Introduction
The Income Tax Act, 1961 (hereinafter referred to as the Act) is a comprehensive code governing taxation in India. The provisions in the Act emphasize on the tax implications arising from transactions relating to income, profits and gains. This article is aimed at analysing one of the provisions embodied in the Act, particularly Section 40A(3).
Overview of Section 40A(3) of Income Tax Act, 1961
Section 40A(3) is a provision of the Act dealing with the taxability of payments that can be considered as expenditure. Under this provision, any expenditure in the form of allowance or reimbursement, made by an employer to his employees, shall be treated as income in the hands of the employees when the amount of expenditure incurred is not less than the amount specified under sub-section (2) of section 40A, or when the actual expenditure incurred by the employer is not otherwise verifiable (by means of documents, vouchers, etc.).
In other words, Section 40A(3) of the Act provides that the amount of expenditure incurred by an employer in the form of allowances and reimbursements shall be included in the taxable income of the employees in the relevant assessment year, provided that the amount is not less than the amount specified in sub-section (2) of section 40A, or when the actual expenditure incurred is not otherwise verifiable.
Meaning of Allowance and Reimbursement for Section 40A(3) of Income Tax Act, 1961
Before embarking on the analysis of Section 40A(3), it is important to understand the meaning of the terms “allowance” and “reimbursement” for the purpose of the section.
An allowance can be defined as the provision of money by an employer for specific purposes, such as daily expenses, travel allowance, etc. It is given in lieu of a salary but is taxable. On the other hand, reimbursement is the repayment of an expense to the employee, which can include expenses that were incurred while carrying out the employer’s business. The employee is not liable to pay any tax on the reimbursed amount.
Analysis of Section 40A(3) of Income Tax Act, 1961
The amendment of the Act introduced Section 40A(3), which provides that any expenditure made in the form of allowances and reimbursements shall be treated as income and be liable to tax in the hands of the employees. The amount specified under sub-section (2) of section 40A, or any amount not otherwise verifiable, shall be included in the taxable income. Also, the property or facilities given to employees as per the provisions of section 37 shall not be included in the taxable income though it is a form of allowance/reimbursement.
The Explanation to the section states that any expenditure incurred by the employer which is not less than the amount specified in sub-section (2) of the section and is not otherwise verifiable, shall be considered as income of the employee. The Explanation also implies that any expenditure which is not specified in sub-section (2) of the section, albeit being not less than the amount mentioned in the sub-section, or is otherwise verifiable, shall not be subject to tax in the hands of the employee. The section further states that the payment of salary, wages etc. shall not be subject to the provisions of this section, however, any allowances and reimbursements given in addition to such payment can be considered as income in the hands of the employee.
Conclusion
Section 40A(3) of the Income Tax Act, 1961 provides that any expenditure in the form of allowances or reimbursements made by an employer to his employees shall be treated as income in the hands of the employees when the amount of expenditure incurred is not less than the amount specified under sub-section (2) of Section 40A, or when the actual expenditure incurred by the employer is not otherwise verifiable. The Explanation to the section emphasizes that any allowance and reimbursement given to employees in addition to their salary shall be included in the taxable income of the employees, if the amount of expenditure is not less than the amount specified in sub-section (2) of the section or if the expenditure is not verifiable.
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