Expenses Disallowed under Income Tax
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 Default |
Expenses 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 Default |
Expenses 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:
- Payments made to financial institutions
- Payments made to the government
- Payments made through book adjustments
- Payments made for the procurement of agricultural products
- Payments made to specific cottage industries
- Payments made to a person domiciled in a rural area where there is genuine inadequacy of banking facilities
- Payments made towards employment terminal benefits
- Payment of salary after the appropriate deduction of TDS
- Payments remitted on a government holiday during which the banks are not functioning
- Payments made by a forex dealer
