Income-tax Act : Amounts not deductible Indian Bare Acts :

Income-tax Act,1961

Act No : 43

Section : Amounts not deductible

3 40. Amounts not deductible Notwithstanding anything to the contrary in sections 30 to 4 [38], the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",- (a) in the case of any assessee- 5[(i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable outside India, on which tax has not been paid or deducted under Chapter XVII-B: Provided that where in respect of any such sum, tax has been paid or deducted under Chapter XVII-B in any subsequent year, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid or deducted. Explanation.-For the purposes of this sub-clause,- (A) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9; (B) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub- section (1) of section 9;] ----------------------------------------------------------------------- 1 Substituted for 'Income-tax' by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1988. 2 Prior to the omission, section 39 read as under: "39. Managing agency commission.-Where a managing agent of a company is liable under an agreement in writing made for adequate consideration to share managing agency commission with a third party or third parties, the said agent and the said party or parties shall file a declaration showing the proportion in which such commission is shared between them under the agreement, and on proof to the satisfaction of the Income-tax Officer of the facts contained in such declaration, such agent and each such party shall be chargeable only on the share to which such agent or party is entitled under the agreement". 4 Substituted for "39" by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989. 5 Substituted by the Finance Act, 1988, w.e.f. 1-4-1989. Prior to the substitution, subclause (i) read as under: "(i) any interest chargeable under this Act which is payable outside India (not being interest on a loan issued for public subscription before the 1st day of April, 1938) on which tax has not been paid or deducted under Chapter XVII-B and in respect of which there is no person in India who may be treated as an agent under section 163;" ----------------------------------------------------------------------- 1.235 (ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains; 1[(iia) any sum paid on account of wealth-tax. Explanation.-For the purposes of this sub-clause, "wealth-tax" means wealth-tax chargeable under the Wealth-tax Act, 1957 (27 of 1957), or any tax of a similar character chargeable under any law in force in any country outside India or any tax chargeable under such law with reference to the value of the assets of, or the capital employed in, a business or profession carried on by the assessee, whether or not the debts of the business or profession are allowed as a deduction in computing the amount with reference to which such tax is charged, but does not include any tax chargeable with reference to the value of any particular asset of the business or profession;] (iii) any payment which is chargeable under the head "Salaries", if it is payable outside India and if the tax has not been paid thereon nor deducted therefrom under Chapter XVII-B; (iv) any payment to a provident or other fund established for the benefit of employees of the assessee, unless the assessee has made effective arrangements to secure that tax shall be deducted at source from any payments made from the fund which are chargeable to tax under the head "Salaries"; 2[(v) *] ---------------------------------------------------------------------- 1 Inserted by the Income-tax (Amendment) Act, 1972, w.r.e.f. 1-4- 1962. Section 4 of the Amendment Act extended the prohibition to assessment years governed by the 1922 Act and section 5 saved certain cases. These sections read as under: "4. Wealth-tax not deductible in computing the total income for certain assessment years.-Nothing contained in the Indian Income-tax Act, 1922 (11 of 1922), shall be deemed to authorise, or shall be deemed ever to have authorised, any deduction in the computation of the income of any assessee chargeable under the head 'Profits and gains of business, profession or vocation' or 'Income from other sources' for the assessment year commencing on the 1st day of April, 1957, or any subsequent assessment year, of any sum paid on account of wealth-tax. Explanation.-For the purposes of this section, 'wealth-tax' shall have the same meaning as is assigned to it in the Explanation to sub- clause (iia) of clause (a) of section 40 of the principal Act.' "5. Saving in certain cases.