While arriving from the Book Profit to the Taxable Income, assessee has to adhered to various sections contained under Income-tax Act relating to allowance and disallowance of expenditure or income and reporting under Form 3CD of Tax Audit conducted by the Chartered Accountant. Few of the sections are discussed below:
1. Section 36(1)(va) – Deduction of Employee Contribution to various funds – Any sum received from the employee to which section 2(24)(x) applies [relating to contributions made to any provident fund or superannuation fund or any fund set up under the provisions of the Employees’ State Insurance Act, 1948 or any other fund for the welfare of the employees], if such sum is credited by the assessee (employer) to the employee’s account in the relevant fund or funds on or before the due date specified under the relevant Act.
Further, Due Date means the due date the date by which the assessee is required as an employer to credit an employee’s contribution to the employee’s account in the relevant fund under any Act, rule, order or notification issued thereunder or under any standing order, award, contract of service or otherwise.
Further, if the contribution is deposited after the due date specified under the relevant Act, amount shall be disallowed while computing the Taxable Income of the employer.
Further, in case, Tax Audit is applicable on the employer, details of deposits including due date, sum received from employees, actual amount paid and date of actual deposit to various fund is provided under clause 20(b) of Form 3CD.
Further, controversy related to deposit in various funds before the due date in the relevant Act or before the due date of filing the Return of Income has come to an end by the Amendment introduced by Finance Act 2021 that deposit to various funds is allowed only if deposited before the due date specified in the relevant Act. More provided in the Article written by me titled as: Interplay of section 36 & section 43B [Employee Contribution]
2. Section 40(a)(i) – Deduction in respect of payment made to Non-Residents – In case of an assessee being a Non-Resident, not being a company or a foreign company to whom payment is made in the nature of Interest, Royalty, Fees for Technical Services or any other sum chargeable to tax under the Income-tax Act, outside India or in India on which tax is deductible under Chapter XVII-B and such tax has not been deducted or after deduction, has not been paid on or before the due date specified in section 139(1) shall be disallowed while computing the Taxable Income of the deductor.
Further, in case, Tax Audit is applicable on the deductor, in case of disallowance u/s 40(a)(i), it is to be reported in clause 21(b)(i) of Form 3CD.
3. Section 40(a)(ia) – Deduction in respect of payment made to Residents – In case of assessee being a resident to whom any sum is payable on which tax is deductible under Chapter XVII-B and such tax has not been deducted or after deduction, has not been paid on or before the due date specified in section 139(1). 30% of such sum shall be disallowed while computing the Taxable Income of the deductor.
With respect to section 40(a)(i) and section 40(a)(ia), following points needs to be noted:
- In case, where tax has been deducted in any subsequent year, or has been deducted during the previous year but deposited after the due date specified under section 139(1). Such sum is allowed as deduction in the year in which such tax is deposited.
- In case where assessee fails to deduct whole or part of the tax on any such sum but is not deemed to be Assessee in Default under first proviso to section 201(1), it shall be deemed that assessee has deducted and paid the taxes on such sum on the date of furnishing of return of income.
- Following conditions need to be satisfied where the deductor is not deemed to be Assessee in Default if the deductee:
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- Has furnished his return of income u/s 139,
- Has taken into account such income on which no TDS is deducted, and
- Has paid the taxes due on the income declared by him in such return of income
- And the deductor has furnished a certificate from a Chartered Accountant in Form 26A (as per Rule 31ACB).
Further, till 2004, only payment made to Non-Resident is disallowed and there is no provision relating to disallowance of payment made to Resident. Afterwards, section 40(a)(ia) was introduced by Finance Act 2004.
Further, there is a discrimination relating to disallowance of expenses relating to resident vis-à-vis non-resident. In case of resident, only 30% of expense is disallowed where in case of non-resident, 100% of expense is disallowed and various Courts have held that due to application of Non-Discrimination clause in the relevant Tax Treaty, no disallowance should be made in case of no TDS is deducted on payment to non-residents similar to no TDS deducted on same nature of payment made to residents.
Cases referred for Non-Discrimination Clause
- CIT v/s Mitsubishi Corporation India (P.) Ltd. (2024) 159 taxmann 539 (Delhi High Court)
- CIT v/s Herbalife International India (P.) Ltd. (2016) 69 taxmann 205 (Delhi High Court)
Further, in case, Tax Audit is applicable on the deductor, in case of disallowance u/s 40(a)(ia), it is to be reported in clause 21(b)(ii) of Form 3CD.
4. Section 40(a)(ib) – No Equalisation Levy (EL) deducted on payment made to Non-Residents – Any payment paid or payable to a Non-Resident on which EL is applicable as per provisions contained in Chapter VIII of Finance Act 2016 and such levy has not been deducted or after deduction, has not been paid on or before the due date specified in section 139(1). Such sum shall be disallowed while computing the Taxable Income of the deductor.
In case, where EL has been deducted in any subsequent year, or has been deducted during the previous year but deposited after the due date specified under section 139(1). Such sum is allowed as deduction in the year in which such EL is deposited.
5. Section 40A(3) and 40A(3A) – Payment made exceeding INR 10,000 through modes other than specified – As per section 40A(3), where the assessee incurs expenditure in respect of which payment or aggregate of payment made to a person in a day otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank or through any other mode specified in rule 6ABBA exceeding INR 10,000 shall be disallowed while computing the Taxable Income of the assessee.
