Income Tax Act

Official PDF pages 71–75

SOURCE PDF PAGE 71
( A )   shall not be applicable in respect of interest paid to or received
from, such individual otherwise than in his capacity as a
representative member;
( B )   shall be applicable in respect of interest paid to or received
from, an individual in his capacity as a representative member
and, the person so represented;
( C )   shall not be applicable in respect of interest paid to a member,
otherwise than as representative member, on behalf or for the
benefit of any other person.
Expenses or payments not deductible in certain circumstances.
36.   (1) The provisions of this section shall have effect irrespective of anything to
the contrary contained in any other provision of this Act relating to compu -
tation of income under the head “Profits and gains of business or profession”.
(2) If the assessee incurs any expenditure for which payment has been or is to be
made to any “specified person”, which in the opinion of the Assessing Officer is
excessive or unreasonable having regard to the—
( a )   fair market value of the goods, services or facilities; or
( b )   legitimate needs of the business or profession of the assessee; or
( c )   benefit derived by or accruing to the assessee therefrom,
so much of the expenditure as considered excessive or unreasonable by him shall
not be allowed as a deduction.
(3) For the purposes of sub-section (2) and this sub-section,—
( a )   “specified person” shall mean the following,—
( i )   in relation to an assessee mentioned in column B of the Table below,
the person referred to in column C thereof:—
TABLE
Sl.
No.
Assessee   Specified person
A   B   C
1 .   Individual.   Any relative of the assessee.
2.   Company.   Any director of the company or his
relative.
3.   Firm.   Partner of the firm or his relative.
4.   Association of
persons.
Member of the association or his relative.
5.   Hindu undivided
family.
Member of the family or his relative;
( ii )   any person being an individual or company or firm or association
of persons or Hindu undivided family having substantial interest in
the business or profession of the assessee, or any director, partner,

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member thereof or any relatives of such individual, director, part -
ner, member or any other company in which the first mentioned
company has substantial interest;
( iii )   a company, firm, association of persons, or Hindu undivided family
whose director, partner or member has substantial interest in the
business or profession of the assessee, or any director, partner or
member thereof and their relatives, as the case may be;
( iv )   any person carrying on a business or profession, where assessee,
being—
( A )   an individual or his relative; or
( B )   a company, its directors or their relatives; or
( C )   a firm, its partners or their relatives; or
( D )   an association of persons, its members or their relatives; or
( E )   a Hindu undivided family, its members or their relatives,
has substantial interest in the business or profession of such person;
( b )   a person is deemed to have “substantial interest in the business or pro -
fession” if—
( i )   in a case where the business or profession is carried on by a com -
pany, such person is, at any time during the tax year, the beneficial
owner of shares (not being shares entitled to a fixed rate of dividend
whether with or without a right to participate in profits) carrying
not less than 20% of the voting power; and
( ii )   in any other case, such person is, at any time during the tax year,
beneficially entitled to not less than 20% of the profits of such
business or profession.
(4) Where in respect of any expenditure incurred by the assessee, any payment or
aggregate of payments made in a day to a person exceeds   `   10000 and is not made
through specified banking or online mode, then the expenditure by way of such
payments shall not be allowed as a deduction.
(5) Where any deduction was made in any preceding tax year for a liability incurred
for any expenditure and payment in respect of such liability is made during a sub -
sequent tax year and if such payment or aggregate of payments made in a day to a
person exceeds   `   10000 and is not made through specified banking or online mode,
such payment shall be deemed to be the income under the head “Profits and gains
of business or profession” in such subsequent tax year.
(6) For the purposes of sub-sections (4) and (5), the figures “ `   10000” shall be read as
“ `   35000” in case the payment is made for plying, hiring or leasing of goods carriages.
(7) The provisions of sub-sections (4) and (5) shall not be applicable in cases and
circumstances, as may be prescribed, having regard to the nature and extent
of banking facilities available, considerations of business expediency and other
relevant factors.
(8) Nothing (with reference to mode of payment) contained in any other law in
force or in any contract, shall apply in respect of any payment which has been made
through specified banking or online mode, in compliance of sub-sections (4) to (7),

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and no plea shall be allowed to be raised, in any suit or other proceeding on the
ground that the payment was not made or tendered in cash or in mode other than
through specified banking or online mode.
(9) No deduction or allowance shall be allowed in respect of marked to market loss
or other expected loss, except as allowable under section 32(1)( h ).
Certain deductions allowed on actual payment basis only.
37.   (1) The sums payable, as specified in sub-section (2), which are otherwise
allowable as a deduction under this Act, shall be allowed as a deduction while
computing the income chargeable under section 26 only in the tax year in which
such sums are actually paid irrespective of—
( a )   any provision to the contrary in this Act; or
( b )   method of accounting regularly followed; or
( c )   the tax year in which the liability was incurred.
(2) The sums payable for the purposes of sub-section (1), shall be—
( a )   tax, duty, cess, surcharge or fee, by whatever named called, levied under
any law in force;
( b )   contribution of the employer to a provident fund or superannuation fund
or gratuity fund or any fund for the welfare of employees;
( c )   amount payable by employer   in lieu   of any leave at the credit of the
employee;
( d )   any sum referred to in section 32( a );
( e )   interest on loans or advances or borrowings from specified financial
entities as per the terms and conditions of the agreement governing such
loans or advances or borrowings;
( f )   amount payable to the Indian Railways for use of railway assets; or
( g )   amount payable by the assessee to a micro or small enterprise beyond
the time limit specified in section 15 of the Micro, Small and Medium
Enterprises Development Act, 2006 (27 of 2006).
(3) In case the amounts specified in sub-section (2), except the sum referred to in
clause ( g ) thereof, are paid after the end of the tax year in which the liability was
incurred, but on or before the due date of filing of return of income under section
263(1) for such tax year, the deduction towards such sum shall be allowed in such
tax year.
(4) If interest on loans or advances or borrowings specified in sub-section (2)( e ) is
converted into a loan or advance or debenture or any other instrument by which
the liability to pay is deferred to a future date, then it shall not be deemed to have
been actually paid.
(5) If a deduction in respect of any sum payable under sub-section (2) has already
been allowed in any tax year when such liability was incurred, it shall not be
allowed again in any subsequent tax year when it is paid.
(6) The provisions of this section shall not apply to a sum received by the assessee
from any employee as contribution towards any of the funds referred to in section
2( 49 )( o ).

