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Income Tax Laws – I

Notes 9.6.2 Expenses Restricted

The expenses restricted include the following:
1. Payment to Relatives or Associates [Section 40A(2)]: Where the assessee incurs any
expenditure in respect of which payment has been or is to be made to any person specified
below and the Assessing Officer is of the opinion that such expenditure is excessive or
unreasonable, having due 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 considered to be excessive or unreasonable must be disallowed in computing the
assessee’s income from business or profession.
However, no disallowance, on account of any expenditure being excessive or unreasonable
having regard to the fair market value, shall be made in respect of a specified domestic
transaction referred to in section 92BA, if such transaction is at arm’s length price as
defined in clause (ii) of section 92F.

Notes Meaning of specified domestic transaction (Section 92BA)

For the purposes of this section and sections 92, 92C, 92D and 92E, “specified domestic
transaction” in case of an assessee means any of the following transactions, not being an
international transaction, namely:
any expenditure in respect of which payment has been made or is to be made to a
person referred to in clause (b) of sub-section (2) of section 40A;

any transaction referred to in section 80A;
any transfer of goods or services referred to in sub-section (8) of section 80-IA;
any business transacted between the assessee and other person as referred to in
sub-section (10) of section 80-IA;
any transaction, referred to in any other section under Chapter VI-A or section
10AA, to which provisions of sub-section (8) or sub-section (10) of section 80-IA are
applicable; or
any other transaction as may be prescribed, and where the aggregate of such
transactions entered into by the assessee in the previous year exceeds a sum of five
crore rupees.
The specified persons, the payments to whom may fall for disallowance under this section
are the following:
Where the assessee is an individual - any relative of the assessee.
Where the assessee is a company, firm, association of persons or H.U.F. any director
of the company partner of the firm, member of the association or family, or any
relative of such director, partner or member.

Any individual who has a substantial interest in the business or profession of the
assessee or any relative of such individual.

A company, firm, association of persons or H.U.F. having substantial interest in the
business or profession of the assessee or any director, partner or member of such
Contd...

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