If you are running a business or a profession you are allowed to claim its expenses from your income. However, these expenses may not be allowed if you make payment to specified persons who are listed in the Income Tax Act. Where payment made to them is excessive or unreasonable and not according to fair market value of goods or services provided, you may not be able to claim it. The assessing officer may not allow you to claim expenses for payments made to specified persons ( as per Section 40A(2) of the Income Tax Act ) if :
AND
If both the above conditions are fulfilled, the Income Tax Officer can disallow the expenditure to the extent he considers it excessive or unreasonable.
There is a list of specified persons mentioned in the Income Tax Act. Specified Person includes the relatives also. But before we discuss the list of specified persons, we should know the meaning of substantial interest.
Substantial Interest
A person will considered to have substantial interest in the business or profession on satisfying the conditions below.
For instance
If in ABC pvt ltd, X1 firm holds 23% equity shares of the ABC ltd , then X1 firm shall have Substantial Interest in the company.
The list of specified persons in case of different categories of taxpayers for imposing the provisions of section 40A(2) are as follows:
For instance
Mr Ashok who is running a business has 22 % shares in X ltd.Now any amount paid/payable by Mr Ashok to X ltd for will be subject to the category of specified person under Section 40 A(2)(b)
For instance
If the relative of director of X1 ltd is entitled to 22% share of profits in ABC firm, then ABC firm ltd will be considered as specified person to X1 ltd in case of any business transaction between the two
OR
For instance
If the relative of director of X1 ltd is entitled to 22% share of profits in ABC firm, then ABC firm ltd will be considered as specified person to X1 ltd in case of any business transaction between the two
For instance
Mr Puneet is entitled to 25% share of Abc firm , then he shall deemed to be specified person to ABC firm in case of any business transaction between the two.
For instance
if director ABC ltd is entitled to 25% of the profits in the business run by Mr Rahul.Then ABC ltd shall deemed to be specified person to Mr Rahul in case of any business transaction between the two.