-Where, before the 15th day of July, 1972 (being the date on which the Income-tax (Amendment) Ordinance, 1972 (7 of 1972), came into force], the Supreme Court has, on an appeal in respect of the assessment of an assessee for any particular assessment year, held that wealth-tax paid by the assessee is deductible in computing the total income of that year, then, nothing contained in subclause (ii-a) of clause (a) of, section 40, or sub- section (1A) of section 58, of the principal Act, as amended by this Act, or, as the case may be, section 4 of this Act, shall apply to the assessment of such assessee for that particular year.' 2 Omitted by the Finance (No. 2) Act, 1971, w.e.f. 1-4-1972. Earlier, it was inserted by the Finance Act, 1968, w.e.f. 1-4-1969 and amended by the Taxation Laws (Amendment) Act, 1970, w.e.f. 1-4-1971. ----------------------------------------------------------------------- 1.236 1[(b) in the case of any firm assessable as such,- (i) any payment of salary, bonus, commission or remuneration, by whatever name called (hereinafter referred to as remuneration) to any partner who is not a working partner; or (ii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is not authorised by, or is not in accordance with, the terms of the partnership deed; or (iii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is authorised by, and is in accordance with, the terms of the partnership deed, but which relates to any period (falling prior to the date of such partnership deed) for which such payment was not authorised by, or is not in accordance with, any earlier partnership deed, so, however, that the period of authorisation for such payment by any earlier partnership deed does not cover any period prior to the date of such earlier partnership deed; or (iv) any payment of interest to any partner which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as such amount exceeds the amount calculated at the rate of eighteen per cent simple interest per annum; or (v) any payment of remuneration to any partner who is a working partner, which is authorised by, and is in accordance with, the ---------------------------------------------------------------------- 1 'Substituted by the Finance Act, 1992, w.e.f. 1-4-1993. Prior to the substitution, clause (b), as originally enacted and amended by the Taxation Laws (Amendment) Act, 1984, w.e.f. 1-4-1985; Direct Tax Laws (Amendment) Act, 1987 and Direct Tax Laws (Amendment) Act, 1989, both with effect from 1-4-1989, read as under: "(b) in the case of any firm, any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm; Explanation 1.-Where interest is paid by a firm to any partner of the firm who has also paid interest to the firm, the amount of interest to be disallowed under this clause shall be limited to the amount by which the payment of interest by the firm to the partner exceeds the payment of interest by the partner to the firm. Explanation 2.-Where an individual is a partner in a firm on behalf, or for the benefit, of any other person (such partner and the other person being hereinafter referred to as 'partner in a representative capacity' and 'person so represented' respectively),- (i) interest paid by the fir-in to such individual or by such individual to the firm other-wise than as partner in a representative capacity, shall not be taken into account for the purposes of this clause; (ii) interest paid by the firm to such individual or by such individual to the firm as partner in a representative capacity and interest paid by the firm to the person so represented or by the person so represented to the firm, shall be taken into account for the purposes of this clause. Explanation 3.-Where an individual is a partner in a firm other- wise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person;' ----------------------------------------------------------------------- 1.237 terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder:- (1) in the case of a firm carrying on a profession referred to in section 44AA or which is notified for the purpose of that section- (a) on the first Rs. 1,00,000 Rs. 50,000 or at the rate of the book-profit or in of 90 per cent of the case of a loss book-profit, whichever is more; (b) on the next Rs. 1,00,000 at the rate of 60 per of the book-profit cent; (c) on the balance of the at the rate of 40 per bookprofit cent; (2) in the case of any other firm- (a) on the first Rs. 75,000 Rs.5,000 or at the rate of the book-profit or in of 90 per cent of the case of a loss book-profit, whichever is more; (b) on the next Rs. 75,000 at the rate of 60 per of the book-profit cent; (c) on the balance of the at the rate of 40 per bookprofit cent; Provided that in relation to any payment under this clause to the partner during the previous year relevant to the assessment year commencing on the 1st day of April, 1993, the terms of the partnership deed may, at any time during the said previous year, provide for such payment. Explanation 1.-Where an individual is a partner in a firm on behalf, or for the benefit, of any other person (such partner and the other person being hereinafter referred to as "partner in a representative capacity" and "person so represented", respectively),- (i) interest paid by the firm to such individual otherwise than as partner in a representative capacity, shall not be taken into account for the purposes of this clause; (ii) interest paid by the firm to such individual as partner in a representative capacity and interest paid by the firm to the person so represented shall be taken into account for the purposes of this clause. Explanation 2.