts not deductible"
40. Notwithstanding anything to the contrary in sections
30 to 38, the following amounts shall not be deducted in
computing the income chargeable under the head "Profits and
gains of business or profession",-
(a) in the case of any assessee-
(i) any interest (not being interest on a loan issued for
public subscription before the 1st day of April, 1938),
royalty, fees for technical services or other sum chargeable
under this Act, which is payable,-
(A) outside India; or
(B) in India to a non-resident, not being a company or to a
foreign company,
on which tax is deductible at source under Chapter XVII-B
and such tax has not been deducted or, after deduction, has
not been paid on or before the due date specified in
sub-section (1) of section 139 :
Provided that where in respect of any such sum, tax has been
deducted in any subsequent year, or has been deducted during
the previous year but paid after the due date specified in
sub-section (1) of section 139, such sum shall be allowed as
a deduction in computing the income of the previous year in
which such tax has been paid:
70[Provided further that where an assessee fails to deduct
the whole or any part of the tax in accordance with the
provisions of Chapter XVII-B on any such sum but is not
deemed to be an assessee in default under the first proviso
to sub-section (1) of section 201, then, for the purposes of
this sub-clause, it shall be deemed that the assessee has
deducted and paid the tax on such sum on the date of
furnishing of return of income by the payee referred to in
the said proviso.]
Explanation.-For the purposes of this sub-clause,-
(A) "royalty" shall have the same meaning as in Explanation
2 to clause (vi) of sub-section (1) of section 9;
(B) "fees for technical services" shall have the same
meaning as in Explanation 2 to clause (vii) of sub-section
(1) of section 9;
(ia) thirty per cent of any sum payable to a resident, on
which tax is deductible at source under Chapter XVII-B and
such tax has not been deducted or, after deduction, has not
been paid on or before the due date specified in sub-section
(1) of section 139 :
Provided that where in respect of any such sum, tax has been
deducted in any subsequent year, or has been deducted during
the previous year but paid after the due date specified in
sub-section (1) of section 139, thirty per cent of such sum
shall be allowed as a deduction in computing the income of
the previous year in which such tax has been paid :
Provided further that where an assessee fails to deduct the
whole or any part of the tax in accordance with the
provisions of Chapter XVII-B on any such sum but is not
deemed to be an assessee in default under the first proviso
to sub-section (1) of section 201, then, for the purpose of
this sub-clause, it shall be deemed that the assessee has
deducted and paid the tax on such sum on the date of
furnishing of return of income by the 71[***] payee referred
to in the said proviso.
Explanation.-For the purposes of this sub-clause,-
(i) "commission or brokerage" shall have the same meaning as
in clause (i) of the Explanation to section 194H;
(ii) "fees for technical services" shall have the same
meaning as in Explanation 2 to clause (vii) of sub-section
(1) of section 9;
(iii) "professional services" shall have the same meaning as
in clause (a) of the Explanation to section 194J;
(iv) "work" shall have the same meaning as in Explanation
III to section 194C;
(v) "rent" shall have the same meaning as in clause (i) to
the Explanation to section 194-I;
(vi) "royalty" shall have the same meaning as in Explanation
2 to clause (vi) of sub-section (1) of section 9;
(ib) any consideration paid or payable to a non-resident for
a specified service on which equalisation levy is deductible
under the provisions of Chapter VIII of the Finance Act,
2016, and such levy has not been deducted or after
deduction, has not been paid on or before the due date
specified in sub-section (1) of section 139 :
Provided that where in respect of any such consideration,
the equalisation levy has been deducted in any subsequent
year or has been deducted during the previous year but paid
after the due date specified in sub-section (1) of section
139, such sum shall be allowed as a deduction in computing
the income of the previous year in which such levy has been
paid;
(ic) any sum paid on account of fringe benefit tax under
Chapter XIIH;
(ii) any sum paid on account of any rate or tax levied on
the profits or gains of any business or profession or
assessed at a proportion of, or otherwise on the basis of,
any such profits or gains.
