Section 40A

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 Income

tax Officer is of opinion that such expenditure is excessive or unreosanable 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 accurring 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 the ²[provisions of this section] shall not apply in the case of an assessee being a company in respect of any expenditure to which sub-clause (i) of clause (c) of section 40 applies.

(b) The persons referred to in clause (a) are the following, namely :

(i) where the assessee is any relative of the assessee; an individual	Any relative of the assessee;
(ii) where the assesee 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 ;

(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 payment is made, after such date (not being later than the 31st day of March, 1959) as may be specified in this behalf by the Central Government by notification in the Official Gazettee¹ in a sum exceeding two thousand five hundred rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, such expenditure shall not be allowed as a deduction :

Provided that where an allowance has been made in the assessment for any year not being an assessment year commencing prior to the 1st day of April, 1969 in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year the assessee makes any payment in respect thereof in a sum exceeding two thousand five hundred rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, the allowance originally made shall be deemed to have been wrongly made and the Income-tax Officer may recompute the total income of the assessee for the previous year in which such liability was incurred and make the necessary amendment, and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) of that section being reckoned from the end of the assessment year next following the previous year in which the payment was so made :

Provided further that no disallowance under this sub-section shall be made where any payment in a sum exceeding two thousand five hundred rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, in such cases and under such circumstance as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors.

(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 a crossed cheque dawn on a bank or by a crossed bank draft 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; 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.

²[(5) (a) Where the assessee

  (i) incurs any expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee, or

 (ii) incurs any expenditure which results directly or indirectly in the provision of any perquisite (whether convertible into money or not) to an employee or incurs directly or indirectly any expenditure or is entitled to any allowance in respect of any assets of the assessee used by an employee either wholly or partly for his own purposes or benefit,

then subject to the provisions of clause (b) so much of such expenditure or allowance as is in excess of the limit specified in respect thereof in clause (c) shall not be allowed as a deduction :

Provided that where the assessee is a company, so much of the aggregate of—

(a) the expenditure and allowance referred to in sub-clause (i) and (ii) of this clause; and

(b) the expenditure and allowance referred to in sub-clause (i) and (ii) of clause (c) of section 40,

in respect of an employee or a former employee, being a director or a person who has a substantial interest in the company or a relative of the director or of such person as is in excess of the sum of seventy-two thousand rupees, shall in no case be allowed as a deduction :

Provided further that in computing the expenditure referred to in sub-clause (i) or the expenditure or allowance referred to in sub-clause (ii) of this clause or the aggregate referred to in the foregoing proviso, the following shall not be taken into account, namely:

  (i) the value of any travel concession or assistance referred to in clause (5) of section 10;

 (ii) passage moneys or the value of any free or concessional passage refereed to in sub-clause (i) of clause (6) of section 10;

(iii) any payment referred to in clause (iv) or clause (v) of sub-clause (1) of section 36;

(iv) any expenditure referred to in clause (ix) of sub-section (1) of section 36.

(b) Nothing in clause (a) shall apply to any expenditure or allowance in relation to—

  (i) any employee in respect of any period of his employment outside India;

 (ii) any employee being an individual referred to in sub-clause (vii) or sub-clause (viia) of clause (6) of section 10 in respect of any period during which he is entitled to the exemption under sub-clause (vii) or, as the case may be, sub-clause (viia) aforesaid;

(iii) any employee whose income chargeable under the head ''Salaries" is seven thousand and five hundred rupees or less.

(c) The limits referred to in clause (a) are the following, namely :

  (i) in respect of the expenditure referred to in sub-clause (i) of clause (a) in the case of an employee, an amount calculated at the rate of five thousand rupees for each month or part thereof comprised in the period of his employment in India during the previous year, and in the case of a former employee being an individual who ceases or ceased to be the employee of the assessee during the previous year or any earlier previous year, sixty thousand rupees;

 (ii) in respect of the aggregate of the expenditure and the allowance referred to in sub-clause (ii) of clause (a), one-fifth of the amount of the salary payable to the employee or an amount calculated at the rate of one thousand rupees for each month or part thereof comprised in the period of employment in India of the employee during the previous year, whichever is less.

Explanation 1.—The provisions of this sub-section shall apply notwithstanding that any amount not to be allowed under this sub-section is included in the total income of the employee or, as the case maybe, the former employee.

Explanation 2.—In this sub-section, —

(a) "salary" has the meaning assigned to it in clause (1) read with clause (3) of section 17 subject to the following modifications, namely :

(1) In the said clause (1), the word "perquisites" occurring in sub-clause (iv) and the whole of sub-clause (vii) shall be omitted;

(2) In the said clause (3), the references to "assessee" shall be construed as references to "employee or former employee" and the references to "his employer or a former employer" and "an employer or a former employer" shall be construed as references to "the assessee",

(b) "perquisite" means

  (i) rent-free accommodation provided to the employee by the assessee;

 (ii) any concession in the matter of rent respecting any accommodation provided to the employee by the assessee;

(iii) any benefit or amenity granted or provided free of cost or at concessional rate to the employee by the assessee;

(iv) payment by the assessee of any sum in respect of any obligation, which but for such payment, would have been payable by the employee; and

(v) payment by the assessee of any sum, whether directly or through a fund other than a recognised provident fund, or an approved superannuation fund, to effect an assurance on the life of the employee or to effect a contract for an annuity.

(6) Where the assessee incurs any expenditure by way of fees for services rendered by a person who at any time during the twenty-four months immediately preceding the previous year was an employee of the assessee,

(a) such expenditure by way of fees, or

(b) where the assessee has also incurred in relation to such person any expenditure by way of salary referred to in sub-clause (i) of clause

(a) of sub-section (5), the aggregate of such expenditure by way of fees and by way of salary,

shall not be allowed as a deduction to the extent such expenditure by way of fees or, as the case may be, the aggregate of such expenditure by way of fees and by way of salary exceeds sixty thousand rupees.]

 

 

[As amended by Finance (No. 2) Act, 1971 and Taxation Laws (Amendment) Act, 1970]