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Section 40A(2) – Claiming Expenses against Personal Income | Company Vakil

While running a business, you may need to take heed of certain details. Today this article by CompanyVakil.com shows the importance of Section 40A(2) of the Income Tax Act which includes details about claiming expenses against income of Individuals(Specifically individuals related by blood) and regulations posted on it. In itself, it is an overriding section of the act which provides that even if a certain expenditure or allowance comes within the purview of any other section, their treatment should only be done as laid down in Section 40A(2).

One should note that payment when made to these ‘Specified persons’ is unreasonable according to economic fairness, it may be proven void and expenses against them can’t be claimed.

Under the following conditions, the assessing officer can prohibit you from claiming expenses for payments made to specified persons ( as per Section 40A(2) of the Income Tax Act):-

  • Payment is made to a certain Specified person which is prohibited
  • Assessing officer believes that the allowance or expenditure is excessively high in terms of fair market value

(Note: Both the conditions if violated simultaneously can only cause the official to disallow the expenditure claim)

Specified persons

The list of specified persons applicable to this situation mentioned is in the Income Tax Act. Specified Person includes the relatives as well. These specified persons are:-

    • Individuals – Any Relative, Any person in whose business or profession, the individual himself or his relative has a substantial interest in the organization
    • Company, Firm, Associations, Proprietorships-Any Director of the Company, Partner of the firm, or member of the association, or family or any relative of such director, partner or member as well as any individual 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.

 

  • All Further Assesses – 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

 

One must be aware of Substantive Interest i.e. a company carrying on business or profession, any individual owning at least 20% voting power in the company at any time during the year shall be called as someone who has a substantial interest in the company per se.

Furthermore, in the case of firms, associations and sole proprietorship, people who get a minimum of 20% of profits made by the business or profession during the year shall be deemed to have Substantial Interest in such business or profession.

Definition of Relative under Section 40A(2)

As the definition of Relative is not clearly defined in this article, we refer to the official definition of that word given in Section 2. However, relatives of the spouse are not considered under this case.

As per Section 2(41), relative in relation to an individual means:-

  • Husband,
  • Wife,
  • Brother or Sister,
  • Linear ascendant or descendant of that individual

 

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