Query: payments covered under Section 40A(2)b of Income Tax Act
Shareholders of ABC Pvt Ltdare A having 8% holding, B having 29% holding and balance are with a trust. A is a relative (mother) of B. Now company is purchasing land from A. So the company has to make payment to A. Whether such payment falls under sec 40A(2)b transactions.
Relevant Extract of Section 40A of the Income Tax Act:
- (a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the 57[Assessing] Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.
(b) The persons referred to in clause (a) are the following, namely:-
(i) where the assessee is an individual any relative of the assessee;
(ii) where the assessee is a company, any director of the firm, association of persons or company, partner of the Hindu undivided family firm, of member if the association or family, or family, or any relative of such director, partner or member;
(iii) any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual;
(iv) a company, firm, association of persons or Hindu undivided family having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member;
(v) a company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member;
(vi) any person who carries on a business or profession,-
(A) where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or
(B) where the assessee being a company, firm, association of persons or Hindu undivided family, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner or member, has a substantial interest in the business or profession of that person
Please clarify regarding the transaction getting covered under the above section. The payment is to be made to A and not B. Do such individual under 40A (2)b (iii) interprets an individual who has a substantial interest.? Here A do not have a substantial interest and payment is to be made only to A. Also suggest whether SDT will be applicable? Kindly reply with your valuable suggestion.
Regards,
Pooja Gogri
CAclubindia
