Section 40 - Amounts not deductible - Income-tax Act, 1961

Amounts not deductible. 40. Notwithstanding anything to the contrary in sections 30 to 1 [ 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- 2 [ ( 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 22 [on or before the due date specified in sub-section (1) of section 139] 23 [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. ] 27 [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 Explanation2 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 ) 24 [thirty percent. 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, 16 [ has not been paid on or before the due date specified in sub-section (1) of section 139],- 17 [ 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 subsection (1) of section 139, 25 [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. ] 20 [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 28 [****] 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 Explanation2 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 ExplanationIII to section 194C; 4 [ ( 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 ; ] 26 [( 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;] 5 [ ( ic ) any sum paid on account of fringe benefit tax under Chapter XII-H ;] ( 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. 6 [ 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. ] 7 [ 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; ] 29 [ Explanation 3.- For the removal of doubts, it is hereby clarified that for the purposes of this sub-clause, the term tax shall include and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax. ] 8 [ ( 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;] 21 [(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] 9 [ ( 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 ; 10 [ ( v ) any tax actually paid by an employer referred to in clause ( 10CC ) of section 10; ] 11 [ ( 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 12 [ 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 :- 19 [ (a) on the first 30 [ Rs. 6,00,000 ] of the book-profit or in case of a loss 31 [ Rs. 3,00,000 ] 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; ] 13 [ ( 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 ) 14 [****] ( d ) 15 [****] ----------------------------------- Notes :- 1. Substituted for 39 by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989. 2. Sub-clauses (i), (ia) and (ib) substituted for sub-clause (i) by the Finance (No. 2) Act, 2004, w.e.f. 1-4-2005. Prior to its substitution, sub-clause (i), as substituted by the Finance Act, 1988, w.e.f. 1-4-1989 and the Finance Act, 2003, w.e.f. 1-4-2004, read as under : '(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 has not been deducted or, after deduction, has not been paid before the expiry of the time prescribed under sub-section (1) of section 200 and in accordance with other provisions of Chapter XVII-B : Provided that where in respect of any such sum, tax has been deducted under Chapter XVII-B or paid in any subsequent year, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. 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;' 3. Inserted by the Taxation Laws (Amendment) Act, 2006, w.r.e.f. 1-4-2006. 4. Inserted by the Taxation Laws (Amendment) Act, 2006, w.r.e.f. 1-4-2006. 5. Inserted by the Finance Act, 2005, w.e.f. 1-4-2006. 6. Inserted by the Finance Act, 2006, w.e.f. 1-4-2006. 7. Inserted by the Finance Act, 2006, w.e.f. 1-6-2006. 8. Inserted by the Income-tax (Amendment) Act, 1972, with retrospective effect from 1-4-1962 subject to savings prescribed by sections 4 and 5 of that Act. 9. Substituted by the Finance Act, 2003, w.e.f. 1-4-2004. Prior to its substitution, sub-clause (iii) read as under : '(iii) any payment which is chargeable under the head Salaries , if it is payable outside India and if the tax has not been paid thereon nor deducted therefrom under Chapter XVII-B;' 10. Inserted by the Finance Act, 2002, w.e.f. 1-4-2003. Original clause (v) was inserted by the Finance Act, 1968, w.e.f. 1-4-1969, amended by the Taxation Laws (Amendment) Act, 1970, w.e.f. 1-4-1971 and later on omitted by the Finance (No. 2) Act, 1971, w.e.f. 1-4-1972. 11. Substituted by the Finance Act, 1992, w.e.f. 1-4-1993. Prior to substitution, clause (b) was amended by the Taxation Laws (Amendment) Act, 1984, w.e.f. 1-4-1985, the Direct Tax Laws (Amendment) Act, 1989, w.e.f. 1-4-1989, and the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989. 12. Substituted for eighteen by the Finance Act, 2002, w.e.f. 1-6-2002. 13. Inserted by the Direct Tax Laws (Amendment) Act, 1989, w.e.f. 1-4-1989. 14. 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 15 . Omitted by the Finance Act, 1988, w.e.f. 1-4-1989. 16 . Substituted by the Finance Act, 2008, w.e.f. 1-4-2005. Prior to substitution it was read as under: has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200 . Further substituted vide vide Finance Act, 2010 w.e.f. 01.04.2010, before it was read as, [ has not been paid,- (A) in a case where the tax was deductible and was so deducted during the last month of the previous year, on or before the due date specified in sub-section (1) of section 139; or (B) in any other case, on or before the last day of the previous year ; ] 17 . Proviso to sub-clause(ia) has been substituted by the Finance Act, 1988, w.e.f. 1-4-1989., Prior to subsctitution it was read as under: Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. Further substituted vide vide Finance Act, 2010 w.e.f. 01.04.2010, before it was read as, [ Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted- (A) during the last month of the previous year but paid after the said due date; or (B) during any other month of the previous year but paid after the end of the said previous year, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid ] 18. Omitted by the Finance Act, 2008, w.e.f. 1-4-2009. Prior to omission it was read as under: any sum paid on account of securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004 ; 19. Substituted vide Finance (No. 2) Act, 2009 with effect from 1-4-2010, before it was read as, ( 1 ) in case of a firm carrying on a profession referred to in section 44AA or which is notified for the purpose of that section- ( a ) on the first ₹ 1,00,000 of the book-profit or in case of a loss ₹ 50,000 or at the rate of 90 per cent of the book-profit, whichever is more; ( b ) on the next ₹ 1,00,000 of the book-profit at the rate of 60 per cent; ( c ) on the balance of the book-profit at the rate of 40 per cent; ( 2 ) in the case of any other firm- ( a ) on the first ₹ 75,000 of the book-profit, or in case of a loss ₹ 50,000 or at the rate of 90 per cent of the book-profit, whichever is more; ( b ) on the next ₹ 75,000 of the book-profit at the rate of 60 per cent; ( c ) on the balance of the book-profit at the rate of 40 per cent: 20. Inserted vide Finance Act, 2012, w.e.f. 01-04-2013 21. Inserted vide Finance Act, 2013, w.e.f. 01-04-2014. 22. Substituted vide THE FINANCE (No. 2) ACT, 2014, w.e.f. 1st day of April, 2015 , before it was read as, during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200 : 23. Substituted vide THE FINANCE (No. 2) ACT, 2014, w.e.f. 1st day of April, 2015 , before it was read as, Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. 24. Substituted vide THE FINANCE (No. 2) ACT, 2014, w.e.f. 1st day of April, 2015 , before it was read as, any interest, commission or brokerage, 3 [ rent, royalty, ] fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work) . 25. Inserted vide THE FINANCE (No. 2) ACT, 2014, w.e.f. 1st day of April, 2015 26. Inserted vide THE FINANCE ACT, 2016 w.e.f. 1st day of June, 2016, earlier Omitted by the Finance Act, 2008, w.e.f. 1-4-2009 , see foot note 18. 27. Inserted vide FINANCE (NO. 2) ACT, 2019 w.e.f. 01-04-2020 28. Substituted vide FINANCE (NO. 2) ACT, 2019 w.e.f. 01-04-2020 before it was read as resident 29. Inserted vide Finance Act, 2022 w.e.f. 01-04-2005 30. Substituted vide Section 14 of the Finance (No. 2) Act, 2024 dated 16-08-2024 w.e.f. 01-04-2025 before it was read as, ₹ 3,00,000 31. Substituted vide Section 14 of the Finance (No. 2) Act, 2024 dated 16-08-2024 w.e.f. 01-04-2025 before it was read as, ₹ 1,50,000