Explanation 1.-For the removal of doubts, it is hereby
declared that for the purposes of this sub-clause, any sum
paid on account of any rate or tax levied includes and shall
be deemed always to have included any sum eligible for
relief of tax under section 90 or, as the case may be,
deduction from the Indian income-tax payable under section
91.
Explanation 2.-For the removal of doubts, it is hereby
declared that for the purposes of this sub-clause, any sum
paid on account of any rate or tax levied includes any sum
eligible for relief of tax under section 90A;
(iia) any sum paid on account of wealth-tax.
Explanation.-For the purposes of this sub-clause,
"wealth-tax" means wealth-tax chargeable under the
Wealth-tax Act, 1957 (27 of 1957), or any tax of a similar
character chargeable under any law in force in any country
outside India or any tax chargeable under such law with
reference to the value of the assets of, or the capital
employed in, a business or profession carried on by the
assessee, whether or not the debts of the business or
profession are allowed as a deduction in computing the
amount with reference to which such tax is charged, but does
not include any tax chargeable with reference to the value
of any particular asset of the business or profession;
(iib) any amount-
(A) paid by way of royalty, licence fee, service fee,
privilege fee, service charge or any other fee or charge, by
whatever name called, which is levied exclusively on; or
(B) which is appropriated, directly or indirectly, from,
a State Government undertaking by the State Government.
Explanation.-For the purposes of this sub-clause, a State
Government undertaking includes-
(i) a corporation established by or under any Act of the
State Government;
(ii) a company in which more than fifty per cent of the
paid-up equity share capital is held by the State
Government;
(iii) a company in which more than fifty per cent of the
paid-up equity share capital is held by the entity referred
to in clause (i) or clause (ii) (whether singly or taken
together);
(iv) a company or corporation in which the State Government
has the right to appoint the majority of the directors or to
control the management or policy decisions, directly or
indirectly, including by virtue of its shareholding or
management rights or shareholders agreements or voting
agreements or in any other manner;
(v) an authority, a board or an institution or a body
established or constituted by or under any Act of the State
Government or owned or controlled by the State Government;
(iii) 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
therefrom under Chapter XVII-B;
(iv) any payment to a provident or other fund established
for the benefit of employees of the assessee, unless the
assessee has made effective arrangements to secure that tax
shall be deducted at source from any payments made from the
fund which are chargeable to tax under the head "Salaries";
(v) any tax actually paid by an employer referred to in
clause (10CC) of section 10;
(b) in the case of any firm assessable as such,-
(i) any payment of salary, bonus, commission or
remuneration, by whatever name called (hereinafter referred
to as "remuneration") to any partner who is not a working
partner; or
(ii) any payment of remuneration to any partner who is a
working partner, or of interest to any partner, which, in
either case, is not authorised by, or is not in accordance
with, the terms of the partnership deed; or
(iii) any payment of remuneration to any partner who is a
working partner, or of interest to any partner, which, in
either case, is authorised by, and is in accordance with,
the terms of the partnership deed, but which relates to any
period (falling prior to the date of such partnership deed)
for which such payment was not authorised by, or is not in
accordance with, any earlier partnership deed, so, however,
that the period of authorisation for such payment by any
earlier partnership deed does not cover any period prior to
the date of such earlier partnership deed; or
(iv) any payment of interest to any partner which is
authorised by, and is in accordance with, the terms of the
partnership deed and relates to any period falling after the
date of such partnership deed in so far as such amount
exceeds the amount calculated at the rate of twelve per cent
simple interest per annum; or
(v) any payment of remuneration to any partner who is a
working partner, which is authorised by, and is in
accordance with, the terms of the partnership deed and
relates to any period falling after the date of such
partnership deed in so far as the amount of such payment to
all the partners during the previous year exceeds the
aggregate amount computed as hereunder :-
(a)
on the first Rs. 3,00,000 of the book-profit or in case of a
loss
Rs. 1,50,000 or at the rate of 90 per cent of the
book-profit, whichever is more;
(b) on the balance of the book-profit at the rate of 60 per
cent :
Provided that in relation to any payment under this clause
to the partner during the previous year relevant to the
assessment year commencing on the 1st day of April, 1993,
the terms of the partnership deed may, at any time during
the said previous year, provide for such payment.