-Where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person. Explanation 3.-For the purposes of this clause, "book- profit" means the net profit, as shown in the profit and loss account for 1.238 the relevant previous year, computed in the manner laid down in Chapter IVD as increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net profit. Explanation 4.-For the purposes of this clause, "working partner" means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner;] 1[(ba) in the case of an association of persons or body of individuals (other than a company or a co-operative society or a society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India), any payment of interest, salary, bonus, commission or remuneration, by whatever name called, made by such association or body to a member of such association or body. Explanation 1.-Where interest is paid by an association or body to any member thereof who has also paid interest to the association or body, the amount of interest to be disallowed under this clause shall be limited to the amount by which the payment of interest by the association or body to the member exceeds the payment of interest by the member to the association or body. Explanation 2.-Where an individual is a member of an association or body on behalf, or for the benefit, of any other person (such member and the other person being hereinafter referred to as "member in a representative capacity" and "person so represented", respectively),- (i)interest paid by the association or body to such individual or by such individual to the association or body otherwise than as member in a representative capacity, shall not be taken into account for the purposes of this clause; (ii)interest paid by the association or body to such individual or by such individual to the association or body as member in a representative capacity and interest paid by the association or body to the person so represented or by the person so represented to the association or body, shall be taken into account for the purposes of this clause. Explanation 3.-Where an individual is a member of an association or body otherwise than as member in a representative capacity, interest paid by the association or body to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person.] 2[(c) Omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989.] --------------------------------------------------------------------- 1 Inserted by the Direct Tax Laws (Amendment) Act, 1989, w.e.f. 1-4-1989. 2 Prior to the omission, clause (c), as amended by the Finance Act, 1963, w.e.f. 1-4-1963; the Finance Act, 1964, w.e.f. 1-4-1964; the Finance Act, 1968, w.e.f. 1-4-1969; the Finance (No. 2) Act, 1971, w.e.f. 1-4-1972; the Finance Act, 1984, w.e.f. 1-4-1985 and the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1988, read as under: ---------------------------------------------------------------------- 1.239 1[(d) Omitted by the Finance Act, 1988, w.e.f 1-4-1989.] 2 [40A. Expenses or payments not deductible in certain circumstances (1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head "Profits and gains of business or profession". (2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the 3[Assessing] Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction: ---------------------------------------------------------------------- -> "(c) in the case of any company- (i)any expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to a director or to a person who has a substantial interest in the company or to a relative of the director or of such person, as the case may be, (ii)any expenditure or allowance in respect of any assets of the company used by any person referred to in sub-clause (i) either wholly or partly for his own purposes or benefit, if in the opinion of the Assessing Officer any such expenditure or allowance as is mentioned in sub-clauses (i) and (ii) is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom, so, however, that the deduction in respect of the aggregate of such expenditure and allowance in respect of any one person referred to in sub- clause (i) shall, in no case, exceed- (A) where such expenditure or allowance relates to a period exceeding eleven months comprised in the previous year, the amount of one hundred and two thousand rupees; (B) where such expenditure or allowance relates to a period not exceeding eleven months comprised in the previous year, an amount calculated at the rate of eight thousand five hundred rupees for each month or part thereof comprised in that period: Provided that in a case where such person is also an employee of the company for any period comprised in the previous year, expenditure of the nature referred to in clauses (i), (ii), (iii) and (iv) of the second proviso to clause (a) of sub- section (5) of section 40A shall not be taken into account for the purposes of sub-clause (A) or sub-clause (B), as the case may be. Explanation.