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    Expenses Disallowed under Income Tax

    List of various expenses disallowed under Income Tax Act. Certain payments to taxpayers must comply with the TDS mechanism. If TDS due is not deducted appropriately, the expense will be disallowed leading to higher taxes.

    Expenses Disallowed under Income Tax

    Post by: Sreeram Viswanath in Business Startup Income Tax

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    Expenses Disallowed under Income Tax

    The provisions of Income-tax Law facilitate taxpayers to deduct certain expenditures for the purpose of performing the calculation of taxable income. However, certain expenses incurred under the head “Profits and Gains of Business or Profession (PGBP)” do not qualify for any deductions and are classified as expenses disallowed under Income Tax. This requirement prompts taxpayers to remit the taxes on such expenditures by adding it back to the net profits. In this article, we briefly discuss the various expenses disallowed under the Income Tax Act.

    Reasons for Disallowance

    An expense could be disallowed for the following reasons:

    Any tax amount deductible on certain expenses like TDS was not deducted while making the payment.

    The expenditure is not associated with the conduct of the assessee’s business or profession.

    Tax Implications

    Expenditures prohibited under this provision attract a tax rate of 30%, in addition to the applicable interest, penalty, and prosecution provisions.

    Expenses Disallowed on TDS Default

    Certain payments to taxpayers must comply with the TDS mechanism. If TDS due is not deducted appropriately, the expense will be disallowed, leading to higher taxes. The provisions connected with disallowance on account of TDS include the following constituent elements:

    Payments Remitted in any Form (other than Salaries) outside India or to a Non-Resident or Foreign Company

    Payments remitted for this purpose could be in the form of interest, royalty, technical fee, etc. Defaults pertaining to this provision could result in the following consequences.

    Nature of DefaultExpenses Deductible in Current Year (Quantum of Disallowance)Expenditure Deductible in any Financial Year

    Tax-deductible but not deducted Totally disallowed Expenses deducted in the subsequent year as expenses are allowed in the year of tax deduction and remittance

    Tax deducted but not deposited before the due date of filing ITR Totally disallowed Expenses deducted after the due date of IT return is allowed in the year in which the tax is deposited

    Payments Remitted as Salaries outside India or to a Non-Resident without TDS Deduction

    Any sum remitted as salaries to a person who is located out of the Indian jurisdiction or to a non-resident without TDS deductions is disallowed as an expenditure. The implications for the same are tabulated below:

    Nature of DefaultExpenses Deductible in Current Year (Quantum of Disallowance)Expenditure Deductible in any Financial Year

    Tax-deductible but not deducted Totally disallowed Expenses deducted in the subsequent year as expenses are allowed in the year of tax deduction and remittance

    Tax deducted but not deposited before the due date of filing ITR Totally disallowed Expenses deducted after the due date of IT return is allowed in the year in which the tax is deposited

    Pertinent Jurisprudence

    Following are some of the recent court rulings which had its effect on these provisions:

    Short deductions of TDS are not grounds for disallowance in the event of a shortfall on account of the difference in opinion.

    The income enhanced due to disallowance under this provision can be allowed for granting of a deduction if the business qualifies for the deduction under Section 80IB (profits and gains from certain industrial undertakings).

    Excess payment of tax in the previous year or pending tax refund of previous years do not hold grounds for non-deduction of TDS and the applicable TDS must be deducted.

    Relief for Non-Deduction of TDS

    Not all occasions on which the TDS was not deducted will result in a disallowance, as the taxpayer may claim relief on the following scenarios:

    The recipient has filed the returns of income within the stipulated time.

    The payment has been accounted for by the recipient during the filing of returns.

    The recipient has remitted the appropriate tax payments on the declared income.

    A certificate of the chartered accountant has been obtained and uploaded with the return for this purpose.

    Expenses Disallowed for Default in Equalization Levy

    In the event of any default on account of equalization levy with respect to a particular expenditure (which qualifies for deduction in equalization levy) through either of the following channels, the amount of such expenditure is prohibited:

    Non-deduction of equalization levy.

    Non-deposit of equalization levy prior to the date affixed for filing ITR returns.

    However, the expenditure shall be allowed if the respective deposit or deduction is made in the subsequent year.

    Cash Expenditures Disallowed

    Taxpayers making cash payments for their goods or services are allowed as expenditures under this provision if the sum of such payment is less than Rs. 20,000. Taxpayers making remittances above this limit may do so in the form of an account payee cheque, account payee bank draft, bank transfer, and so on. Certain payments, a list of which is provided in Rule 6DD, is allowed as expenses for payments remitted through cash mode, irrespective of the sum remitted in total. A few of the admissibilities are mentioned below:

    स्रोत : www.indiafilings.com

    Expenses disallowed under PGBP

    Any payments made on which an amount is required to be deducted and deposited to the government and the same is not deducted or remains unpaid, such payments attract disallowance. To know more about Expenses disallowed under PGBP read here.