Explanation 1.-Where an individual is a partner in a firm on
behalf, or for the benefit, of any other person (such
partner and the other person being hereinafter referred to
as "partner in a representative capacity" and "person so
represented", respectively),-
(i) interest paid by the firm to such individual otherwise
than as partner in a representative capacity, shall not be
taken into account for the purposes of this clause;
(ii) interest paid by the firm to such individual as partner
in a representative capacity and interest paid by the firm
to the person so represented shall be taken into account for
the purposes of this clause.
Explanation 2.-Where an individual is a partner in a firm
otherwise than as partner in a representative capacity,
interest paid by the firm to such individual shall not be
taken into account for the purposes of this clause, if such
interest is received by him on behalf, or for the benefit,
of any other person.
Explanation 3.-For the purposes of this clause,
"book-profit" means the net profit, as shown in the profit
and loss account for the relevant previous year, computed in
the manner laid down in Chapter IV-D as increased by the
aggregate amount of the remuneration paid or payable to all
the partners of the firm if such amount has been deducted
while computing the net profit.
Explanation 4.-For the purposes of this clause, "working
partner" means an individual who is actively engaged in
conducting the affairs of the business or profession of the
firm of which he is a partner;
(ba) in the case of an association of persons or body of
individuals [other than a company or a co-operative society
or a society registered under the Societies Registration
Act, 1860 (21 of 1860), or under any law corresponding to
that Act in force in any part of India], any payment of
interest, salary, bonus, commission or remuneration, by
whatever name called, made by such association or body to a
member of such association or body.
Explanation 1.-Where interest is paid by an association or
body to any member thereof who has also paid interest to the
association or body, the amount of interest to be disallowed
under this clause shall be limited to the amount by which
the payment of interest by the association or body to the
member exceeds the payment of interest by the member to the
association or body.
Explanation 2.-Where an individual is a member of an
association or body on behalf, or for the benefit, of any
other person (such member and the other person being
hereinafter referred to as "member in a representative
capacity" and "person so represented", respectively),-
(i) interest paid by the association or body to such
individual or by such individual to the association or body
otherwise than as member in a representative capacity, shall
not be taken into account for the purposes of this clause;
(ii) interest paid by the association or body to such
individual or by such individual to the association or body
as member in a representative capacity and interest paid by
the association or body to the person so represented or by
the person so represented to the association or body, shall
be taken into account for the purposes of this clause.
Explanation 3.-Where an individual is a member of an
association or body otherwise than as member in a
representative capacity, interest paid by the association or
body to such individual shall not be taken into account for
the purposes of this clause, if such interest is received by
him on behalf, or for the benefit, of any other person.
(c) [Omitted by the Direct Tax Laws (Amendment) Act, 1987,
w.e.f. 1-4-1989. Earlier, it was amended by the Finance Act,
1963, w.e.f. 1-4-1963, Finance Act, 1964, w.e.f. 1-4-1964,
Finance Act, 1965, w.e.f. 1-4-1965, Finance Act, 1968, w.e.f.
1-4-1969, Finance (No. 2) Act, 1971, w.e.f. 1-4-1972,
Finance Act, 1984, w.e.f. 1-4-1985 and Direct Tax Laws
(Amendment) Act, 1987, w.e.f. 1-4-1988.]
(d) [Omitted by the Finance Act, 1988, w.e.f. 1-4-1989.]