{"id":739,"date":"2024-09-20T12:26:43","date_gmt":"2024-09-20T06:56:43","guid":{"rendered":"https:\/\/www.caclubindia.com\/guide\/?p=739"},"modified":"2025-06-26T15:56:46","modified_gmt":"2025-06-26T10:26:46","slug":"section-40a2b","status":"publish","type":"post","link":"https:\/\/www.caclubindia.com\/guide\/section-40a2b\/","title":{"rendered":"Section 40A(2)(b): Tax Implications of Related Party Payments"},"content":{"rendered":"\n<p>Section 40A(2)(b) of the Income Tax Act means that if a taxpayer makes a payment to a related party, they cannot claim it as a business expense if they cannot prove that the payment was at market value and necessary for business purposes.<\/p>\n\n\n\n<p>Section 40A of Income Tax Act talks about \u201cExpenses or payments not deductible in certain circumstances\u201d.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"538\" src=\"https:\/\/www.caclubindia.com\/guide\/wp-content\/uploads\/2024\/09\/Section-40A2b-1024x538.jpg\" alt=\"\" class=\"wp-image-741\" srcset=\"https:\/\/www.caclubindia.com\/guide\/wp-content\/uploads\/2024\/09\/Section-40A2b-1024x538.jpg 1024w, https:\/\/www.caclubindia.com\/guide\/wp-content\/uploads\/2024\/09\/Section-40A2b-300x158.jpg 300w, https:\/\/www.caclubindia.com\/guide\/wp-content\/uploads\/2024\/09\/Section-40A2b-768x403.jpg 768w, https:\/\/www.caclubindia.com\/guide\/wp-content\/uploads\/2024\/09\/Section-40A2b.jpg 1200w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 counter-hierarchy ez-toc-counter ez-toc-light-blue ez-toc-container-direction\">\r\n<div class=\"ez-toc-title-container\">\r\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\r\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\r\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.caclubindia.com\/guide\/section-40a2b\/#Payments_made_to_relatives_and_associates\" >Payments made to relatives and associates<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.caclubindia.com\/guide\/section-40a2b\/#Note\" >Note<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.caclubindia.com\/guide\/section-40a2b\/#Excessive_payments_to_Related_Party_Transactions\" >Excessive payments to Related Party Transactions<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.caclubindia.com\/guide\/section-40a2b\/#Other_Terminologies\" >Other Terminologies<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.caclubindia.com\/guide\/section-40a2b\/#Relative\" >Relative<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.caclubindia.com\/guide\/section-40a2b\/#Where_the_assessee_is_a_Firm_HUF_AOP\" >Where the assessee is a Firm\/ HUF\/ AOP<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.caclubindia.com\/guide\/section-40a2b\/#Where_the_assessee_is_a_Company\" >Where the assessee is a Company<\/a><\/li><\/ul><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.caclubindia.com\/guide\/section-40a2b\/#Substantial_Interest_in_a_business_or_profession\" >Substantial Interest in a business or profession<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/www.caclubindia.com\/guide\/section-40a2b\/#Conclusion\" >Conclusion<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/www.caclubindia.com\/guide\/section-40a2b\/#FAQs\" >FAQs<\/a><\/li><\/ul><\/nav><\/div>\r\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Payments_made_to_relatives_and_associates\"><\/span>Payments made to relatives and associates<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong><a href=\"https:\/\/www.caclubindia.com\/articles\/section-40a-2b-income-tax-act-1961-44646.asp\">Section 40A(2)(a)<\/a><\/strong> states where the assessee incurs any expenditure in respect of which a payment has been made or is to be made to a specified person (clause (b)- below) that the expenditure will be considered to be excessive or unreasonable shall be disallowed by the Assessing Officer. While doing so he shall have due regard to:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The fair market value of the goods, service of facilities for which the payment is made; or<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The legitimate needs of the business or profession carried on by the assessee; or<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The benefit derived by or accruing to the assessee from such a payment<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Note\"><\/span>Note<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>It is to be noted that the disallowance under this section is not automatic and will be disallowed only if Assessing Officer finds such expenditure as unreasonable or excessive in nature.<\/p>\n\n\n\n<p>Further, no disallowance, on account of any expenditure being excessive or unreasonable having regard to the fair market value, shall be made in respect of a specified domestic transaction referred to in section 92BA, if such transaction is at arm&#8217;s length price.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Excessive_payments_to_Related_Party_Transactions\"><\/span>Excessive payments to Related Party Transactions<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>In simple words, Section 40A(2) talks about <strong>Excessive payments to Related Party Transactions<\/strong>.