Expenses not deductible under section 40


1.Section 40(a)(i): Non-Compliance of provision of TDS where payment is made to Non-Resident Disallowance u/s 40(a)(i) shall be attracted if:

  • A. The amount paid or payable is interest, royalty, fees for technical services or any other sum chargeable under I.T. Act. The aforesaid sums must be taxable in the hands of the recipient under I.T. Act.
  • B. The aforesaid sum is paid or is payable:
    • -Outside India to a non-resident or a foreign company
    • -In India to a non-resident or a foreign company
  • C. Tax is deductible at source on the aforesaid payments.
  • D. And any of the following defaults takes place
    • -Tax at source has not been deducted, or
    • -Tax at source has been deducted but has not been paid on or before the due date specified in section 139(1).
  • 2.Section 40(a)(ia): Non-Compliance of provisions of TDS where payment is made to a Resident. Disallowance u/s 40(a)(ia) shall be attracted if an assessee:

  • A. Fails to deduct TDS; or
  • B. after deduction, fails to pay the TDS, then he shall be deemed to be an assessee in default under section 220 and 221. Consequently, he is liable to pay:
    • -Penalty under section 221 which can be up to the amount of TDS not deducted/not paid.
    • -Interest u/s 220 @ 1% p.m. from the date the tax was deductible/payable till the date of passing of an order u/s 201.
  • 3. Section 40(a)(ii): Income Tax

    • A. Income Tax paid under the India Income tax Act, 1961 is not allowed as deduction.
    • B. Tax paid in foreign country for which relief or credit is available under Double Taxation Avoidance Agreements (DTAAs) u/s 90.
    • C. Tax paid in foreign country with which India does not have a DTAA but which is allowed as deduction from Indian Income Tax payable u/s 91.
    • D. service tax is allowable as deduction u/s 37(1), Subject to section 43B.

    4. Section 40(a)(iib): Fee or charges paid by State Government Undertaking

    • A. Any amount paid by way of royalty, license fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called, which is levied exclusively on; or
    • B. which is appropriated, directly or indirectly from, a state government undertaking by the State Government.

    5. Section 40(a)(iii): TDS on salary payable outside India or to a Non-Resident

    • A. salaries payable outside India or to a Non-Resident in India are allowed as deduction only if:
      • - TDS has been deducted, and
      • - TDS has been paid, within time prescribed under Income Tax act.
    • B. If TDS is deposited late even by one day, the salary paid outside India or to a Non-Resident in India shall not be allowed as deduction.
    • C. If TDS is not deducted but paid by the assessee from his own pocket, then also salary payable outside India or to a Non-Resident in India shall not be allowed as deduction.