Section 40A(2): Disallowance of certain payments to Relatives

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Section 40A(2) is an over-riding sections which provide that even if an expenditure or allowance comes within the purview of any other section, there treatment should only be done as laid down in Section 40A(2).

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.

Expenses-disallowed

Therefore, for an amount to be disallowed as an expense under Section 40A(2), the following 3 conditions are to be satisfied:-

  1. The payment is in respect of any expenditure
  2. The payment has been made or is to be made to a specified person in respect of such expenditure
  3. 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:-

Category of
Taxpayer
Specified Persons
1. Individual a. Any Relative (i.e. Spouse, Brother, Sister, Lineal Ascendant or Descendant) of
such individual;
b. Any person in whose buinsess or profession, the individual himself or his
relative has substancial interest
2. CompanyFirm, AOP or HUF a. 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;
b. Any Person in whose business or profession the assessee or director or partner or     member of the assessee or any relative of such person has a substancial interest
3. All
Assessees
a. Any Individual who has substancial interest in the business or profession of the
Assessee
b. A Company, Firm, AOP, or HUF having a substancial interest in business or profession of the assessee or any director, partner or member of any such person or any relative of any such director, partner or member
c. A Company, firm, AOP or HUF of which a director, partner or member has a substancial interest in the business or profession of the assessee or any director, partner, or member of any such person or any relative of any such director partner or member

Meaning of Substantial Interest for purpose of Section 40A(2)

A person shall be deemed to have substantial interest in a business or profession, if:-

  1. In a case where 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 20% of the voting power
  2. In any other case, such person is, at any time during the previous year beneficially entitles o not less than 20% of the profits of such business or profession

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