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Expenses or Payments disallowed under section 40A (2)
The provision of section 40A(2)(a) disallows the expenditure incurred towards payment made or to be made to a person (related party) to the extent such expenditure is excessive or unreasonable having regard to the fair market value of goods, services or facilities for which the payment is made.
- that no disallowance shall be made on account of any expenditure in respect of a specified domestic transaction referred to in section 92BA, if such transaction is at Arm’s Length Price as defined in clause (ii) of section 92F.
Person (related party) referred to in section 40A(2)(a) has been defined under clause (b) of section 40A(2) namely :-
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Category of Taxpayer
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Specified Persons
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- Individual
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- Any Relative (i.e. Spouse, Brother, Sister, Lineal Ascendant or Descendant) of such individual.
- Any person in whose buinsess or profession, the individual himself or his relative has substancial interest.
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- Company, Firm, HUF, AOP
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- Any Director, Partner, Member or relative of the said person.
- 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 substantial interest.
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- All Assessees
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- Any Individual who has substantial interest in the business or profession of the assessee.
- A Company, Firm, AOP, or HUF having a substantial 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.
- A Company, firm, AOP or HUF of which a director, partner or member has a substantial 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.
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A person shall be deemed to have substantial interest in a business or profession, if:-
- 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.
- 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.
Important Findings
If an assessee purchases a capital asset from the persons specified under section 40A(2)(b) then depreciation on such capital asset will not be disallowed as depreciation is not an expense but an allowance. It is governed by Section 32. If at all it is to be disallowed, it will be disallowed under section 32 and not under any other section. And section 32 nowhere says that one of the conditions for claiming the allowance is that the payment for the fixed asset should have been made otherwise than through cash.
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