-The provisions of this clause shall apply notwithstanding that any amount not to be allowed under this clause is included in the total income of any person refer- red to in sub-clause (i);" 1 Prior to the omission, clause (d) read as under: "(d) in the case of a banking company, the amounts which have been allowed as a deduction in computing its income chargeable to income-tax under the head 'Interest on securities" under the provisions of sub-section (1) of section 20." 2 Inserted by the Finance Act, 1968, w.e.f. 1-4-1968. 3 Substituted for "Income-tax" by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. ------------------------------------------------------------------------ 1.240 1[Proviso omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989.] (b) The persons referred to in clause (a)are the following, namely:- (i) where the assessee is an individual any relative of the assessee; (ii) where the assessee is a company, any director of the firm, association of persons or company , partner of the Hindu undivided family firm, of member if the association or family, or family, or any relative of such director, partner or member; (iii) any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual; (iv) a company, firm, association of persons or Hindu undivided family having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member; (v) a company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member; (vi) any person who carries on a business or profession,- (A) where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or (B) where the assessee being a company, firm, association of persons or Hindu undivided family, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner or member, has a substantial interest in the business or profession of that person. Explanation.-For the purposes of this sub-section, a person shall be deemed to have a substantial interest in a business or profession, if,- (a) in a case where the business or profession is carried on by a company, such person is, at any time during the previous year, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) carrying not less than twenty per cent of the voting power; and (b) in any other case, such person is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the profits of such business or profession. ----------------------------------------------------------------------- 1 Prior to its omission, the proviso, as amended by the Finance (No. 2) Act, 1971, w.e.f. 1-4-1972, read as under: "Provided that the provisions of this sub-section shall not apply in the case of an assessee being a company in respect of any expenditure to which sub-clause (i) of clause (C) of section 40 applies.' ----------------------------------------------------------------------- 1.241 1(3) Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than the 31st day of March, 1969) as may be specified in this behalf by the Central Government by notification' in the Official Gazette, in a sum exceeding 3[ten thousand] rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, 4[twenty per cent of] such expenditure shall not be allowed as a deduction: Provided that where an allowance has been made in the assessment for any year not being an assessment year commencing prior to the 1st day of April, 1969, in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year the assessee makes any payment inrespect thereof in a sum exceeding 5[ten thousand] rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, the allowance originally made shall be deemed to have been wrongly made and the 6[Assessing] Officer may recompute the total income of the assessee for the previous year in which such liability was incurred and make the necessary amendment, and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) of that section being reckoned from the end of the assessment year next following the previous year in which the payment was so made: Provided further that no disallowance under this sub-section shall be made where any payment in a sum exceeding 7[ten thousand] rupees is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, in such cases and under such circumstances as may be prescribed,8 having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors.] 2 31-3-1969 has been notified for the purposes of this section: Notification No. 623, dated 14-2-1969. 3 Substituted for "two thousand five hundred" by the Direct Tax Laws (Amendment) Act 1987, w.e.f. 1-4-1989. 4 Being inserted by the Finance Act, 1995, w.e.f. 1-4-1996. 5 Substituted for 'two thousand five hundred" by the Direct Tax Laws (Amendment) Act 1987, w.e.f. 1-4-1989. 6 Substituted for "Income-tax", ibid, w.e.f. 1-4-1988. 7 Substituted for "two thousand five hundred" by the Direct Tax Laws (Amendment) Act 1987, w.e.f. 1-4-1989. 