Section 40 – Income Tax Act, 1961

Income Tax Act, 1961

 

Section 40. AMOUNTS NOT DEDUCTIBLE.

 

Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”, – (a) In the case of any assessee – (i) Any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable outside India, on which tax has not been paid or deducted under Chapter XVII-B : 

 

Provided that where in respect of any such sum, tax has been paid or deducted under Chapter XVII-B in any subsequent year, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid or deducted.

 

Explanation : For the purposes of this sub-clause, – (A) “Royalty” shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;

 

(B) “Fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;

 

(ii) Any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains;

 

(iia) Any sum paid on account of wealth-tax.

 

Explanation : For the purposes of this sub-clause, “wealth-tax” means wealth-tax chargeable under the Wealth-tax Act, 1957 (27 of 1927) , or any tax of a similar character chargeable under any law in force in any country outside India or any tax chargeable under such law with reference to the value of the assets of, or the capital employed in, a business or profession carried on by the assessee, whether or not the debts of the business or profession are allowed as a deduction in computing the amount with reference to which such tax is charged, but does not include any tax chargeable with reference to the value of any particular asset or the business or profession;

 

(iii) Any payment which is chargeable under the head “Salaries”, if it is payable outside India and if the tax has not been paid thereon nor deducted therefrom under Chapter XVII-B;

 

(iv) Any payment to a provident or other fund established for the benefit of employees of the assessee, unless the assessee has made effective arrangements to secure that tax shall be deducted at source from any payment made from the fund which are chargeable to tax under the head “salaries”;

 

(b) In the case of any firm assessable as such, – (i) Any payment of salary, bonus, commission or remuneration, by whatever name called (hereinafter referred to as remuneration) to any partner who is not a working partner; or

(ii) Any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is not authorised by, or is not in accordance with, the terms of the partnership deed; or

 

(iii) Any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is authorised by, and is in accordance with, the terms of the partnership deed, but which relates to any period (falling prior to the date of such partnership deed) for which such payment was not authorised by, or is not in accordance with, any earlier partnership deed, so, however, that the period of authorisation for such payment by any earlier partnership deed does not cover any period prior to the date of such earlier partnership deed; or 

 

(iv) Any payment of interest to any partner which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as such amount exceeds the amount calculated at the rate of eighteen per cent simple interest per annum; or

 

(v) Any payment of remuneration to any partner who is a working partner, which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder :- (1) In case of a firm carrying on a profession referred to in section 44AA or which is notified for the purpose of that section –

 

(a) On the first Rs. 1,00,000 of the Rs. 50,000 or at the rate book-profit or in case of a loss of 90 per cent of the book-profit, whichever is more;

 

(b) On the next Rs. 1,00,000 of the at the rate of 60 per cent; book-profit

 

(c) On the balance of the book-profit at the rate of 40 per cent;

 

(2) In the case of any other firm – (a) On the first Rs. 75,000 of the Rs. 50,000 or at the rate of book-profit or in case of a loss 90 per cent of the book-profit, whichever is more;

 

(b) On the next Rs. 75,000 of the book-profit at the rate of 60 per cent;

(c) On the balance of the book-profit at the rate of 40 per cent :

 

Provided that in relation to any payment under this clause to the partner during the previous year relevant to the assessment year commencing on the 1st day of April, 1993, the terms of the partnership deed may, at any time during the said previous year, provide for such payment.

 

Explanation 1 : Where an individual is a partner in a firm on behalf, or for the benefit, of any other person (such partner and the other person being hereinafter referred to as “partner in a representative capacity” and “person so represented”, respectively), – (i) Interest paid by the firm to such individual otherwise than as partner in a representative capacity, shall not be taken into account for the purposes of this clause;

 

(ii) Interest paid by the firm to such individual as partner in a representative capacity and interest paid by the firm to the person so represented shall be taken into account for the purposes of this clause.

 

Explanation 2. : Where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person.

 

Explanation 3 : For the purposes of this clause, “book-profit” means the net profit, as shown in the profit and loss account for the relevant previous year, computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net profit.

 

Explanation 4 : For the purposes of this clause, “working partner” means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner.

 

(ba) In the case of an association of persons or body of individuals (other than a company or a co-operative society or a society registered under the Societies Registration Act, 1860 [21 of 1860], or under any law corresponding to that Act in force in any part of India), any payment of interest, salary, bonus, commission or remuneration, by whatever name called, made by such association or body to a member of such association or body. 

 

Explanation 1 : Where interest is paid by an association or body to any member thereof who has also paid interest to the association or body, the amount of interest to be disallowed under this clause shall be limited to the amount by which the payment of interest by the association or body to the member exceeds the payment of interest by the member to the association or body.

 

Explanation 2 : Where an individual is a member of an association or body on behalf, or for the benefit, of any other person (such member and the other person being hereinafter referred to as “member in a representative capacity” and “person so represented”, respectively), – (i) Interest paid by the association or body to such individual or by such individual to the association or body otherwise than as member in a representative capacity, shall not be taken into account for the purposes of this clause;

 

(ii) Interest paid by the association or body to such individual or by such individual to the association or body as member in a representative capacity and interest paid by the association or body to the person so represented or by the person so represented to the association or body, shall be taken into account for the purposes of this clause.

 

Explanation 3 : Where an individual is a member of an association or body otherwise than as member in a representative capacity, interest paid by the association or body to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person.

 

Related Judgements

 

COMMISSIONER OF INCOME-TAX v. HEERA LAL BHAT. (CIT v. HARI SINGH & CO.)

 

COMMISSIONER OF INCOME TAX v. KAMADHENU.

 

COMMISSIONER OF INCOME-TAX v. KANJI SHIVJI & CO.

 

SHENBAGAM AUTO WORKS & SHENBAGAM TRACTORS v. COMMISSIONER OF INCOME TAX

 

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Income Tax Act, 1961 

 

Indian Laws – Bare Acts

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