Section 40A(2)(b) of the Income Tax Act

Income-tax Act, 2025: s.36

Section 40A(2)(b) 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)(b) is CIT v. Dalmia Cement (Bharat) Ltd. (254 ITR 377), cited in 417 of the 1,172 judgments on BharatTax that turn on this section.

Leading authorities on Section 40A(2)(b)

CIT v. Dalmia Cement (Bharat) Ltd.
254 ITR 377 · 2002 · High Court
417
citing judgments

When there is a nexus between an expenditure and the purpose of business, incurred on grounds of commercial expediency, the Revenue cannot question its reasonableness or assume the role of the businessman to compel profit maximization. This principle applies even if the business is not that of the assessee itself.

CIT v. Winsome Textile Industries Ltd.
319 ITR 204 · 2009 · High Court
378
citing judgments

Section 14A of the Income-tax Act, 1961, which disallows expenditure incurred in relation to exempt income, is not applicable if the assessee has not earned any exempt income in the relevant assessment year.

Eastern Investments Ltd. v. CIT
38 ITR 601 · 1960 · Supreme Court
346
citing judgments

Expenditure must be commercially expedient for carrying on the business, and it is not for revenue authorities to dictate how an assessee should conduct its business. The court will not question the business expediency of a transaction, even if a third party also benefits.

Biocon Ltd. v. DCIT
35 Taxmann.com 335 · 2013 · ITAT
322
citing judgments

The discount arising from the grant of Employee Stock Option Plans (ESOPs) is an allowable business expenditure under Section 37(1) of the Income-tax Act, 1961, as it is an ascertained liability, not a contingent one, and constitutes a revenue expense rather than a capital expense.

CIT v. Walchand & Co.
65 ITR 381 · 1967 · Supreme Court
314
citing judgments

The necessity and reasonableness of business expenditure, including the utilization of borrowed funds, must be judged from the perspective of a businessman based on commercial expediency, and cannot be dictated by revenue authorities. The onus is on the assessee to demonstrate the business purpose and commercial expediency.

India Cements Ltd. v. CIT
60 ITR 52 · 1966 · Supreme Court
247
citing judgments

Expenses incurred for obtaining a loan for the purpose of the assessee's business, such as debenture discount, bank guarantee charges, and stamp duty, are considered revenue expenditure. These liabilities, though potentially spread over time, are deductible as revenue expenses.

CIT v. Ankitech (P) Ltd.
340 ITR 14 · 2012 · High Court
202
citing judgments

Deemed dividend under section 2(22)(e) cannot be taxed in the hands of a non-shareholder. The Supreme Court confirmed this view, affirming the Delhi High Court's decision in Ankitech.

Challapalli Sugars Ltd. v. CIT
98 ITR 167 · 1975 · Supreme Court
185
citing judgments

Interest on borrowed capital utilized for acquiring a capital asset is capitalized until business commences. Once business is set up, this interest is deductible under section 36(1)(iii) even if the asset has not yet been put to use, accepting commercial accounting standards in the absence of contrary statutory provisions.

DCIT v. Core Health Care Ltd.
298 ITR 194 · 2008 · Supreme Court
165
citing judgments

Interest expenditure incurred for acquiring capital assets, even if capitalized in the books, is deductible if for the purpose of business. Section 36(1)(iii) is a self-contained code regarding such deductions.

CIT v. Dhanrajgirji Raja Narasingirji
91 ITR 544 · 1973 · Supreme Court
154
citing judgments

The revenue cannot question the commercial expediency or wisdom of an expenditure incurred by a businessman, as the businessman is the best judge of their own business interests. The department's role is limited to verifying if the expenditure was genuinely incurred and was wholly and exclusively for business purposes.

Judgments on Section 40A(2)(b)

Money Magnum Constructions, Mumbai vs. Principal Commissioner of Income Tax, Circle- 27, Mumbai

In the result, the appeal filed by the assessee is dismissed

ITA 2445/MUM/2024[2014-15]Status: DisposedITAT Mumbai27 Nov 2024AY 2014-15

Bench: Shri Om Prakash Kant, Am & Ms. Kavitha Rajagopal, Jm Money Magnum Constructions Pr. Cit, Circle-27 Room No. 401, 4Th Floor, Plot No. 157 Samruddhi, 18Th Road, Near Ambedkar Garden, Tower No. 6, Vashi Railway Station, Vs. Chembur (E), Mumbai-400 071 Commercial Complex, Vashi, Navi Mumbai-400 703. Pan/Gir No. Aacfn 9126 C (Assessee) : (Respondent) Assessee By : Shri. Paresh Shaparia : Ms.Sanyogita Nagpal Respondent By : 09.09.2024 Date Of Hearing Date Of Pronouncement : 27.11.2024 O R D E R Per Kavitha Rajagopal, J M: This Appeal Has Been Filed By The Assessee, Challenging The Order Of The Learned Principal Commissioner Of Income Tax, Pcit, Mumbai-27 (‘Ld. Pcit For Short), Passed U/S.263 Of The Income Tax Act, 1961 (‘The Act'), Relevant To Assessment Year (‘A.Y.’ For Short) 2014-15. 2. The Assessee Has Raised The Following Ground Of Appeal: I. “Order Passed Under Section 263 Is Bad In Law: 1. On The Facts & In The Circumstances Of The Case & In Law, The Learned Pr. Cit 27 Erred In Treating The Order Under Section 147 R.W.S 144B Of The Income- Tax Act, 1961 (The Act) Dated 24 March 2022 (Re-Assessment Order) As Erroneous & Prejudicial To The Interest Of The Revenue & Thereby Setting Aside The Order. 2. On The Facts & In The Circumstances Of The Case & In Law, The Learned Pr.Cit 27 Failed To Appreciate The Fact That The Original Assessment Order As Well As Re- Assessment Order Have Duly Considered The Transaction Of Nsel Commodity Loss Of Rs

For Appellant: Shri. Paresh ShapariaFor Respondent: 09.09.2024
Section 143(1)Section 143(3)Section 147Section 148Section 263Section 40A(2)(b)