Section 40A(2) - Payment to specified persons not deductible under certain circumstances - Income Tax - Ready Reckoner - Income Tax

Section 40A(2) : Payment to specified persons not deductible under certain circumstances Section 40A(2)(a) of Income Tax Act authorizes the Assessing Officer to disallow deductions on certain expenses. Where the assessee incurs any expenditure, in respect of which payment has been made or is to be made to relatives or close associates of the assessee, and the AO is of the opinion that such expenditure is excessive or unreasonable having regard to the FMV of the goods, services or facilities for which payment is made or the legitimate needs of business or profession or the benefit derived or accruing to him therefrom, so much of the expenditure, as is considered by him excessive or unreasonable. Provided that for an AY commencing on or before 1-4-2016 (inserted by FA, 2017 , w.e.f. 1-4-2017) 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 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. Persons having SUBSTANTIAL INTEREST: A person is deemed to have substantial interest in the business or profession if such person is the beneficial owner of at least 20% of equity share capital (in case of a company) or if such person is entitled to 20% profits of a concern (in any other case) at any time during the previous year. Disallowance of excessive expenditure The following scenarios could lead to the disallowance of expenditure under this section: Expenditure is incurred for goods, services or facilities. The payment be remitted to specific persons. The Assessing Officer finds the expenditure to be unreasonable and excessive with respect to the fair market value of the goods, services or facilities paid for, the benefits derived by or accruing to the assessee from the payment made or the legitimate business needs of the taxpayer s business or profession. Note: i. Amount disallowed under section 40A(2) is however taxable as income in the hands of recipient. ii. Section 40A(2 ) applies to expenditure only. It is not attracted when assessee makes a sale to specified person at a price lower than FMV.