PGBP | Part-4 | Sec 40 | Disallowed Expenses | by CA Pradeep Kalra |

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EXPENSES OR PAYMENT NOT DEDUCTIBLE IN CERTAIN CIRCUMSTANCES [SECTION 40A]
1. PAYMENT TO RELATIVE/RELATED PERSON SECTION 40A(2)
If the assessee incurs any expenditure and payment has been given to any person mentioned below and such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities, so much of the expenditure as is so considered to be excessive or unreasonable shall not be allowed as a deduction.
e.g. Mr. X has purchased raw material for his business from his brother and has paid `5,00,000 but market value is `3,00,000, in this case expenditure disallowed shall be `2,00,000.
The persons covered in this category are —
a. If any individual has made any payment to his relative. As per section 2(41) Relative, in relation to an individual, means the husband, wife, brother or sister or any lineal ascendant or descendant of that individual.
b. If the assessee is a company, firm, association of persons or Hindu Undivided Family etc. and it has made payment to 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 etc.
c. If any person made payment to any other person who has substantial interest in the business of the assessee e.g. ABC Ltd. has paid `5,00,000 to XYZ Ltd. and XYZ Ltd. is holding 20% shares of ABC Ltd., in this case excessive payment is disallowed.

2. PROVISIONS RELATING TO PAYMENTS IN EXCESS OF `10,000 SECTION 40A(3) RULE 6DD
According to section 40A(3), where the assessee incurs any expenditure, in respect of which payment or aggregate of payments made to a person in a day otherwise than by an account payee cheque drawn on a bank or by an account payee bank draft or use of electronic system through bank account or through such other prescribed electronic modes exceeds ` 10,000, such expenditure shall not be allowed as a deduction.
The prescribed electronic modes are credit card, debit card, net banking, IMPS (Immediate payment Service), UPI (Unified Payment Interface), RTGS (Real Time Gross Settlement), NEFT (National Electronic Funds Transfer), and BHIM (Bharat Interface for Money) Aadhar Pay [CBDT Notification No. 8/2020 dated 29.01.2020].
The provision applies to all categories of expenditure involving payments for goods or services which are deductible in computing the taxable income.
Payments in excess of ` 10,000 made otherwise than through prescribed modes deemed to be the income of the subsequent year, if expenditure has been allowed as deduction in any previous year on due basis
In case of payment made for plying, hiring or leasing goods carriages, the ceiling of ten thousand rupees shall be enhanced to ` 35,000.
3. DISALLOWANCE IN RESPECT FOR THE PROVISION FOR GRATUITY: SECTION 40A(7)

4. NON-STATUTORY OR UNRECOGNISED FUND: Section 40A(9)
Any contribution made by employer to unrecognised provident fund or non-statutory welfare fund account is not deductible while calculating PGBP income.
5. Appropriation to Profit
(Transfer to Reserves of dividend, issue of Bonus Share)
6. Any provision made without any Liability.
7. Personal Expenses
8. Illegal Expenses
9. Expenses not related to business or profession
10. Capital nature expenses
11. Penalty or fine payable or paid on breach of law.
12. Interest on Capital
13. Salary to proprietor
14. Fringe Benefit Tax (FBT)
15. Extra payment to relatives, and specified person.
16. Disallowance in respect of contributions to non-statutory funds.
17. Drawings
18. Income tax
19. Wealth tax

EXPENDITURE IN CONNECTION WITH ASSETS WHICH ARE PARTLY IN BUSINESS USE AND PARTLY IN PERSONAL USE SECTION 38

DEDUCTIBILITY OF INCOME TAX OR SECURITIES TRANSACTION TAX
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