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Disallowance of Expenses in Computation of Profit and Gains


Sai Tharun Boppana 
posted on 29 October 2012



 

Disallowance of Expenses in Computation of Profit and Gains of Business or Profession

 

Part - I

 

Section 40(a) of Income Tax Act, 1961

 

Purpose: Disallowance of expenses for computing income u/s 28 of Income Tax Act, 1961.

 

Applicability: All assesses.

 

i. Any interest, royalties, fees for technical services or other sum allowable as an expense, which is payable, outside India; or in India to a non-resident, or a foreign company, for which TDS is applicable but not deducted or after deduction, has not been paid during the previous year, or before due date u/s 200(1).

 

If such TDS is paid after due date, the expense will be allowed as a deduction is that previous year.

 

a. It is applicable not only to interest, royalties or technical services but also to any other payments such as rent, commission or brokerage etc. as it was mentioned “other sum” in the provision.

 

b. Here, the due date for this disallowance is u/s 200(1) i.e. due date for  payment of TDS , unlike for  40(ia) i.e. 139(1).

 

c. Due date of payment of TDS is by the end of the previous year or due date u/s 200(1)

 

Quarter

Due date Condition – 1 End of previous year

Due date condition -2 200(1)

Due date (Later of Two)

Q1

31st March

7th July

31st March

Q2

31st March

7th October

31st March

Q3

31st March

7th January

31st March

Q4

31st March

30th April

30th April

 

Hence, Due date in all the normal cases is 30th April of next financial year for the 4th quarter and 31st March for other quarters.

 

a. The expenses for which TDS is paid after due date can be claimed as an expense in the previous year in which it is paid.

 

b. There is no provision talking about short deduction, but taking the intention of law into consideration, we can allow the proportion of amount on which TDS is paid.

 

(ia) Any payment other than salary, for which TDS is applicable but not deducted or after deduction, has not been paid during the previous year, or before due date u/s 139(1). w.e.f. AY 13-14, The assessee failed to deduct tax at source, but the receiver of such payment,

 

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

 

iii. has paid the tax due on the income declared by him in such return of income, and

 

iv. the receiver furnishes a certificate to this effect from an accountant in such form as may be prescribed

 

If such TDS is paid after due date, the expense will be allowed as a deduction is that previous year.

 

a. Here, the due date for this disallowance is u/s 139(1) i.e. due date for  filing of return, unlike for  40(i) i.e. 200(1).

 

b. Due date of payment of TDS is by the end of the previous year or due date u/s 139(1)

 

Quarter

Due date Condition – 1 End of previous year

Due date condition -2 139(1)

Due date   (Later of Two)

Q1

31st March

31st July/30th Sep

31st July/30th Sep

Q2

31st March

31st July/30th Sep

31st July/30th Sep

Q3

31st March

31st July/30th Sep

31st July/30th Sep

Q4

31st March

31st July/30th Sep

31st July/30th Sep

 

Hence, due date is 31st July for normal assesses and 30th September for assesses required Tax Audit.

 

a. From this assessment year, even if TDS is not deducted and paid, assessee can claim the expense provided the receiver of payment filed his return along with the payment of tax. However, this provision is not applicable for 40(a) i.e. Payment to non-residents.

 

b. Disallowance of expense on non-payment of TDS is not applicable to salary paid to a resident employee.

 

(ib) Any sum paid on account of fringe benefit tax.

 

It will be no longer applicable unless the liability of previous years’ is paid in the relevant previous year.

 

(ii)  Any tax on the profits or gains of any business,

 

As this taxes paid were already allowed as deductions u/s 90,90A and 91, The act is disallowing them here.

 

(iia) Any sum paid on account of wealth-tax.

 

For this sub-clause, any tax paid on wealth, capital employed in a business inside or outside India, except assets in the business or profession.

 

Any tax paid on assets in the business or profession can be claimed as expense.

 

(iii) Any payment which is chargeable under the head "Salaries", if it is payable outside India; or to a non-resident, if TDS is neither deducted nor paid.

 

a. As the due date is not mentioned, for this section, it can be taken as 139(1).i.e. due date of filing the return.

 

b. Salary paid to non-resident will be allowed as a deduction only if TDS is either deducted or paid.

 

c. If it is neither deducted nor paid before due date, it is permanently disallowed as there was no provision for allowing later in the year which it is deducted and paid.

 

Amount paid

TDS deducted

TDS paid by due date

Allowance

Yes

Yes

Yes

Yes

Yes

Yes

No

Yes

Yes

No

Yes

Yes

Yes

No

No

Permanent Disallowance

No

Yes

Yes

Yes

No

Yes

No

Yes

 

(iv) Any payment to a provident or other fund established for the benefit of employees without effective arrangement for payment of TDS out of sums paid under head salaries.

 

The Act said nothing about what constitutes effective arrangement. So it can be taken that the intimation of management to trust maintaining statutory payments to make effective arrangements can be considered as sufficient.

 

(v) Any tax actually paid by an employer on behalf of employee.

 

This will be in case of perquisite tax paid by employer on behalf of employee. It will be disallowed in the hands of employer and added as perquisite to employee.

 

This can be reasoned as ones tax should be paid by oneself.

 

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Published in Income Tax
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