Section 40A - Expenses or payments not deductible in certain circumstances - Income-tax Act, 1961

1 [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 2 [ 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. 28 [Provided that 30 [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. ] 3 [ * * * ] ( 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, 29 [ 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. 25 [ (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, 31 [or use of electronic clearing system through a 39 [ bank account 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 32 [ or use of electronic clearing system through a 39 [ bank account 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 33 [ 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 subsection 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, 34 [ or use of electronic clearing system through a 39 [ bank account 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. ] 26 [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 35 [ ten thousand rupees ] , the words thirty-five thousand rupees had been substituted. ] 15 [ (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 16 [ an account payee cheque drawn on a bank or account payee bank draft ] 36 [ or use of electronic clearing system through a 39 [ bank account 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 37 [ or electronic clearing system ] 40 [ 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) 17 [****] (6) 18 [****] 19 [ (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) 20 [ * * * ] 21 [ (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) 27 [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 22 [ 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. ] 23 [ (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) 24 [****] 38 [(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.] ******************** Notes :- 1. Inserted by the Finance Act, 1968, w.e.f. 1-4-1968. 2. Substituted for Income-tax by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1988. 3. Omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989. Prior to its omission, proviso was amended by the Finance (No. 2) Act, 1971, w.e.f. 1-4-1972. 4. Substituted for two thousand five hundred by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989. 5. Substituted for ten by the Finance (No. 2) Act, 1996, w.e.f. 1-4-1997. 6. Substituted for a crossed cheque drawn on a bank or by a crossed bank draft by the Taxation Laws (Amendment) Act, 2006, w.e.f. 13-7-2006. 7. Substituted for such expenditure shall not be allowed as a deduction by the Finance Act, 1995, w.e.f. 1-4-1996. 8. Substituted for two thousand five hundred by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989. 9. Substituted for ten by the Finance (No. 2) Act, 1996, w.e.f. 1-4-1997. 10. Substituted for a crossed cheque drawn on a bank or by a crossed bank draft by the Taxation Laws (Amendment) Act, 2006, w.e.f. 13-7-2006. 11. Substituted for Income-tax by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1988. 12. Substituted for two thousand five hundred by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989. 13. Substituted for ten by the Finance (No. 2) Act, 1996, w.e.f. 1-4-1997. 14. Substituted for a crossed cheque drawn on a bank or by a crossed bank draft by the Taxation Laws (Amendment) Act, 2006, w.e.f. 13-7-2006. 15. Inserted by the Finance Act, 1969, w.e.f. 1-4-1969. 16. Substituted for a crossed cheque drawn on a bank or by a crossed bank draft by the Taxation Laws (Amendment) Act, 2006, w.e.f . 13-7-2006. 17. 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. Prior to its omission, sub-section (5) was amended by the Direct Taxes (Amendment) Act, 1974, w.e.f. 1-4-1974, Taxation Laws (Amendment) Act, 1984, w.e.f. 1-4-1985, Finance Act, 1984, w.e.f. 1-4-1985 and Finance Act, 1985, w.e.f. 1-4-1985. 18. 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. Prior to its omission, sub-section (6) was amended by the Finance Act, 1984, w.e.f. 1-4-1985. 19. Substituted by the Finance Act, 1999, w.e.f. 1-4-2000. Prior to its substitution, sub-section (7), as inserted by the Finance Act, 1975, w.r.e.f. 1-4-1973, read as under : '(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- (i) 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; (ii) any provision made by the assessee for the previous year relevant to any assessment year commencing on or after the 1st day of April, 1973, but before the 1st day of April, 1976, to the extent the amount of such provision does not exceed the admissible amount, if the following conditions are fulfilled, namely :- (1) the provision is made in accordance with an actuarial valuation of the ascertainable liability of the assessee for payment of gratuity to his employees on their retirement or on termination of their employment for any reason; (2) the assessee creates an approved gratuity fund for the exclusive benefit of his employees under an irrevocable