Income Tax Act criteria for disallowance of business Expenses in INDIA

There are rules under Income Tax, which result in disallowance of expenses, if not followed. Such disallowed expenses attract income tax according to the rates applicable on the entity.  While making purchase of any asset, or paying for expenses, you must consider the following points, so that these are allowed at the time of computing Profit and Loss Account -

1. Cash payment exceeds Rs. 10,000-   

   In case, the cash payment made by assessee towards services, or goods exceeds Rs. 10,000 - this expense disallowed. The act makes it mandatory to make such payments through account payee cheque, draft or ECS (Electronic Clearing System). But, here Rule 6DD give some exceptions such as deposits in Bank, payment to purchase agriculture produce, payment of salary after TDS deduction, and many more. [Read more about Rule 6DD] 

2.  TDS default expenditures-

   Deducting TDS is compulsory rule under Income Tax Act, and the payment will become ineligible expense if TDS rules are not followed. Two types of cases are there:-

   Payment to Non-resident or outside India (Other than Salaries)

   • Tax is deductible, but not deducted. 

   • Tax is deducted, but not deposited. 

     In both cases, 100% expense is dis-allowed. However, if the assessee further deposited the tax in the next year, then such expense is allowed in such relevant assessment year. In case Salary is paid to such person, payment is completely a disallowed expense.

   Payment to resident (including Salaries)  

   • Tax is deductible, but not deducted. 

   • Tax is deducted, but not deposited.

     In both cases, 30% expense is dis-allowed. However, if the assessee further deposited the tax in the next year, then such part of expense dis-allowed earlier, allowed in such relevant assessment year.

   3.Equalisation Levy default -

   The scheme was introduced in 2016 in India, for taxing the digital transaction from Business to business, especially income accruing to foreign E-commerce companies from India. There are two cases of 100% disallowance - 

   • Equalisation levy is not deducted.

   • Equalisation is deducted, but not deposited before ITR due date.

   However, if the assessee further deposited the tax in the next year, then such part of expense dis-allowed earlier, allowed in such relevant assessment year. [Read more about Equalisation Levy]

    

   CONCLUSION :- In case a transaction attracts any payment of tax to Government, and the tax is not deposited - It is disallowed. However, it can be further allowed if the same amount is deducted and deposited except payment to Non-residents in the form of salaries.

    

    

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