What expenditures or payments are disallowed under Income Tax Act?

1. Relevant Legal Provisions:

• Section 40 – General disallowance of certain expenses

• Section 40A – Disallowance of certain cash payments

• Section 40A(2) – Disallowance of excessive payments to related parties

• Section 40(a) – Disallowance related to non-deduction of TDS

• Section 43B – Certain expenses only allowed on actual payment basis

2. General Expenditures Disallowed Under the Income Tax Act:

2.1. Non-deduction of TDS (Section 40(a))

If TDS is not deducted on certain payments (e.g., rent, professional fees, salary), then such payments will be disallowed.

• Section 40(a)(ia) – If TDS is not deducted or deposited before the due date of filing of ITR, the expenditure will be disallowed.

• deduction will be disallowed in computing the income.

2.2. Payments Exceeding ₹10,000 in Cash (Section 40A(3))

Any expenditure made in cash exceeding ₹10,000 in a day to a single person is disallowed unless it falls under the exceptions.

2.3. Excessive Payments to Relatives or Related Parties (Section 40A(2))

Expenditure or payments made to relatives or related parties which are deemed to be excessive or unreasonable in the opinion of the Assessing Officer will be disallowed.

2.4. Payments to Non-Residents Without TDS (Section 40(a)(i))

Payments made to non-residents without deducting tax at source (TDS), or not depositing the deducted TDS, are disallowed.

2.5. Unpaid Liabilities (Section 43B)

Certain expenditures like taxes, duties, and contributions to employee welfare schemes are allowed only if paid on time. If not paid within the relevant period, they will be disallowed.

2.6. Capital Expenditure Without Actual Usage

Capital expenditure on assets not put to use for business purposes is disallowed.

2.7. Illegal Payments (Section 37)

Any illegal payments or expenses made, including bribes or kickbacks, will be disallowed under Section 37, which disallows expenses not wholly and exclusively incurred for the business.

2.8. Personal Expenses

Personal expenditures that are not related to business are disallowed.

2.9. Depreciation on Ineligible Assets

Depreciation is allowed only on assets used for business purposes. If an asset is not used for business, depreciation on it will be disallowed.

3. Summary Table: Disallowed Expenses Under Income Tax Act

✅ Conclusion:

Expenditures or payments are disallowed under the Income Tax Act if they do not meet the prescribed conditions of deduction, such as failing to comply with TDS provisions, being paid in cash exceeding specified limits, being excessive or unreasonable when paid to related parties, or being of a personal or illegal nature. Always ensure that payments are backed by proper documentation and are in compliance with the legal provisions to avoid disallowance.