Section 40A of Income Tax Act "Expenses or payments not deductible in certain circumstances"
40A. (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 undivided 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 72[or through such
other electronic mode as may be prescribed], 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 73[or through such other electronic
mode as may be prescribed], 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 74[or through such
other electronic mode as may be prescribed], exceeds ten
thousand rupees, in such cases and under such circumstances
as may be prescribed, 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 75[or through such other electronic mode as may be
prescribed] 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 75[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.]