    Expenses disallowed under PGBP

    Updated on :  Feb 02, 2022 - 02:00:45 PM

    14 min read.

    Certain expenditures are not allowable as deductions. They have to be added back to the net profit.

    Latest UpdateLatest updates –Clarification on proposed Section 115BBH in Budget 2022

    1. Losses incurred from one virtual digital currency cannot be set-off against income from another digital currency.

    2. Infrastructure cost incurred on mining crypto assets will not be treated as cost of acquisition.

    Union Budget 2022 Outcome:

    1. Income from transfer of virtual digital assets such as crypto, NFTs will be taxed at 30%.

    2. No deduction, except the cost of acquisition, will be allowed while reporting income from transfer of digital assets.

    3. Loss from digital assets cannot be set-off against any other income.

    4. Gifting of digital assets will attract tax in the hands of receiver.Losses incurred from one virtual digital currency cannot be set-off against income from another digital currency.

    Introduction

    While computing the profit and gains from business or profession, there are certain expenditures which are disallowed. This means that the income tax department does not allow the benefit of such expenditures and the assesses are required to pay taxes on such expenditures by adding it back to the net profits. There are two primary reasons for disallowance of any expenditure:

    The tax amount required to be deducted on certain expenditures are not deducted while making the payment.

    The expenditure does not implicitly relate to the conduct of such business or profession;

    Any expenditure which is disallowed attracts the tax at 30% rate (25% in case of certain companies) but alongside, interest, penalty, and prosecution provisions are also triggered.

    Expenditures disallowed for TDS default

    The Income Tax Act states certain circumstances where if the TDS deductible on payments has not been deducted appropriately, such expenses are expressly disallowed. The various provisions which relate to disallowance on account of TDS default are as follows:

    Payment (for other than salaries) outside India or to a non-resident or foreign company (for example payments for interest, royalty, technical fee, etc.)

    The repercussions under various scenarios of TDS default are given below:

    Nature of default Expenditure deductible in current year Expenditure deductible in any previous year

    Tax is deductible but not deducted 100% of such expenditure is disallowed If deducted in the subsequent year, expenditure is allowed in the year in which tax is deducted and deposited

    Tax is deducted but not deposited before the due date or date of I.T. return 100% of such expenditure is disallowed If deposited after due date or date of IT return, expenditure is allowed in the year in which tax is deposited

    If any amount is paid as salaries to a person outside India or a non-resident without deduction of TDS, the amount so paid is disallowed as expenditure.

    Payment of any sum to a resident with TDS default (including salaries)

    The repercussions under various scenarios of TDS default are given below:

    Nature of default Expenditure deductible in current year Expenditure deductible in any previous year

    Tax is deductible but not deducted 30% of such expenditure is disallowed If deducted in the subsequent year, expenditure is allowed in the year in which tax is deducted and deposited

    Tax is deducted but not deposited before the due date or date of I.T. return 30% of such expenditure is disallowed If deposited after due date or date of IT return, expenditure is allowed in the year in which tax is deposited

    Certain case laws in this respect have pointed out some interpretations and applicability of provisions as follows:

    CIT vs Chandabhoy and Jassobhoy – Short deduction of TDS is not a reason for disallowance if there is a shortfall on account of the difference in opinion.S.B. Developers and Builders vs ITO – The income increased due to disallowance under this provision is eligible for deduction under 80IB (if the business is applicable for deduction u/s 80IB i.e. profits and gains from certain industrial undertakings)HCC Pati Joint Venture vs CIT – Excess payment of tax in the previous year or a tax refund pending from previous years can’t be a reason for non-deduction of TDS. The applicable TDS will still be required to be deducted.

    The act also provides for a relief in case of non-deduction of TDS if the below-mentioned clauses are fulfilled. In a case where TDS is required to be deducted and the same has not been deducted, the assessee can claim a relief and the expenditures will be allowed if: –

    The recipient has filed his return of income in time;

    The above payment has been taken into account by the recipient while filing his/her return;

    The recipient has paid taxes appropriately on the declared income;

    A certificate from a Chartered Accountant is obtained and uploaded with the return to this effect.

    Expenditures disallowed for Equalization Levy default

    In cases where for any particular expenditure (where the equalization levy is required to be deducted) there is a default on account of equalization levy through either of the following channels, the amount of such expenditure is disallowed.

