Disallowance under section 40A(2)

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 :-

A person shall be deemed to have substantial interest in a business or profession, if:-

1. 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.

1. 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.