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Doubt regarding disallowance of expenditure

Priyanka.S (Articled Student) (168 Points)

27 December 2016

For a co-operative society,provisions has been charged to profit & loss a/c.But as per Income tax act, those provisions are to be disallowed. under which section should those provisions be disallowed?

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CA Tanvi Sheth (Consultant) (232 Points)
Replied 28 December 2016

Under the Income tax Act, there are mainly the following sections which cover the abmit of disallowance of expenditure. They are Section 37(1), Section 43B, Sec 40 and 40A.

Expenditure of the co-opeartive society as mentioned in your query is of which nature, will be the base for disallowance.

For E.g Bad debts provision is disallowed under 36(1)(viia).

Priyanka.S (Articled Student) (168 Points)
Replied 29 December 2016

Provisions are like provision for doubtful interest,debtors risk fund,pension interest.We are attempting to take it under section 37(1).Are we right?

CA Tanvi Sheth (Consultant) (232 Points)
Replied 30 December 2016

[Section 40(b)] : Expenses Expressly Disallowed In General Cases

The followings are the expense, allowances and losses which are also not allowed as deduction while computing income under the head ‘profits and gains of business or profession’

(i) Drawings private or personal expenses of the proprietors partners etc.

(ii) Any expenditure in the nature of capital expenditure.

(iii) The amount paid as charity and presents. However, subscripttion is allowed.

(iv) Any provision or reserve except the special reserve of the approved financial corporations.

(v) Past losses (i.e., loss of the past previous years) charged to profit and loss account.

(vi) Any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by any law, shall not be allowed to be debited as business expenditure out of any income. This amendment has been made by the Finance Act (2) 1998 with retrospective effect from 1-4-1962.

(vii) Any other expenditure which was incurred not necessarily, wholly and exclusively for the purposes of the business or profession of the assessee.

(viii) Any provision for bad debts, taxation etc.

(ix) Depreciation in excess of the admissible amount under the provisions of the Income-tax Act, discussed in the next chapter.

From the above table, it can be concluded that the provisions which will be created on accrual basis shall be disallowed under 40(b)