    स्रोत : cleartax.in

    'Expenses Not Deductible' under 'Profits and Gains of Business'

    Interest, Royalty, Fees for Technical Services Payable Outside India or Payable to a Non-Resident [Section 40(a)(i)] -

    Disallowance of Expenditure in respect of any Payment / Credit to a Resident [Section 40(a)(ia)]

    Default pertaining to Non-Deduction / Non-Deposit of Equalisation Levy [Section 40(a)(ib)] -

    Disallowance of royalty, licence fees, etc., in case of State Government Undertakings [Section 40(a)(iib)] -

    Salary Payable outside India without Tax Deduction [Section 40(a)(iii)] -

    Tax on Non-Monetary Perquisite paid by the Employer [Section 40(a)(v)] -

    Amounts Not Deductible in respect of Payment to Ralatives [Section 40A(2)]

    Amounts Not Deductible in respect of Expenditure exceeding Rs. 10,000 (Rs. 35,000 if an assessee makes payment for Plying, Hiring or Leasing Goods Carriages) [Section 40A(3)] -

    Disallowance in respect of Provision for Unapproved Gratuity Fund [Section 40A(7)]:

    Amount Not Deductible in respect of contributions to Non-Statutory Funds [Section 40A(9)] -

    Certain Deductions to be Allowed only on Actual Payment Basis [Section 43B]

    The following expenses given by sections 40, 40A and 43B are expressly disallowed by the Act while computing income chargeable under the head “Profits and gains of business or profession”.

    1. Interest, Royalty, Fees for Technical Services Payable Outside India or Payable to a Non-Resident [Section 40(a)(i)] -

    Disallowance of expenditure under section 40(a)(i) -

    If TDS default is committed in respect of payment/credit given to a foreign company/non-resident, the expenditure is disallowed in the hands of payer under section 40(a)(i). These provisions are given below –

    Case-1 : TDS is Deductible but not Deducted :100 % of such expenditure is disallowed in the current Year-

    If tax is deducted in any subsequent year, the expenditure (which is disallowed in the current year) will be deducted in the year in which TDS will be deposited by the assessee with the Government

    Case-2 : Tax is deductible (and is so deducted) during the current financial year but it is not deposited on or before the due date of submission of return of income under section 139(1) :100 % of such expenditure is disallowed in the current year

    If tax is deposited with the Government after the due date of submission of return of income, the expenditure (which is disallowed in the current year) will be deductible in that year in which tax will be deposited

    Note :

    If the following three conditions are satisfied, the assessee (i.e., the payer) is supposed to deduct tax at source (TDS) under section 195—

    The amount paid is interest, royalty, fees for technical services or any other sum (not being salary).

    The aforesaid amount is chargeable to tax in India in the hands of the recipient.

    The aforesaid amount is paid/payable to a non-resident. If the above three conditions are satisfied, the assessee (the payer) is supposed to deduct tax at source and deposit the same with the Government.

    2. Disallowance of Expenditure in respect of any Payment / Credit to a Resident [Section 40(a)(ia)]

    - If TDS default is committed in respect of the above payment/credit given to a resident, 30 % of such expenditure is disallowed in the hands of payer under section 40(a)(ia). These provisions are given below –

    TDS Default Is such Expenditure Deductible in the Current Previous Year Is such Expenditure Deductible in any Subsequent Previous Year

    Case 1 - TDS is deductible but not deducted.

    30 % of such expenditure is disallowed in the current year If tax is deducted in any subsequent year, the expenditure (which is disallowed in the current year) will be deducted in the year in which TDS will be deposited by the assessee with the Government

    Case 2- TDS is deductible (and is so deducted) during the current financial ear but it is not deposited on or before the due date of submission of return of income under section 139(1) 30% of such expenditure is disallowed in the current year If tax is deposited with the Government after the due date of submission of return of income, the expenditure (which is disallowed in the current year) will be deductible in that year in which tax will be deposited

    Note :

    In respect of the following payments/credit to a resident, tax is deductible under Chapter XVII-B of the Income-tax Act (i.e., Sections 192 to 206AA)

    Salary

    Payment in respect of life insurance policy

    Interest

    Payment in respect of deposits under NSS

    Dividends

    Payment on account of certain units

    Winnings from lottery or crossword puzzles

    Rent

    Winnings from horse races

    Payment on purchase of immovable property

    Payments to contractors

    Technical/professional fees, royalty, fees to a part time director

    Commission or brokerage (including insurance

    Payment of compensation on acquisition of immovable commission) property

    3. Default pertaining to Non-Deduction / Non-Deposit of Equalisation Levy [Section 40(a)(ib)] -

    Any consideration paid or payable (to a non-resident for a specified service on which equalisation levy is applicable) will be disallowed from the assessment year 2017-18 in the following cases—

    Equalisation levy is deductible and such levy has not been deducted.

    Equalisation levy is deductible (and it is so deducted) but it is not deposited [on or before the due date of submission of return of income under section 139(1)].

    स्रोत : incometaxmanagement.com

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