40A.Expenses or payments not deductible in certain circumstances.-
(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.
(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 un- divided 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 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, exceeds twenty 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,
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
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 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, exceeds twenty 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 “twenty
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]
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.
(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.
(c) 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) Omitted
(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.]
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