8 See rule 6DD. ----------------------------------------------------------------------- 1.242 (i) the purchaser is new to the sellers; or (ii) the transactions are made at a place where either the purchaser or the seller does not have a bank account; or (iii) the transactions and payments are made on a bank holiday; or (iv) the seller is refusing to accept the payment by way of a crossed cheque/draft and the purchaser's business interest would suffer due to nonavailability of goods otherwise then from this particular seller; or (v) the seller acting as a commission agent is required to pay cash in turn to persons from whom he has purchased the goods; or (vi) specific discount is given by the seller for payment to be made by way of cash. 3. The suspension of cheque clearing and banking operations consequent to the strike of bank employees will constitute unavoidable circumstances and accordingly payments for business expenditure made during this period and until clearance of cheques is resumed will be expected from the operation of section 40A(3). [Letter No. 142(14)170, dated 28th September, 1970] 4. Section 40A(3) would not apply to repayment of loans or payment towards the purchase price of capital assets like plant and machinery not for resale. 5. Banks may return the paid cheques to their constituents after obtaining a formal undertaking from them to the effect that they shall retain the returned paid cheques for a period of eight years and produce them before the Income-tax Officer whenever called upon to do so. 6. Payments made in advancing loans and returning the principal amount of borrowed moneys are not covered by the provisions of section 40A(3). [Letter No. 21(22)169, dated 18th April, 1969] 1[(4) Notwithstanding anything contained in any other law for the time being in force or in any contract, where any payment in respect of any expenditure has to be made by a crossed cheque drawn on a bank or by a crossed bank draft in order that such expenditure may not be disallowed as a deduction under sub-section (3), then the payment may be made by such cheque or draft; and where the payment is so made or tendered, no person shall be allowed to raise, in any suit or other proceeding, a plea based on the ground that the payment was not made or tendered in cash or in any other manner.] 2[(5) Omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989.] ---------------------------------------------------------------------- 1 Inserted by the Finance Act, 1969, w.e.f. 1-4-1969. 2 Prior to the omission, sub-section (5), as amended by the Direct Taxes (Amendment) Act, 1974, w.e.f. 1-4-1974; the Finance Act, 1984; the Taxation Laws (Amendment) Act, 1984 and the Finance Act, 1985, the last three being w.e.f. 1-4-1985, read as under: "(5)(a) Where the assessee- (i) incurs any expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee, or (ii) incurs any expenditure which results directly or indirectly in the provision of any perquisite (whether convertible into money or not) to an employee or incurs directly or indirectly any expenditure or is entitled to any allowance in respect of any assets of the assessee used by an employee either wholly or partly for his own purposes or benefit, then, subject to the provisions of clause (b), so much of such expenditure or allowance as is in excess of the limit specified in respect thereof in clause (c) shall not be allowed as a deduction: ---------------------------------------------------------------------- 1.243 --------------------------------------------------------------------- ->-> Provided that where the assessee is a company, so much of the aggregate of- (a) the expenditure and allowance referred to in sub- clauses (i) and (ii) of this clause; and (b) the expenditure and allowance referred to in sub- clauses (i) and (ii) of clause (c) of section 40, in respect of an employee or a former employee, being a director or a person who has a substantial interest in the company or a relative of the director or of such person, as is in excess of the sum of one hundred and two thousand rupees, shall in no case be allowed as a deduction: Provided further that in computing the expenditure referred to in sub-clause (i) or the expenditure or allowance referred to in sub- clause (i) of this clause or the aggregate referred to in the foregoing proviso, the following shall not be taken into account, namely:- (i) the value of any travel concession or assistance referred to in clause (5) of section 10; (ii) passage moneys or the value of any free or concessional passage refer-red to in sub-clause (i) of clause (6) of section 10; (iii) any payment referred to in clause (iv) or clause (v) of sub-section (1) of section 36; (iv) any expenditure referred to in clause (ix) of sub- section (1) of section 36. (b) Nothing in clause (a) shall apply to any expenditure or allowance in relation to- (i) any employee in respect of any period of his employment outside India; (ii) any employee being an individual referred to in sub- clause (vii) or sub-clause (viia) of clause (6) of section 10 in respect of any period during which he is entitled to the exemption under sub-clause (vii) or, as the case may be, subclause (viia) aforesaid; (iii) any employee whose income chargeable under the head 'Salaries' is seven thousand and five hundred rupees or less. (c) The limits refer-red to in clause (a) are the following, namely:- (i) in respect of the expenditure referred to in sub-clause (i) of clause (a), in the case of an employee, an amount calculated at the rate of seven thousand five hundred rupees for each month or part thereof comprised in the period of his employment in India during the previous year, and in the case of a former employee, being an individual who ceases or ceased to be the employee of the assessee during the previous year or any earlier previous year, ninety thousand rupees: Provided that where the expenditure is incurred on payment of any salary to an employee or a former employee engaged in scientific research during any one or more of the three years immediately preceding the commencement of the business and such expenditure is deemed under the Explanation to clause (i) of sub-section (1) of section 35 to have been laid out or expended in the previous year in which the business is commenced, the limit referred to in this sub-clause shall, in relation to the previous year in which the business is commenced, be an amount calculated at the rate of five thousand rupees for each month or part thereof comprised in the period of his employment in India during the previous year in which such business is commenced and in the period of his employment in India during which he was engaged in scientific research during the three years immediately preceding that previous year: Provided further that in relation to any month or part thereof comprised in any such previous year as is relevant to the assessment year commencing on the 1st day of April, 1985, or any subsequent assessment year, the reference to 'five thousand rupees' in the preceding proviso shall be construed as a reference to 'seven thousand five hundred rupees'; (ii) in respect of the aggregate of the expenditure and the allowance referred to in sub-clause (ii) of clause (a), one- fifth of the amount of the salary payable -> -> ---------------------------------------------------------------------- 1.244 1[(6) Omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989.] 2[(7)(a) 'Subject to the provisions of clause (b), no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason. (b) Nothing in clause (a) shall apply in relation to- (i) any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, ----------------------------------------------------------------------- -> -> to the employee or an amount calculated at the rate of one thousand rupees for each month or part thereof comprised in the period of employment in India of the employee during the previous year, whichever is less. Explanation 1.-The provisions of this sub-section shall apply notwithstanding that any amount not to be allowed under this sub-section is included in the total income of the employee or, as the case may be, the former employee. Explanation 2.-In this sub-section,- (a) salary' has the meaning assigned to it in clause (1) read with clause (3) of section 17 subject to the following modifications, namely:- (1) in the said clause (1), the word 'perquisites' occurring in sub-clause (iv) and the whole of sub-clause (vii) shall be omitted; (2) in the said clause (3), the references to 'assessee' shall be construed as references to 'employee or former employee' and the references to 'his employer or former employer' and 'an employer or a former employer' shall be construed as references to 'the assessee'; (b) 'Perquisite' means- (i) rent-free accommodation provided to the employee by the assessee; (ii) any concession in the matter of rent respecting any accommodation provided to the employee by the assessee; (iii) any benefit or amenity granted or provided free of cost or at concessional rate to the employee by the assessee; (iv) payment by the assessee of any sum in respect of any obligation which, but for such payment, would have been payable by the employee; and (v) payment by the assessee of any sum, whether directly or through a fund, other than a recognised provident fund or an approved superannuation fund, to effect an assurance on the life of the employee or to effect a contract for an annuity." 1 Prior to the omission, sub-section (6), as amended by the Finance Act, 1984, w.e.f. 1-4-1985, read as under: "(6) Where the assessee incurs any expenditure by way of fees for services rendered by a person who at any time during the twenty-four months immediately preceding the previous year was an employee of the assessee,- (a) such expenditure by way of fees, or (b) where the assessee has also incurred in relation to such person any expenditure by way of salary referred to in sub- clause (i) of clause (a) of sub-section (5), the aggregate of such expenditure by way of fees and by way of salary, shall not be allowed as a deduction to the extent such expenditure by way of fees or, as the case may be, the aggregate of such expenditure by way of fees and by way of salary exceeds ninety thousand rupees." 