Section 40A(2) of the Income Tax Act
Income-tax Act, 2025: s.36
Section 40A(2) falls under section 40A of the Income-tax Act, 1961, which corresponds to section 36 (Expenses or payments not deductible in certain circumstances) of the Income-tax Act, 2025.
Read section 36 of the 2025 Act
Correspondence checked against the ICAI tabular mapping of the two Acts and the BharatTax.co section commentary.
The decision most relied on for Section 40A(2) is CIT v. Tasgaon Taluka S.S.K. Ltd. (103 Taxmann.com 57), cited in 306 of the 542 judgments on BharatTax that turn on this section.
Leading authorities on Section 40A(2)
The Supreme Court holds that the issue of payment of excessive price on purchase of sugarcane by assesses is no longer res integra. The court elaborately dealt with this issue.
Expenditure for replacement of machinery parts qualifies as 'current repairs' under Section 31(i) of the Income-tax Act if it does not result in a new asset or substantially enhance the existing asset's life. For Section 31(i), the critical factor is whether the expense constitutes current repairs, making the general revenue vs. capital distinction less relevant for that specific section.
No tax evasion occurs when a company pays higher expenditure to a sister concern if the sister concern also pays taxes at a higher rate. This principle applies to disallowances under section 40A(2)(b) when it can be shown that the related entity is not benefiting from a lower tax rate.
Depreciation under section 32 is allowable even if an asset is not actively used, provided it is kept in a condition of readiness or is put ready for use, as this amounts to passive user.
For Section 80IA and 80IB deductions, the profits of an eligible industrial undertaking or unit must be computed independently based on its actual profitability and market-rate inter-unit transactions, rather than applying a global profit margin of all the assessee's units.
The Principal Commissioner cannot exercise revisionary powers under Section 263 by merely stating that further enquiry is required or by simply setting aside the assessment order. To revise an assessment, the Principal Commissioner must establish how the assessment order is erroneous and prejudicial to the interest of the revenue.
The Assessing Officer must establish a proximate nexus between the expenditure and the investments before invoking Section 14A(2) and Rule 8D for disallowance. Failure to do so renders the invocation illegal and the addition liable for deletion.
For the purpose of computing the deduction allowable under Section 80IA, the market price of electricity supplied by a captive power plant (CPP) is to be determined by adopting the rate at which the manufacturing unit has been purchasing electricity from the open market.
Deduction for commission payments cannot be disallowed solely because summons served on commission agents were returned unserved, especially if the agents may have moved addresses years after the transactions.