Disallowance of Expenses

The following amounts paid by the State government Undertaking are not deductible while computing the business Income:

(a) Any amount paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge which is levied on a State Government Undertaking by the State Government.

(b) Any amount appropriated, directly or indirectly, from a State Government undertaking by the State Government.

For this purpose, State Government Undertaking shall include following:

• A corporation established by or under any Act of the State Government

• A company in which more than 50% of the paid-up equity capital is held by the State Government

• A company in which more than 50% of the paid-up equity share capital is held by entities referred above, whether singly or taken together

• A company or corporation in which State Government has the right (by virtue of its shareholding, management rights, shareholders agreement, voting agreements or in any other manner) to appoint majority of the directors or to control the management or policy decisions, whether directly or indirectly

• An authority or a board or an institution or a body established or constituted by or under any Act of the State Government or owned or controlled by the State Government.

1.4. Disallowance of employer’s contribution to provident fund [Section 35(b)(iii)]

Payment of employer’s contribution to a provident fund or other fund, established for the benefit of employees, is not deductible in computing the taxable profits of business or profession if employer has not made effective arrangement to deduct tax at source under Section 392 or other section from any payments made from the fund which are chargeable to tax under the head ‘Salaries’.

1.5. Disallowance of tax paid on non-monetary perquisite [Section 35(a)(ii)]

If employer, at his option, pays tax on the value of non-monetary perquisite provided by him to his employee, the taxes so paid are not allowed as deduction while computing the business income of such employer.

1.6. Disallowance of payment made to the partners [Section 35(e)]

               Main article: Deduction for partner’s remuneration

If payment of salary, commission or remuneration is not authorized by the partnership deed or the payment made exceeds the prescribed limit, it shall be disallowed while computing the business income of the partnership firm. Similarly, any payment of interest in excess of 12% per annum shall be disallowed in the hands of the partnership firm. The amount of interest and remuneration, which has been allowed as deduction to the firm, shall be taxable in the hands of partner.

1.7. Disallowance of payment made to the members of AOP/BOI [Section 35(f)]

               Main article: Disallowance of sum paid to members of AOP or BOI

Any sum paid by an AOP or BOI to its members in form of salary, bonus, commission, remuneration or interest shall not be allowable as deduction. However, the disallowance of payment of interest to the members shall be limited to the net amount paid (as reduced by the amount of interest recovered from members) by the AOP or BOI to the member.

1.8. Disallowance of payment made to related parties [Section 36(2)]

               Main article: Disallowance of payment made to related persons

Any expenditure, in respect of which, payment has been made to the specified persons, shall be disallowed to the extent such expenditure is considered excessive or unreasonable having regard to the fair market value of goods or services or facilities or legitimate business needs of the business of the assessee or benefit derived by or accruing to assessee’s as a result of the expenditure.

1.9. Disallowance of payment made in cash [Section 36(4)/(5)]

               Main article: Disallowance of cash payments

No deduction shall be allowed for an expenditure, even if it is deductible under any other provision, if payment (or aggregate of payments) for such expenditure to a person in a day exceeds Rs. 10,000 and it is made by any mode other than account payee cheque or bank draft or electronic clearing system. Where any payment is made for plying, hiring or leasing goods carriages, the ceiling of Rs. 35,000 shall be considered instead of Rs. 10,000.

1.10. Disallowance of provision for gratuity [Section 29(2)]

No deduction is admissible in respect of any provision made by the assessee for payment of gratuity to his employees on their retirement or on termination of their employment for any reason. However, the restriction does not apply in the following cases:

(a) Any provision made for payment of gratuity by way of contribution towards an approved gratuity fund; or

(b) Any provision for payment of gratuity that has become payable during the previous year.

If such provision for payment of gratuity has been allowed as deduction in any of the previous years, no deduction will be allowed again when payment is actually made out of such provision, whether by way of contribution to approved gratuity fund or by way of payment to employee.

1.11. Disallowance of contributions to non-statutory funds [Section 29(3)]

Any sum paid by the employer by way of contribution towards recognised provident fund, or approved superannuation fund or pension scheme or an approved gratuity fund is deductible to the extent such contribution is permissible under income-tax law or under any other law for the time being in force.

However, no deduction is allowable for the employer’s contribution towards a fund (for the benefit of employees) which is otherwise not required by any law (which is paid or contributed by an employer under contractual obligation or otherwise but not under a legal requirement). Thus, deduction is not allowable in respect of any sum paid by employer towards the setting up or formation of or as contributions paid to any fund, trust, company, AOP, BOI, societies or it is paid by way of contribution to any fund (not being recognised provident fund, approved superannuation fund/gratuity fund).

Example, employer’s contribution towards unrecognized provident fund or any other staff welfare fund (without any statutory requirement) will be disallowed under this provision.

1.12. Disallowance for marked to market loss [Section 36(9)]

‘Marked-to-Market’ is a methodology of revaluing a financial instrument based on its market price on the closing day of the accounting period. A financial instrument is valued at market rate so as to report its actual value on the date of reporting.

As per ICDS-VIII (Securities),the listed securities held as stock-in-trade shall be valued at lower of actual cost initially recognised or net realisable value at the end of the previous year. Where due to such restatement, any loss arises, it shall be allowed as deduction under Section 32(h). While as if any gain arises due to such valuation, it shall be taxable as business income under Section 26.

The option to restate the value at the year-end shall not be available in respect of securities, which are not listed or which are listed but not quoted on a recognised stock exchange. Such securities shall be recognised in the books at the actual cost at which it has been recognised initially. If any notional gain or loss is recognized by the assessee in the books, it shall be disallowed under Section 36(9).

References

Kirloskar Electric Company Ltd. v. CIT (1997) 228 ITR 767 (Kar.)

Assam Forest Products (P.) Ltd. v. CIT [1989] 180 ITR 478 (Gauhati)

National Engg. Industries Ltd. v. CIT [1978] 113 ITR 252 (Cal.), Roopchand Chabildass & Sons v. CIT [1967] 63 ITR 166 (Mad.)

CIT v. Tata Sons Ltd. [2010] 8 taxmann.com 85 (Mum.)

Karan Johar v. CIT [2011] 46 SOT 21 (Mum.), Italian Thai Development Public Co. Ltd. v. DIT [2012] 49 SOT 450 (Delhi).

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.