2 Inserted by the Finance Act, 1975, w.r.e.f. 1-4-1973. 1.245 or for the purpose of payment of any gratuity, that has become payable during the previous year; (ii) any provision made by the assessee for the previous year relevant to any assessment year commencing on or after the 1st day of April, 1973, but before the 1st day of April, 1976, to the extent the amount of such provision does not exceed the admissible amount, if the following conditions are fulfilled, namely:- (1) the provision is made in accordance with an actuarial valuation of the ascertainable liability of the assessee for payment of gratuity to his employees on their retirement or on termination of their employment for any reason; (2) the assessee creates an approved gratuity fund for the exclusive benefit of his employees under an irrevocable trust, the application for the approval of the fund having been made before the 1st day of January, 1976; and (3) a sum equal to at least fifty per cent of the admissible amount, or where any amount has been utilised out of such provision for the purpose of payment of any gratuity before the creation of the approved gratuity fund, a sum equal to at least fifty per cent of the admissible amount as reduced by the amount so utilised, is paid by the assessee by way of contribution to the approved gratuity fund before the 1st day of April, 1976, and the balance of the admissible amount or, as the case may be, the balance of the admissible amount as reduced by the amount so utilised, is paid by the assessee by way of such contribution before the 1st day of April, 1977. Explanation 1.-For the purpose of sub-clause (ii) of clause (b) of this sub-section, "admissible amount" means the amount of the provision made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason, to the extent such amount does not exceed an amount calculated at the rate of eight and one-third per cent of the salary [as defined in clause (h) of rule 2 of Part A of the Fourth Schedule] of each employee entitled to the payment of such gratuity for each year of his service in respect of which such provision is made. Explanation 2.-For the removal of doubts, it is hereby declared that where any provision made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason has been allowed as a deduction in computing the income of the assessee for any assessment year, any sum paid out of such provision by way of contribution towards an approved gratuity fund or by way of gratuity to any employee shall not be allowed as a deduction in computing the income of the assessee of the previous year in which the sum is so paid.] 1[(8) Omitted by the Finance Act, 1985 w.e.f 1-4-1986.] ---------------------------------------------------------------------- 1 Prior to the omission, sub-section (8), as inserted by the Finance Act, 1975, w.e.f. 1-4-1976, read as under: "(8) Where the assessee, being a company (other than a banking company or a financial company), incurs any expenditure by way of interest in respect of -> -> ----------------------------------------------------------------------- 1.246 ---------------------------------------------------------------------- -> -> any deposit received by it, fifteen per cent of such expenditure shall not be allowed as a deduction. Explanation.- In this sub-section,- (a) "banking company" means a company to which the Banking Regulation Act, 1949 (10 of 1949) applies and includes any bank or banking institution referred to in section 51 of that Act; (b) "deposit" means any deposit of money with, and includes any money borrowed by a company, but does not include any amount received by the company- (i) from the Central Government or any State Government or any local authority or from any other source where the repayment of the amount is guaranteed by the Central Government or a State Government; (ii) from the Government of a foreign State, or from a citizen of foreign State, or from any institution, association or body (whether incorporated or not) established outside India; (iii) as a loan from a banking company or from a co- operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank); (iv) as a loan from any institution or body specified in the list in the Tenth Schedule or such other institution or body as the Central Government may, having regard to the nature and objects of the institution or body, by notification in the Official Gazette, specify in this behalf; (v) from any other company; (vi) from an employee of the company by way of security deposit; (vii) by way of security or as an advance from any purchasing agent, selling agent or other agent in the course of, or for the purpose of, the business of the company or as advance against orders for the supply of goods or for the rendering of any service; (viii) by way of subscription to any share, stock, bond or debenture (such bond or debenture being secured by a charge or a lien on the assets of the company) pending the allotment of the said share, stock, bond