Expenses disallowed under PGBP

Updated on: Feb 2nd, 2022

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8 min read

Certain expenditures are not allowable as deductions. They have to be added back to the net profit.

Latest Update

Latest updates Clarification on proposed Section 115BBH in Budget 2022

1. Losses incurred from one virtual digital currency cannot be set-off against income from another digital currency.
2. Infrastructure cost incurred on mining crypto assets will not be treated as cost of acquisition.

Union Budget 2022 Outcome:

1. Income from transfer of virtual digital assets such as crypto, NFTs will be taxed at 30%.
2. No deduction, except the cost of acquisition, will be allowed while reporting income from transfer of digital assets.
3. Loss from digital assets cannot be set-off against any other income.
4. Gifting of digital assets will attract tax in the hands of receiver.Losses incurred from one virtual digital currency cannot be set-off against income from another digital currency.

Introduction

While computing the profit and gains from business or profession, there are certain expenditures which are disallowed. This means that the income tax department does not allow the benefit of such expenditures and the assesses are required to pay taxes on such expenditures by adding it back to the net profits. There are two primary reasons for disallowance of any expenditure:

  • The tax amount required to be deducted on certain expenditures are not deducted while making the payment.
  • The expenditure does not implicitly relate to the conduct of such business or profession;

Any expenditure which is disallowed attracts the tax at 30% rate (25% in case of certain companies) but alongside, interest, penalty, and prosecution provisions are also triggered.

Expenditures disallowed for TDS default

The Income Tax Act states certain circumstances where if the TDS deductible on payments has not been deducted appropriately, such expenses are expressly disallowed. The various provisions which relate to disallowance on account of TDS default are as follows:

  • Payment (for other than salaries) outside India or to a non-resident or foreign company (for example payments for interest, royalty, technical fee, etc.)

The repercussions under various scenarios of TDS default are given below:

Nature of defaultExpenditure deductible in current yearExpenditure deductible in any previous year
Tax is deductible but not deducted100% of such expenditure is disallowed If deducted in the subsequent year, expenditure is allowed in the year in which tax is deducted and deposited
Tax is deducted but not deposited before the due date or date of I.T. return100% of such expenditure is disallowedIf deposited after due date or date of IT return, expenditure is allowed in the year in which tax is deposited

If any amount is paid as salaries to a person outside India or a non-resident without deduction of TDS, the amount so paid is disallowed as expenditure.

  • Payment of any sum to a resident with TDS default (including salaries)
  • The repercussions under various scenarios of TDS default are given below:
Nature of defaultExpenditure deductible in current yearExpenditure deductible in any previous year
Tax is deductible but not deducted30% of such expenditure is disallowed If deducted in the subsequent year, expenditure is allowed in the year in which tax is deducted and deposited
Tax is deducted but not deposited before the due date or date of I.T. return30% of such expenditure is disallowedIf deposited after due date or date of IT return, expenditure is allowed in the year in which tax is deposited

Certain case laws in this respect have pointed out some interpretations and applicability of provisions as follows:

  • CIT vs Chandabhoy and Jassobhoy – Short deduction of TDS is not a reason for disallowance if there is a shortfall on account of the difference in opinion.
  • S.B. Developers and Builders vs ITO – The income increased due to disallowance under this provision is eligible for deduction under 80IB (if the business is applicable for deduction u/s 80IB i.e. profits and gains from certain industrial undertakings)
  • HCC Pati Joint Venture vs CIT – Excess payment of tax in the previous year or a tax refund pending from previous years can’t be a reason for non-deduction of TDS. The applicable TDS will still be required to be deducted.

The act also provides for a relief in case of non-deduction of TDS if the below-mentioned clauses are fulfilled. In a case where TDS is required to be deducted and the same has not been deducted, the assessee can claim a relief and the expenditures will be allowed if: –

  • The recipient has filed his return of income in time;
  • The above payment has been taken into account by the recipient while filing his/her return;
  • The recipient has paid taxes appropriately on the declared income;
  • A certificate from a Chartered Accountant is obtained and uploaded with the return to this effect.

Expenditures disallowed for Equalization Levy default

In cases where for any particular expenditure (where the equalization levy is required to be deducted) there is a default on account of equalization levy through either of the following channels, the amount of such expenditure is disallowed.

  • Non-deduction of equalization levy
  • Non-deposit of equalization levy before due-date or filing of IT return

Although, in the subsequent year when the deduction or deposit is so made, the expenditure is thus allowed.

Expenditures disallowed for payment in cash

There are certain transactions where the payment for the services or goods are made by the assesses in cash instead of cheque or bank transfer, etc. In all such cases where the amount of payment exceeds Rs. 10,000, the expenditure is disallowed. The act provides for such payments to be made through an account payee cheque, account payee bank draft or bank transfer and likewise.

Although the section provides for disallowance in case of payments for expenditure in cash beyond Rs 10,000, there are certain instances where the payment exceeding Rs 10,000 is allowed in cash and the allowance for such expenditures are given as well. Such list of expenditures is prescribed in Rule 6DD.

An illustrative list is given here as follows:

  • Payment to banks, financial institutions, etc.
  • Payment to government
  • Payment made by book adjustments
  • Payment for purchase of agricultural products
  • Payment made to cottage industries which are producing without the aid of power
  • Payment to a person in a village which is not served by any banks
  • Payment of employment terminal benefits (Up to Rs. 50,000)
  • Payment of salary after deducting TDS appropriately
  • Payment made on a day on which banks are closed
  • Payment made by forex dealer

The provision applies in the case where the payment is made to a single person in a single day. The rules provides for such payments made through an account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as prescribed under rule 6ABBA and will have effect from the 1st of September 2019.

Here is the list of other electronic modes specified in Rule 6BBA:

  • Credit/debit card
  • Net banking
  • IMPS
  • UPI
  • RTGS
  • NEFT
  • BHIM
  • Aadhaar pay

Conclusion

Apart from TDS default, certain other defaults exist like non-deduction od securities transaction tax, fringe benefits tax, wealth tax for prior years and income tax, provident fund payment without tax deduction. In such cases where the default exists as indicated above, the expenditure is disallowed for the assessee.

In a nutshell, any payments made on which an amount is required to be deducted and deposited to the government and the same is not deducted or remains unpaid, such payments attract disallowance. Although at a later stage when the amount is deducted or deposited, the allowance for the expenditure can be taken.

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Quick Summary

Certain expenditures are disallowed as deductions, leading to a 30% tax rate. Disallowed costs include TDS default, equalization levy, and cash payments exceeding Rs. 10,000. Relief is available with specific conditions like timely filing of recipient's tax return. The section also lists exceptions when cash payment over Rs. 10,000 is allowed. Various case laws and provisions provide insights on deductions and disallowances for different payment scenarios.

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