trust, the application for the approval of the fund having been made before the 1st day of January, 1976; and (3) a sum equal to at least fifty per cent of the admissible amount, or where any amount has been utilised out of such provision for the purpose of payment of any gratuity before the creation of the approved gratuity fund, a sum equal to at least fifty per cent of the admissible amount as reduced by the amount so utilised, is paid by the assessee by way of contribution to the approved gratuity fund before the 1st day of April, 1976, and the balance of the admissible amount or, as the case may be, the balance of the admissible amount as reduced by the amount so utilised, is paid by the assessee by way of such contribution before the 1st day of April, 1977. Explanation 1.- For the purposes of sub-clause (ii) of clause (b) of this sub-section, admissible amount means the amount of the provision made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason, to the extent such amount does not exceed an amount calculated at the rate of eight and one-third per cent of the salary [as defined in clause (h) of rule 2 of Part A of the Fourth Schedule] of each employee entitled to the payment of such gratuity for each year of his service in respect of which such provision is made. Explanation 2.- 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 on 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.' 20. Sub-section (8) was omitted by the Finance Act, 1985, w.e.f. 1-4-1986. Prior to its omission sub-section (8) was inserted by the Finance Act, 1975, w.e.f. 1-4-1976. 21. Inserted by the Finance Act, 1984, with retrospective effect from 1-4-1980. 22. Substituted for Income-tax by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1988. 23. Inserted by the Finance Act, 1984, w.r.e.f. 1-4-1980. 24. Omitted by the Finance Act, 1992, w.e.f. 1-4-1993. Prior to omission sub-section (12) was inserted by the Fi nance Act, 1985, w.e.f. 1-4-1986. 25. Substituted by the Finance Act, 2008, w.e.f. 1-4-2009. Prior to substitution it was read as under: (3)( a ) Where the assessee incurs any expenditure in respect of which payment is made in a sum exceeding twenty thousand rupees otherwise than by an account payee cheque drawn on a bank or account payee bank draft, no deduction shall be allowed in respect of such expenditure; ( b ) 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, 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 amount of payment exceeds twenty 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 this sub-section where any payment in a sum exceeding twenty thousand rupees is made otherwise than by an account payee cheque drawn on a bank or account payee bank draft, 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. Earlier the sub-section (3) was substituted by the Finance Act, 2007, w.e.f. 1-4-2008. Prior to substitution it was read as under: (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, 1969) as may be specified in this behalf by the Central Government by notification in the Official Gazette, in a sum exceeding 4 [ 5 [ twenty ] thousand ] rupees otherwise than by 6 [ an account payee cheque drawn on a bank or account payee bank draft ] , 7 [twenty per cent of 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 8 [ 9 [ twenty ] thousand ] rupees otherwise than by 10 [ an account payee cheque drawn on a bank or account payee bank draft ], the allowance originally made shall be deemed to have been wrongly made and the 11 [ Assessing ] 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 12 [ 13 [ twenty ] thousand ] rupees is made otherwise than by 14 [ an account payee cheque drawn on a bank or account payee bank draft ] , 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. ] 26. Inserted vide Finance (No. 2) Act, 2009 with effect from 1-10-2009. 27. Inserted vide Finance Act, 2011 w.e.f. 1.4.2012 28. Inserted vide Finance Act, 2012, w.e.f. 01-04-2013. 29. Inserted vide Finance Act, 2012, w.e.f. 01-04-2013. 30. Inserted vide THE FINANCE ACT, 2017 w.e.f. 1st day of April, 2017 31. Substituted vide THE FINANCE ACT, 2017 w.e.f. 1st day of April, 2018 before it was read as exceeds twenty thousand rupees 32. Inserted vide THE FINANCE ACT, 2017 w.e.f. 1st day of April, 2018 33. Substituted vide THE FINANCE ACT, 2017 w.e.f. 1st day of April, 2018 before it was read as twenty thousand rupees 34. Substituted vide THE FINANCE ACT, 2017 w.e.f. 1st day of April, 2018 before it was read as exceeds twenty thousand rupees 35. Substituted vide THE FINANCE ACT, 2017 w.e.f. 1st day of April, 2018 before it was read as twenty thousand rupees 36. Inserted vide THE FINANCE ACT, 2017 w.e.f. 1st day of April, 2018 37. Inserted vide THE FINANCE ACT, 2017 w.e.f. 1st day of April, 2018 38. Inserted vide THE FINANCE ACT, 2018 w.e.f. 1st day of April, 2017 39. Substituted vide FINANCE (NO. 2) ACT, 2019 w.e.f. 01-04-2020 before it was read as bank account 40. Inserted vide FINANCE (NO. 2) ACT, 2019 w.e.f. 01-04-2020