“Explore the intricate details of TDS disallowance and partner salary/interest under Section 40 of the Income Tax Act, 1961. Gain insights into provisions addressing non-deduction/payment of TDS, disallowances for excessive payments to partners, and key considerations for tax compliance. Navigate the complexities with our comprehensive summary for accurate understanding and compliance.”
Section 40 of the Income Tax Act, 1961 contains provisions for disallowances of expenses while calculating taxable income in India. This article provides a summary of the various provisions under Section 40, including disallowance of expenses for non-deduction or non-payment of tax deducted at source (TDS), disallowance of certain salary and interest payments to partners in a partnership firm, and more.
The Article mainly explains the provisions of Section 40 (TDS disallowances and disallowances of excessive payments to Partners)
Section 40 of Income tax Act deals with disallowances (i.e. certain expenses claimed in Profit and Loss are not allowed as expenses while calculating Income Tax Payable and hence added back to profit).
1. Section 40(a)(i) : The section states that if any Interest, Royalty or Fees for technical services or any other sum chargeable to tax which is payable
- Outside India (to either Resident or Non Resident) or
- In India to a non Resident (includes Foreign Company) and
- Tax is deductible but not deducted, or after deducted not paid to the Govt before due date of filing return u/s 139(1)
Then Entire such expenses will be disallowed u/s 40(a)
As per the above section , if an assessee pays any Interest , Royalty, Fees for Technical services or any Taxable sum in India to a Non Resident without deducting the applicable TDS, then such expenses will not be allowed as deduction under Income Tax . Similarly, if an assessee pays any Interest , Royalty, Fees for Technical services or any Taxable sum outside India (to either Resident or Non Resident) without deducting the applicable TDS, then such expenses will not be allowed as deduction under Income Tax
The above disallowance will apply even if Tax is deducted , but not deposited to the Govt due date of filing the Original Return
If the above tax is deposited after due date u/s 139(1), the expenses will be allowed as deduction in the year in which tax deposited
For Example :
Technical fees of Rs. 100000 is incurred in FY 2022-23 on which TDS is Rs.10000.
Due date u/s 139(1) is 31.10.2023.
If TDS is deposit deposited on 30.10.2023, it will be allowed as deduction in A.Y. 2023-24(F.Y. 2022-23).
However if TDS is Deposited on 02.11.2023, it will be disallowed in A.Y. 2023-24 and subsequently allowed as deduction in A.Y. 2024-25
Exception to the above Rule : If Assessee produces a certificate from the payee that it has shown amount received as Income in its ITR and due tax has been paid before filing ITR, then Assessee will not have any disallowance even if TDS is not deducted or paid
2. Sec 40(a)(ia) : Any sum is payable to a Resident on which tax is to be deducted but not deducted or paid, then 30% of such sum is disallowed
As per the above section , if an assessee pays any sum to a Resident without deducting the applicable TDS, then 30% of such expenses will not be allowed as deduction under Income Tax
The above disallowance will apply even if Tax is deducted , but not deposited to the Govt due date of filing the Original Return
If the above tax is deposited after due date u/s 139(1), the expenses will be allowed as deduction in the year in which tax deposited
Exception to the above Rule : If Assessee produces a certificate from the payee that it has shown amount received as Income in its ITR and due tax has been paid before filing ITR, then Assessee will not have any disallowance even if TDS is not deducted or paid
3. Sec 40(a)(ii) : Income Tax paid is not allowed as a deduction
4. Sec 40(a)(iii) : Any Salary paid outside India or in India to a non resident will be disallowed if TDS is not deducted, or deducted but not deposited to the Govt before due date of filing the Original Return
5. Sec 40(a)(iv): Payments to Provident Funds by the Assessee will be disallowed if Assessee does not ensure that TDS will be deducted by such fund on payments made by it
6. Sec 40(a)(v) : Tax actually paid by employer u/s 10(10CC) i.e. tax paid by employer on perquisites will be disallowed (it is exempt for employees hence disallowed for employer)
7. Section 40(b) : Disallowance of Partners Salary & Interest
i. Sec 40(b)(i) : As per this sub-section any payment of Salary, bonus or commission to a non working partner is disallowed. Hence even if Partnership deed provides for Salary to non working partner, it will be disallowed to the firm
ii. Sec 40(b)(ii) : This sub-section states that Interest paid to any partner or Remuneration paid to working partner will be disallowed if the same is not authorized (allowed) as per partnership deed
For Example :
ABC is a partnership firm with A,B and C as partners. Mr. A and B are working partners and C is non working partner : Salary and Interest payments are as under :
A : Salary 50000 pm Interest : 10 % on capital
B : Salary 60000 pm Interest : 11 % on capital
C : Salary 40000 pm Interest : 11 % on capital
Payments authorized by partnership deed
A : Salary 40000 pm Interest : 9 % on capital
B : Salary 60000 pm Interest : 9% on capital
C : Salary 20000 pm Interest : 9 % on capital
Disallowance u/s 40(b) will be calculated as follows
- Excess Salary of Mr. A Rs.10000 and Excess Interest of 1%
- Excess Interest of 2% for Mr. B
- Entire Salary of Mr. C of Rs. 40000 (as he is non working) and Excess Interest of 2 %
iii. Sec 40(b)(iii): Interest paid to any Partner or Remuneration paid to working partner will be disallowed even if the same is authorized (allowed) as per partnership deed if the interest or remuneration pertains to a period before such partnership deed and the same is not authorized by an earlier partnership deed
- If in the above example, Partnership deed authorising the above payments is entered into on 10.05.2023 and there is no previous Partnership deed, then the Salary and Interest payments made before 10.05.2023 will be disallowed
iv. Sec 40(b)(iv) : The sub-section says Interest paid to any partner in excess of 12% will be disallowed even if authorised by Partnership deed. Hence maximum interest on capital that can be allowed is 12 %
v. Sec 40(b)(v) : Remuneration to working partner in excess of the following limits will be disallowed even if authorized by partnership deed :
- On first 300000 of book profit (or loss) : 150000 or 90% of book profit whichever is more
- On the balance of book profit : 60 % of the profits
For the purpose of this sub-section, Book Profit Means : Profit as profit and loss plus Partners Salary claimed as expense
For Example :
If Book Profit is Rs. 400000
Max Salary allowed for all working partners taken together is :
| 1 | 90% of 300000 | 270000 |
| 2 | 60% of 100000 | 60000 |
| 3 | Total | 330000 |
Hence any Salary paid in excess of Rs 330000 will be disallowed
However, if Book Profit is 100000,
Max Salary allowed for all working partners taken together is :
-
- 90% of 100000 : 90000 or 150000 (whichever is more) = 150000
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