or debenture, or by way of advance payment of any moneys uncalled and unpaid upon any shares in the company, if such moneys are not repayable in accordance with the articles of association of the company; (ix) as a loan from any person where the loan is secured by the creation of a mortgage, charge or pledge of any assets of the company (such loan being hereafter in this sub-clause referred to as the relevant loan) and the amount of the relevant loan, together with the amount of any other prior debt or loan secured by the creation of a mortgage, charge or pledge of such assets, is not more than seventy-five per cent of the price that such assets would ordinarily fetch on sale in the open market on the date of creation of the mortgage, charge or pledge for the relevant loan; (c) "financial company" means- (i) a hire-purchase finance company, that is to say, a company which carries on, as its principal business, hire-purchase transactions or the financing of such transactions; or (ii) an investment company, that is to say, a company which carries on, as its principal business, the acquisition of shares, stock, bonds, debentures, debenture stock, or securities issued by the Government or a local authority, or other marketable securities of a like nature; or (iii) a housing finance company, that is to say, a company which carries on, as its principal business, the business of financing of acquisition or construction of houses, including acquisition or development of land in connection therewith; (iv) a loan company, that is to say, a company [not being a company referred to in sub-clauses (i) to (iii)] which carries on, as its principal business, the business of providing finance, whether by making loans or -> -> ----------------------------------------------------------------------- 1.247 1[(9) No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act, 1860 (21 of 1860), or other institution for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under clause (iv) or clause (v) of sub-section (1) of section 36, or as required by or under any other law for the time being in force.] 2[(10) Notwithstanding anything contained in sub-section (9), where the 3[Assessing] Officer is satisfied that the fund, trust, company, association of persons, body of individuals, society or other institution referred to in that sub-section has, before the 1st day of March, 1984, bona fide laid out or expended any expenditure (not being in the nature of capital expenditure) wholly and exclusively for the welfare of the employees of the assessee referred to in sub-section (9) out of the sum referred to in that sub-section, the amount of such expenditure shall, in case no deduction has been allowed to the assessee in respect of such sum and subject to the other provisions of this Act, be deducted in computing the income referred to in section 28 of the assessee of the previous year in which such expenditure is so laid out or expended, as if such expenditure had been laid out or expended by the assessee.] 4[(11) Where the assessee has before the 1st day of March, 1984, paid any sum to any fund, trust, company, association of persons, body of individuals, society or other institution referred to in sub- section (9), then, notwithstanding anything contained in any other law or in any instrument, he shall be entitled- (i) to claim that so much of the amount paid by him as has not been laid out or expended by such fund, trust, company, association of persons, body of individuals, society or other institution (such amount being hereinafter referred to as the unutilised amount) be repaid to him, and where any claim is so made, the unutilised amount shall be repaid, as soon as may be, to him; (ii) to claim that any asset, being land, building, machinery, plant or furniture acquired or constructed by the fund, trust, company, association of persons, body of individuals, society or other institution out of the sum paid by the assessee, be transferred to him, and where any claim is so made, such asset shall be transferred, as soon as may be, to him.] ----------------------------------------------------------------------- -> -> advances or otherwise; (v) a mutual benefit finance company, that is to say, a company which carries on, as its principal business, the business of acceptance of deposits from its members and which is declared by the Central Government under section 620A of the Companies Act, 1956 (1 of 1956), to be a Nidhi or Mutual Benefit Society; (vi) a miscellaneous finance company, that is to say, a company which carries on exclusively, or almost exclusively, two or more classes of business referred to in the preceding sub-clauses." 1 Inserted by the Finance Act, 1984, w.r.e.f. 1-4-1980. 2 Ibid. 3 Substituted for "Income-tax" by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1988. 4 Inserted by the Finance Act, 1984, w.r.e.f. 1-4-1980. ------------------------------------------------------------------------ 1.248 1[(12) Omitted by the Finance Act, 1992, w.e.f. 1-4-1993.]