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(7) For the purposes of this section, “specified financial entities” means a public
financial institution or State Financial Corporation or State Industrial Investment
Corporation or such class of non-banking financial companies as may be notified
by the Central Government or a scheduled bank or a co-operative bank (other than
a primary agricultural credit society or a primary co-operative agricultural and
rural development bank).
(8) For the purposes of sub-section (2)( a ), “the sum payable” means a sum for which
the assessee has incurred liability in the tax year even though such sum might not
have been payable within that year under the relevant law.
Certain sums deemed as profits and gains of business or profession.
38.   (1) The following sums shall be deemed to be profits and gains of business or
profession and shall be chargeable to income-tax, in the manner specified
below, subject to the provisions of sub-section (2):—
( a )   where an allowance or deduction has been allowed in respect of any loss,
expenditure or trading liability incurred by the assessee during any tax
year, then,—
( i )   the value of any benefit accruing to the assessee by way of cessation
or remission of such trading liability, including a unilateral act of
write-off of such liability in his accounts, in a subsequent tax year
in which such benefit accrues; or
( ii )   any amount obtained by the assessee, whether in cash or other-
wise, in respect of such loss or expenditure incurred, in subse-
quent tax year in which the amount is obtained,
whether the business or profession in respect of which the allowance or
deduction was made is in existence in such subsequent tax year or not;
( b )   in a case where any tangible asset [as referred to in section 33(12)( a )
( i )], which is owned by assessee, is sold, discarded, demolished or
destroyed, and the moneys payable for such asset, together with the
scrap value [A] exceeds the written down value of such assets [C], the
sum as computed below, in the tax year in which the moneys payable
for such asset becomes due—
( i )   where the moneys payable for such asset together with the scrap
value [A] is less than the actual cost of such asset [B], then—
[A] – [C]; or
( ii )   in any other case,—
[B] – [C];
( c )   in a case where an asset representing expenditure of a capital nature
on scientific research, referred to in section 45(1)( a )( i ) is sold, without
having been used for other purposes, and the sale proceeds together
with the total deductions allowed under that section exceed the amount
of capital expenditure, the excess or the amount of deduction so made,
whichever is less, in the tax year in which the asset was sold;

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( d )   in a case where a deduction has been allowed for a bad debt (or part of
it) under the provisions of section 31(2), and any amount subsequently
recovered exceeds the difference between such debt and the amount
allowed, then the amount in excess, in the tax year in which recovery is
made;
( e )   in a case where a deduction has been allowed for any special reserve
created and maintained under the provisions of section 32( e ), any
amount subsequently withdrawn from such reserve, in the tax year in
which the amount is withdrawn.
(2) The provisions of sub-section (1) shall apply subject to fulfilment of the following
conditions:—
( a )   in respect of sub-section (1)( a ), only when an allowance or deduction has
been made in assessment for any tax year towards the trading liability,
loss or expenditure incurred;
( b )   in respect of sub-section (1)( b ), only when the asset owned by the assessee,
has been used for the purpose of business or profession, and depreciation
has been claimed and allowed thereon under section 33(2);
( c )   in respect of sub-section (1)( c ), only when the asset has not been used
for other purposes.
(3) Where the business or profession referred to in this section is no longer in exis-
tence and there is income chargeable to tax under sub-section (1)( a ), ( c ), ( d ) or
( e ), in respect of that business or profession, any loss, not being a loss sustained in
speculation business, which arose in that business or profession during the tax year
in which it ceased to exist and which could not be set off against any other income
of that tax year shall, so far as may be, be set off against the income chargeable to
tax under the said clauses of that sub-section.
(4) In respect of sums referred to in sub-section (1)( a ), if the benefit referred therein
accrues to, or amount referred therein is obtained, by the successor in business, the
value of the benefit or the amount shall be chargeable to income-tax as income in
the hands of successor in business.
(5) The provisions of sub-section (1)( b ), ( c ), ( d ) and ( e ) shall apply in a tax year even
if the business is no longer in existence.
(6) For the purposes of this section,—
( a )   “sold” includes a transfer by way of exchange or a compulsory acquisition
under any law for the time being in force but does not include a transfer,
in a scheme of amalgamation, of any asset by the amalgamating company
to the amalgamated company where the amalgamated company is an
Indian company;
( b )   “successor in business” means—
( i )   the amalgamated company, where there has been an amalgamation;
( ii )   the resulting company, where there has been a demerger;
( iii )   where the assessee is succeeded by any other person in that business
or profession, that other person;