Under the Income tax Act, 1961 Profit or gain from Business or profession is considered income and such income is chargeable to tax. The expenses incurred in relation to business can be deducted from the revenue from Business or profession. However, there is certain restriction on such deduction of expenses. Certain expenses cannot be allowed as deduction. Section 40 & 40A of the Income Tax Act, 1961 specified it. The provisions of section 40(a) is discussed here.
Section 40(a) start with the wording “Notwithstanding anything contrary in section 30 to 38”. That means it had overriding effect on section 30 to 38.
Any sum paid on account of fringe benefit tax under the relevant chapter of Income tax Act, shall not be allowed as deduction.
Any sum paid on account of tax levied on the profits or gains of any business or profession shall not be allowed as deduction.
Any sum paid on account of wealth-tax not allowed as deduction (not in force).
Tax actually paid by an employer as per clause (10CC) of section 10 (Tax on perquisite provided to employees) not allowed as deduction.
Sum payable To Non Resident or outside India:-
If salary is payable—
(A) Outside India; or
(B) To a non-resident,
And if the tax has not been paid thereon nor deducted there from then it is not allowed as deduction
If any interest, royalty, fees for technical services or other sum chargeable under this Act, which is payable,—
(A) Outside India; or
(B) In India to a non-resident, not being a company or to a foreign company,
On which tax is deductible at source and such tax has not been deducted or, after deduction, has not been paid on or before the due date of filing the income tax Return under section 139(1), then such expenses cannot be allowed as deductions.
If any consideration paid or payable to a non-resident for a specified service on which equalisation levy is deductible under the provisions of Finance Act, 2016, and such levy has not been deducted or after deduction, has not been paid on or before the due date of filing the return under section 139(1), then such sum shall not be allowed to be deducted from Profit or Gain from business or profession.
However, there is a proviso which provides that if tax or levy has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date of filing income tax Return under section 139(1), such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.
Sum payable to a resident:-
If there is any sum payable to a resident, on which tax is deductible at source and such tax has not been deducted or, after deduction, has not been paid on or before the due date of filing the return under section 139(1) then 30% of such sum should be disallowed.
Proviso to the section 40
Where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, 30% of such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.
Where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to section 201(1), then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee.
First proviso to section 201(1)
Any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with the provisions of relevant Chapter on the sum paid to a resident or on the sum credited to the account of a resident shall not be deemed to be an assessee in default in respect of such tax if such resident—
(i) has furnished his return of income under section 139;
(ii) has taken into account such sum for computing income in such return of income; and
(iii) has paid the tax due on the income declared by him in such return of income,
and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed.
The above proviso to section 201(1) is applicable in case of amount paid or payable to resident only. It is not applicable to Non Resident.
Meaning of various term used in this Section:
Meaning of Royalty: – As per Explanation 2 to clause (vi) of section 9(1)
Royalty means consideration for:-
(i) the transfer of all or any rights (including granting of a licence) in
(ii) imparting of any information concerning the working or the use of
(iii) the use of
any patent, invention, model, design, secret formula or process or trade mark or similar property ;
(iv) The imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;
(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; (Section 44BB deals with Special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils.)
(v) the transfer of all or any rights (including the granting of license) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or
(vi) The rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v).
The consideration for royalty includes Lumpsum consideration. However, it excludes the consideration chargeable to capital Gain.
Meaning of Fees for Technical services:-Explanation2 to section 9(1)(vii);
Fees for technical services means any consideration for the rendering of any managerial, technical or consultancy services. It also includes Lumpsum consideration.
Fees for technical services not includes:-
1. consideration for any construction, assembly, mining or like project undertaken by the recipient
2. consideration which would be income of the recipient under the head Salaries
Commission or brokerage:- (clause (i) of the Explanation to section 194H)
It includes any payment received or receivable by a person acting on behalf of another person for services rendered or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities. It excludes professional servies.
“Professional services” (clause (a) of the Explanation to section 194J)
It means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board.
Meaning of work as per Explanation to section 194C:–
It shall include—
(b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting;
(c) carriage of goods or passengers by any mode of transport other than by railways;
(e) manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer,
If we are manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer then it shall not be considered as work.
Meaning of Rent (clause (i) to the Explanation to section 194-I)
Rent means any payment under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of
(c) Land appurtenant to a building
Whether or not any or all of the above are owned by the payee.
Further here building includes factory buildings.
The above discussion is our view under the relevant section of the Income tax Act, 1961. It can’t be considered as legal advice from our side.