Section 40(A) 2: Disallowances of Expenses to Specified Person

Narendra Kumar

06 Mar, 2019

Section 40(A)2 of the Income Tax Act provides powers to the assessing officer. In case of expenditure incurred or payment has been made or is to be made to a specified person, Assessing Officer is of the opinion that the expenditure incurred or to be incurred is unreasonable or excessive with regard to the market value or fair value of the goods and services then he may disallow such expenditure excessive or unreasonable to the extent he thinks fit.

Thus Section 40(A)2 is the overriding provision which states that even if the expenditure or allowance is allowed in any other section if the expenditure is made to the specified person the Section 40(A)2 will override and prevail in case of such application.

Disallowance in case the following 3 conditions are satisfied:

1. Payment is made in case of any expenditure
2. Payment is made or to be made to a Specified Persons in respect of such expenditure
3. Payment of expenditure is considered excessive or unreasonable with regard to the fair market value of goods or services provided.

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Who is a Specified Person?

As per Section 40(A) 2 of the Income Tax Act, Specified Persons are a different category of individuals mentioned below:

What does substantial interest mean?

A person shall have deemed to have a substantial interest in a business or profession if:

1. In the case where business or profession is carried on by a company, such a person holds at any time during the previous year beneficial ownership of not less than 20 % of the voting power.
2. In any other case other than the company, at any time during the previous year beneficially entitles to not less than 20% of the profits of such business or profession

Definition of Relative under Section 40(A)2:

There is no definition mentioned as per Section 40(A) 2. In such cases, the definition of Relative is taken from Section 2 of the Income Tax Act^[1], 1961.

As per Section 2(41) of the Act Relative in relation to individual means:

1. Husband
2. Wife
3. Brother or Sister
4. Linear Ascendant or Descendant of that Individual

Conclusion

I hope we have taken you through the entire Section 40(A) 2 of the Income Tax Act, 1961.

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