Amounts not Allowed as Deduction – Section 40a

The following amount shall not be allowed as a deduction in computing the income chargeable under the head Profit & gains of business or professions: –

1. Any interest, royalty or fees for technical services or any other sum chargeable in the hands of the recipient under the Act which is payable –

1. outside India or
2. in India to a non-resident (not being a company) or to a foreign company

on which –

1. tax is required to be deducted at source and such tax has not been deducted at source or
2. after such deduction has not been paid on or before the due date specified in sub-section (1) of section 139 [Amended w.e.f A.y 2015-16]

However, such sum shall be allowed as a deduction in computing the income of the subsequent year in which it has been so deducted and paid.

2. Thirty percent of any sum payable to a resident, on which –

1. tax is required to be deducted at source and such tax has not been deducted
2. after such deduction, has not been paid on or before the due date of furnishing return of income specified under section 139(1)

However, the amount which is disallowed shall be allowed as a deduction in computing the income of the subsequent year in which it has been so deducted and paid.

Provided that where an assessee fails to deduct the whole or any part of the tax and the payee has deposited the self assessment tax directly then it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing return of income by the resident payee.

3. Any sum paid on account of income tax.

Any income tax paid outside India and eligible for relief of tax under section 90 or 90A or 91 is also not deductible.

If any sum is borrowed for payment of income tax then the interest (if any) paid on such amount is also not deductible.

4. Any sum paid on account of wealth tax
5. any amount
   (A)  paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called, which is levied exclusively on; or(B)  which is appropriated, directly or indirectly, from,a State Government undertaking by the State Government.Explanation.—For the purposes of this sub-clause, a State Government undertaking includes—(i)  a corporation established by or under any Act of the State Government;(ii)  a company in which more than fifty per cent of the paid-up equity share capital is held by the State Government;(iii)  a company in which more than fifty per cent of the paid-up equity share capital is held by the entity referred to in clause (i) or clause (ii) (whether singly or taken together);(iv)  a company or corporation in which the State Government has the right to appoint the majority of the directors or to control the management or policy decisions, directly or indirectly, including by virtue of its shareholding or management rights or shareholders agreements or voting agreements or in any other manner;(v) an authority, a board or an institution or a body established or constituted by or under any Act of the State Government or owned or controlled by the State Government;

6. Any payment which is chargeable under the head “Salaries”, if it is payable
   1. outside India or
   2. to a non-resident

and if the tax has not been deducted at source and if deducted, not paid.
Even if tax is deducted on such salary in subsequent previous year, such salary shall not be allowed as deduction in that previous year.

7. Any payment by the employer to provident fund or the other established for the benefits of the employee of the assessee, unless he made effective arrangement to secure that tax shall be deducted at source from any payment made from the fund which are taxable under the head “Salaries”
8. Any tax actually paid by the employer on non-monetary perquisites.

Also Read – Expenditures disallowed under Section 40A (Section 40a and 40A are different sections)