<\/p>\n\n\n\n<p>Section 40A(2)(b)- the specified persons referred to in clause (a) are the following, namely:\u2014<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Where the assessee is a individual &#8211; any relative of the assessee<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Where the assessee is a company, firm, association of persons or Hindu Undivided Family (HUF)- any director of the company, partner of the firm, or member of the association or family, or any relative of such director, partner or member.<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual.<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-list\">\n<li>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<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-list\">\n<li>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.<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Any person who carries on a business or profession,\u2014<\/li>\n<\/ul>\n\n\n\n<ol class=\"wp-block-list\">\n<li>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<\/li>\n\n\n\n<li>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<\/li>\n<\/ol>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Other_Terminologies\"><\/span>Other Terminologies<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Relative\"><\/span>Relative<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Section 2(41) of Income Tax Act, 1961, Relative, in relation to an \u201cindividual\u201d, means the spouse, brother or sister or any lineal ascendant or descendant of that individual.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Where_the_assessee_is_a_Firm_HUF_AOP\"><\/span>Where the assessee is a Firm\/ HUF\/ AOP <span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>The relationship shall be determined with reference to the partners or members or persons having substantial interest in such Firm\/ HUF\/ AOP.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Where_the_assessee_is_a_Company\"><\/span>Where the assessee is a Company<span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>The relationship shall be determined with reference to the directors or persons having substantial interest in the Company.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Substantial_Interest_in_a_business_or_profession\"><\/span>Substantial Interest in a business or profession<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong>If<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>in a case where the business or profession is carried on by a company, such person is, at any time during the previous year, the beneficial owner of shares carrying not less than twenty per cent of the voting power; and<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-list\">\n<li>in any other case, such person is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the profits of such business or profession.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span>Conclusion<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Section 40A of the Income Tax Act empowers the authorities to disallow certain expenditures made to specified persons. <\/p>\n\n\n\n<p>However, business owners can claim for business-related expenditure. <\/p>\n\n\n\n<p>Further, impermissible deductions under this section will be considered as void for transactions specified in Section 92BA.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"FAQs\"><\/span>FAQs<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<div class=\"schema-faq wp-block-yoast-faq-block\"><div class=\"schema-faq-section\" id=\"faq-question-1726815131502\"><strong class=\"schema-faq-question\">Who is considered an assessee under Section 40A(2)(b)?<\/strong> <p class=\"schema-faq-answer\">An assessee means anyone who is liable to pay taxes in India, including individuals, HUFs, firms, LLPs, and companies.<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1726815143677\"><strong class=\"schema-faq-question\">What happens if TDS is not deducted u\/s 40(a)(2)(b)?<\/strong> <p class=\"schema-faq-answer\">If TDS is not deducted or deposited on time, the expense will be disallowed as a deduction when calculating taxable income.<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1726815164005\"><strong class=\"schema-faq-question\">What penalties apply for non-compliance under Section 40(a)(2)(b)?<\/strong> <p class=\"schema-faq-answer\">If TDS is not deducted, the taxpayer may face a penalty equal to the undeducted tax and interest may be charged on the unpaid tax amount.<\/p> <\/div> <\/div>\n","protected":false},"excerpt":{"rendered":"<p>Section 40A(2)(b) of the Income Tax Act means that if a taxpayer makes a payment to a related party, they [&hellip;]<\/p>\n","protected":false},"author":6,"featured_media":741,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center 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center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[4],"tags":[],"class_list":["post-739","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-income-tax"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.3 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\r\n<title>Section 40A(2)(b): Tax Implications of Related Party Payments - Tax Guide<\/title>\r\n<meta name=\"description\" content=\"Section 40(a)(2)(b) disallows deductions for payments made to a resident for professional or technical services.\" \/>\r\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\r\n<link rel=\"canonical\" href=\"https:\/\/www.caclubindia.com\/guide\/section-40a2b\/\" \/>\r\n<meta property=\"og:locale\" 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