Amounts not deductible.
40. Notwithstanding anything to the contrary in sections 30 to 82[38], the following amounts shall not be deducted in computing the income charge- able under the head "Profits and gains of business or profession",—
(a) in the case of any assessee—
83[(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;]
(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;
84[(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";
(v) 85[* * *]
86[(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.]
87[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 firm to such individual or by such individual to the firm 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 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 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;]]
87a[(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.]
88(c) [Omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989.]
89(d) [Omitted by the Finance Act, 1988, w.e.f. 1-4-1989.]
82. Substituted for "39" by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989.
83. Substituted for the following sub-clause (i) by the Finance Act, 1988, w.e.f. 1-4-1989:
"(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;"
84. Inserted by the Income-tax (Amendment) Act, 1972, with retrospective effect from 1-4-1962 subject to savings prescribed by sections 4 and 5 of that Act which 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 sub-clause (iia) 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.'
85. Omitted by the Finance (No. 2) Act, 1971, w.e.f. 1-4-1972. Original clause (v) was inserted by the Finance Act, 1968, w.e.f. 1-4-1969 and was later amended by the Taxation Laws (Amendment) Act, 1970, w.e.f. 1-4-1971.
86. Restored to its original version by the Direct Tax Laws (Amendment) Act, 1989, w.e.f. 1-4-1989. Earlier clause (b) was substituted by the Direct Tax Laws (Amendment) Act, 1987, with effect from the same date.
87. Inserted by the Taxation Laws (Amendment) Act, 1984, w.e.f. 1-4-1985.
87a. Inserted by the Direct Tax Laws (Amendment) Act, 1989, w.e.f. 1-4-1989.
88. Immediately prior to its omission, clause (c), as amended by the Finance Act, 1963,w.e.f. 1-4-1963, Finance Act, 1964, w.e.f. 1-4-1964, Finance Act, 1965, w.e.f. 1-4-1965, Finance Act, 1968, w.e.f. 1-4-1969, Finance (No. 2) Act, 1971, w.e.f. 1-4-1972, Finance Act, 1984, w.e.f. 1-4-1985 and Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1988, stood as under:
"(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 referred to in sub-clause (i);"
89. Prior to its omission, clause (d) stood 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
[As amended by the Finance Act, 1989 and the Direct Tax Laws (Amendment) Act, 1989]