Expenses disallowable for tax and expenses allowed on payment basis only - Income from Business or profession

All the expenses cannot be claimed as deduction against income from business or profession. There are certain expenses which are prima facie disallowed while calculating taxable income. Section 37 of the Income Tax Act, 1961 has provision related to allowability of expenses incurred while calculating taxable income. The following expenses are disallowed while calculating taxable income.

1. If TDS is not deducted or paid to the credit of government account on any payment of interest, royalty or fees paid for technical services, commission, contract payment, rent chargeable to tax under the Income Tax Act will not be allowed as deduction. But the amounts will be allowed as deduction in the year if tax on such amount is deducted and paid to the account of central government.

2. Amount of Income tax and any interest there on payable or paid is not considered as expenditure in computing the amount of taxable income.

3. Amount of Wealth tax paid or payable and interest thereto on the wealth of the assessee will not be treated as expenditure for calculation of taxable income.

4. If tax is not deducted on the payments on which tax has to be deducted will not be allowed as deduction. If tax is being deducted and deposited at a later stage before filing the return such expenditure will be allowed.

5. If the provident fund or other funds established for the benefits of the employees of the assessee is not recognized it will not be allowed as deduction.

6. Expenses for giving advertisements in any publication of a politically party are not allowed as deduction.

7. Unreasonable expenses made to any specified person will be disallowed to the extent it is excessive or unreasonable, having regard to the market value of the goods or services and the benefit to the business or profession. The specified persons stated above include the relatives of the assessee or persons who have substantial interest in the business or profession of the Assessee.

8. Aggregate of payment made in a single day to the same person exceeding Rs.20,000/- paid other than by way of account payee cheque or demand draft. The amount is enhanced to Rs. 35,000/- w.e.f 1.10.2009 in respect of payment made for plying, hiring or leasing goods carriages.

9. Expenses incurred for the purpose which is an offence, illegal, prohibited by law or penal in nature.

Expenses which are allowed only after payment
The following expenses are not allowed on accrual basis and will be allowed only if they are paid on or before the due date of filing the return of income.

Amount of tax, duty, cess, or fee payable under any law

Amount of bonus or commission payable by way of distribution of dividend or profits

Amount of interest on borrowings from public financial institutions as per terms and conditions of the borrowings

Amount of interest on term loans taken from scheduled banks or public sector banks

Amount payable to employees in lieu of any leave at the credit of employee