14 April 2021
I know that paying to relatives are allowed but in specific cases it may be disallowed.
Section 40A(2): Disallowance of expense on Payments to Relatives
Section 40A(2) provides power to the Income Tax Officer that in case any expenditure has been incurred and the payment has been made or is to be made to certain specified persons and he is of the opinion that such expenditure is excessive or unreasonable with regard to the fair market value of the goods, services or facilities provided, he may disallow such expense as he considers to be excessive or unreasonable.
Therefore, for an amount to be disallowed as an expense under Section 40A(2), the following 3 conditions are to be satisfied:-
The payment is in respect of any expenditure
The payment has been made or is to be made to a specified person in respect of such expenditure
The payment for the expenditure is considered excessive or unreasonable having regard to the fair market value of the goods, services or facilities provided.
If all the above conditions are fulfilled, the Income Tax Officer can disallow the expenditure to the extent he considers it excessive or unreasonable.
Specified Persons for the purpose of Section 40A(2)
The specified persons for different categories of taxpayers for the purpose of Section 40A(2) are as under:-
Taxpayer Specified Persons
1. Individual a. Any Relative;
b. Any person in whose buinsess or profession, the individual himself or his
relative has substancial interest