Amount not allowable under section 40(a)

In the case of any assessee, the following expenses are expressly disallowed under section 40(a):

INTEREST, ROYALTY, FEES FOR TECHNICAL SERVICES PAYABLE TO A NON-RESIDENT [SEC. 40(a) (i)] –

Disallowance under section 40(a) (i) is attracted if the following conditions are satisfied

Condition oneThe amount paid is interest (not being interest on any loan issued for public
subscription before April 1, 1938), royalty, fees for technical services or
other sum.
Condition twoThe aforesaid amount is chargeable to tax under the Act in the hands of the
recipient.
Condition  three
The aforesaid amount is paid/payable as follows—
SituationPlace of PaymentTo whom it is
paid/payable
Situation 1Outside IndiaTo a resident or nonresident
Situation 2In IndiaTo a non-resident or
foreign company
Condition fourIn respect of the aforesaid, tax is deductible but tax has not been deducted; or tax has been deducted but after deduction it has not been paid to the Government in the previous year [or in a subsequent year before the expiry of time given under section 200(1)]

CONSEQUENCES IF THE ABOVE CONDITIONS ARE SATISFIED – If the above conditions are satisfied, the aforesaid expenditure is not deductible.
CONSEQUENCES IF TAX IS DEDUCTED SUBSEQUENTLY – If tax is deducted/paid subsequently, then deduction is available in some cases.
COMPLIANCE OF TDS PROVISIONS IN CASE OF A RESIDENT [SEC. 40(a) (ia)] – Section 40(a) (ia) is applicable from the assessment year 2005-06 if the following conditions are satisfied—
1. It covers interest, commission or brokerage, fees for technical services, fees for
professional services and payment to contractors/ sub-contractors.

2. In the above cases recipient is resident in India.

3. In respect of the aforesaid—

a. tax is deductible but tax has not been deducted; or

b. tax has been deducted but after deduction it has not been paid to the Government in the previous year [or in a subsequent year before the expiry of time given under section 200(1)].

CONSEQUENCES IF THE ABOVE CONDITIONS ARE SATISFIED – If the above conditions are satisfied, the aforesaid expenditure is not deductible with effect from assessment year 2005-06.

CONSEQUENCES IF TAX IS DEDUCTED SUBSEQUENTLY – If tax is deducted/paid subsequently, then deduction is available in some cases. The same is explained in the table given below—

Different situationsDeductible in which year
If in respect of expenses mentioned above, (a) tax has been deducted under the relevant sections, and (b) paid to the Government in the same year and before the expiry of time
limit given under section 200(1)
Deductible in the year in which the liability to pay interest, commission, brokerage, etc.,
is incurred
If in respect of expenses mentioned above , (a) tax has been deducted under the relevant sections, and (b) paid to the Government in the same financial year but after the expiry of
time limit given under section 200(1)
Deductible in the year in which the liability to pay interest, commission, etc. is incurred
If in respect of expenses mentioned above, (a) tax has been deducted under the relevant sections, and (b) paid to the Government in the subsequent year but before the expiry of
time limit given in section 200(1)
Deductible in the year in which the liability to pay interest, commission, brokerage, etc.,
is incurred
If in respect of expenses mentioned above, (a) tax has been deducted under the relevant sections, and (b) paid to the Government in a subsequent year [but after the expiry of timelimit given in section 200(1)]Deductible in the year in which
tax has been paid
If in respect of expenses mentioned above, (a) tax has not been deducted, or (b) tax has been deducted but not paid to the GovernmentNot deductible

SECURITIES TRANSACTION TAX [SEC. 40(a) (ib)] – Securities transaction tax is not deductible while calculating business income.

FRINGE BENEFIT TAX [SEC. 40(a) (ic)] – Fringe benefit tax is not deductible while calculating business income from the assessment year 2006-07.

INCOME-TAX [SEC. 40(a) (ii)] – Any sum paid on account of income-tax (i.e., any rate or tax levied on the profits or gains of any business or profession) is not deductible. Similarly, any interest/penalty/fine for non-payment or late payment of income-tax is not deductible. This rule is applicable whether income-tax is payable in India or outside India.

WEALTH-TAX [SEC. 40(a)(iia)] – Any sum paid on account of wealth-tax under the Wealth-tax Act, 1957, or tax of a similar nature chargeable under any law outside India is not deductible

SALARY PAYABLE OUTSIDE INDIA WITHOUT TAX DEDUCTION [SEC. 40(a) (iii)] – Section 40(a) (iii) is applicable if the following conditions are satisfied—

Condition one – The payment is chargeable under the head “Salaries” in the hands of the recipient.

Condition two – It is payable—
a. outside India (to any person resident or non-resident); or b. in India to a non-resident.

Condition three – Tax has not been paid to the Government nor deducted at source under the Income-tax Act.

If the aforesaid conditions are satisfied, then the payment is not allowed as deduction.

PROVIDENT FUND PAYMENT WITHOUT TAX DEDUCTION AT SOURCE [SEC. 40(a) (iv)] – Any payment to a provident fund (or other fund established for the benefit of employees of the assessee) is not deductible if the
assessee has not 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”.
TAX ON PERQUISITE PAID BY THE EMPLOYER [SEC. 40(a) (v)]
The provisions of section 40(a) (v) are given below—
1. The employer provides non-monetary perquisites to employees.
2. Tax on non-monetary perquisites is paid by the employer.
3. The tax so paid by the employer is not taxable in the hands of employees by virtue of section 10(10CC).
4. While calculating income of the employer, the tax paid by the employer on non-monetary perquisites is not deductible under section 40(a) (v).

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