Further, as per section 40A(3A), where any allowance has been made for any year in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year, the assessee makes payment other than modes specified exceeding INR 10,000 shall be disallowed while computing the Taxable Income of the assessee.
Further, in case of payment is made for plying, hiring or leasing goods carriages, INR 35,000 shall be substituted in place of INR 10,000 under section 40A(3) & 40A(3A).
Further, as per rule 6DD, various cases and circumstances are specified where payment made exceeding INR 10,000 other than modes specifies is not disallowed while computing taxable income of the assessee.
Further, in case, Tax Audit is applicable on the assessee, in case of disallowance u/s 40(A)(3) & 40A(3A), it is to be reported in clause 21(d)(A) and 21(d)(B) respectively of Form 3CD.
It was seen that section 40A(3) & 40A(3A) are not absolute. Consideration of business expediency and other relevant factors are not excluded from the ambit of these provisions. Genuine and bona fide transactions are not taken out of the sweep of such provisions. In the light of nature of business, where assessee has sufficiently demonstrated that strict adherence to payment through banking channel is, at times, not practicable and has the potential to severally hamper the ongoing business, disallowance made is reversed and cancelled by various appellate authorities. Few of the case laws are listed below :
- Attar Singh Gurmukh Singh v/s ITO [1991] 59 Taxmann 11 / 191 ITR 667 Supreme Court]
- Shakti Singh Gulia v/s I.T.O. [2023] 153 Taxmann 287 [Delhi Tribunal]
- Geo Connect Ltd. v/s D.C.I.T. [2023] 149 Taxmann 456 [Delhi Tribunal]
- T.O. v/s Ishan Township (P.) Ltd. [2023] 156 Taxmann 741 [Indore Tribunal]
6. Section 40A(7) – Deduction in respect of Gratuity Fund – Deduction in respect of provision made by the assessee for the purpose of payment of a sum by way of contribution towards gratuity fund shall not be allowed, unless it is APPROVED Gratuity Fund.
Further, where deduction has been allowed in computing the taxable income of the assessee for the provision made for the payment of gratuity to employees on their retirement or termination of their employment for any reason, any sum paid out of such provision shall be disallowed in the year of payment of gratuity.
Further, in case, Tax Audit is applicable on the assessee, in case of disallowance u/s 40(A)(7), it is to be reported in clause 21(e) of Form 3CD.
7. Section 40A(9) – Deduction in respect of contribution by Employer – No Deduction shall be allowed in respect of any sum paid by the employer for setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, Society registered under the Society Registration Act, 1860 or other institution, for any purpose except :
- where such sum was paid for the purpose and to the extent provided in section 36(1)(iv) [any sum of contribution by the employer towards a Recognised Provident Fund or an Approved Superannuation Fund], section 36(1)(iva) [any sum of contribution by the employer towards pension scheme notified under section 80CCD], section 36(1)(v) [any sum of contribution by the employer towards an Approved Gratuity Fund created by him for exclusive benefit of employees] or
- as required by or under any other law for the time being in force.
Further, in case, Tax Audit is applicable on the assessee, in case of disallowance u/s 40(A)(9), it is to be reported in clause 21(f) of Form 3CD.
8. Section 43(B) – Deduction on account of Actual Payment – Notwithstanding anything contained in any other provision of Income-tax Act, deduction in respect of following payments shall be allowed only in computing the income of that previous year in which such sum is actually paid by him :
(a) Any sum payable on account of tax, duty, cess or fee under any law for the time being in force, or
(b) Any sum payable by the employer by way of contribution to Provident Fund, Superannuation Fund, Gratuity Fund or any other fund for the welfare of the employees, or
(c) Any sum referred to in section 36(1)(ii) [any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission]
(d) Any sum payable by the assessee as interest on any loan or borrowing from any financial institution, or
(da) Any sum payable by the assessee as interest on any loan or borrowing from any non-banking financial institution, or
(e) Any sum payable by the assessee as interest on any loan or borrowing from a scheduled bank or a co-operative bank other than primary agricultural credit society or a primary co-operative agricultural and rural development bank, or
(f) any sum payable by the employer in lieu of any leave at the credit of his employee, or
(g) any sum payable by the assessee to the Indian Railways for the use of railway assets, or
(h) any sum payable by the assessee to a Micro and Small Enterprise beyond the time limit specified in section 15 of Micro, Small and Medium Enterprises Development Act, 2006 [MSMED Act, 2006].
Provided that in respect of clause (a) to (g), any sum which is actually paid by the assessee on or before the due date specified in section 139(1) in respect of the previous year in which the liability to pay such sum was incurred and the evidence of such payment is furnished by the assessee along with return of income.
Provided further in respect of clause (h) relating to payment to MSE enterprises, if payment is made is not made within the time specified under section 15 of the MSMED Act, 2006 and after the previous year ends but before the due date specified in section 139(1), the deduction shall not be allowed in the previous year in which liability was incurred unlike the deduction allowed in respect of payment made for clause (a) to (g).
Further, in case, Tax Audit is applicable on the assessee, in case of disallowance or allowance u/s 43B (clause (a) to (f)), it is to be reported in clause 26 of Form 3CD. In respect of reporting of disallowance relating to delayed payment to MSEs under section 43B(h), clause 22 was amended by CBDT vide Notification No. 27/2024 dated March 05, 2024.
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