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)

Sun Pharmaceuticals Industries Ltd., Baroda vs. The ACIT, Central Circle-1, Baroda

In the result, the appeal of the Revenue is partly allowed

ITA 1659/AHD/2015[2008-09]Status: DisposedITAT Ahmedabad20 Jun 2019AY 2008-09

Bench: Shri Waseem Ahmed & Ms. Madhumita Roy1. आयकर अपील सं./Ita No.1659/Ahd/2015 2. आयकर अपील सं./Ita No.1689/Ahd/2015 ("नधा"रण वष"/Assessment Year : 2008-09 ) बनाम/ 1. Sun Pharmaceuticals 1. The Acit Industries Ltd. Cen.Cir-1 Vs. “Sparc” Tandalja Baroda – 20 2. The Acit 2. Sun Pharmaceu- Central Circle-1 Ticals Industries Baroda Ltd. Baroda. "थायी लेखा सं./जीआइआर सं./Pan/Gir No. : Aadcs 3124K (अपीलाथ"/Appellant) (""यथ" / Respondent) .. अपीलाथ" ओर से/ Appellant By : Shri S.N. Soparkar, Ar ""यथ" क" ओर से/Respondent By: Shri R.C. Panday, Cit-Dr सुनवाई क" तार"ख/ Date Of Hearing 28/03/2019 घोषणा क" तार"ख /Date Of Pronouncement 20/06/2019 आदेश / O R D E R Per Waseem Ahmed: The Captioned Cross-Appeals Have Been Filed At The Instance Of The Assessee & Revenue Against The Order Of The Commissioner Of Income Tax (Appeals)–2, Vadodara [Cit(A) In Short] Vide Appeal No.Cab/(A)- 2/387/2014-15 Dated 31/03/2015 Arising In The Assessment Order Passed Under S.143(3) R.W.S.147 Of The Income Tax Act, 1961(Hereinafter Referred To As "The Act") Dated 14/02/2014 Relevant To Assessment Year (Ay) 2008-09. Ita Nos.1659/Ahd/2015 (By Assessee) & Ita No.1689/Ahd/2015 (By Revenue) Sun Pharmaceuticals Industries Ltd. Vs. Acit Asst.Year - 2008-09 2

For Appellant: Shri S.N. Soparkar, ARFor Respondent: Shri R.C. Panday, CIT-DR
Section 143(3)Section 147Section 148Section 40A(2)(b)

DCIT, (It)-2(1)(2), Mumbai vs. Dnv Se- India Branch, Mumbai

In the result the ground No

ITA 3139/MUM/2018[2011-12]Status: DisposedITAT Mumbai29 May 2019AY 2011-12

Bench: Shri G.S. Pannu, Vice- & Shri Pawan Singhdcit (It)-2(1)(2), M/S Dnv Gl Se-India Branch, Room No. 1612, 16Th Floor, Equinox Business Park, Vs. Tower -3, 6Th Floor, Lbs Air India Building, Mumbai-400021. Marg, Off Bandra Kurla Complex, Kurla (West), Mumbai-400070 Pan: Aaacg7903R Appellant Respondent Appellant By : Sh. V. Sreekar Cit-Dr Respondent By : Sh. Harsh Kothari, Kunal Shah & Mrs. Hemlata Bhungave Ar’S Date Of Hearing : 14.05.2018 Date Of Pronouncement : 29.05.2019 Order Under Section 254(1)Of Income Tax Act Per Pawan Singh; 1. This Appeal By Revenue Under Section 253 Of The Income-Tax Act (‘The Act’) Is Directed Against The Order Of Ld. Cit(A)-56, Mumbai Dated 15.02.2017, Which In Turn Arises From The Assessment Order Under Section 143(3) Rws 144C(3) On 25.05.2015, Passed In Pursuance Of Direction Of Dispute Resolution Penal (Drp) For Assessment Year 2011-12. 2. Brief Facts Of The Case Are That The Assessee-Company Is A Tax Resident Of Germany & Engaged In The Business Of Inspection & Certification Services In Marine Industries, Filed Its Return Of Income On 30.11.2011 Declaring Total Income Of Rs. 30,57930/-. The Return Of Income Was Dnv Se-India Branch Selected For Scrutiny. In The Return Of Income The Assessee Reported

For Appellant: Sh. V. Sreekar CIT-DRFor Respondent: Sh. Harsh Kothari, Kunal Shah &
Section 143(3)Section 253Section 254(1)Section 92C

M/S. Ashok Griha Udyog Kendra Private Limited, Kanpur vs. Assistant Commissioner of Income Tax- 5, Kanpur

In the result, for statistical purposes, the appeal is treated as allowed

ITA 402/LKW/2018[2013-14]Status: DisposedITAT Lucknow16 May 2019AY 2013-14

Bench: Shri. A. D. Jain & Shri T. S. Kapoorassessment Year: 2013-14 M/S Ashok Griha Udyog Kendra V. Acit-5 Private Limited Kanpur 51/92, Shree Bhagwati Tower Naya Ganj, Kanpur Tan/Pan:Aabca1684N (Appellant) (Respondent) Appellant By: Shri Jagdish, Advocate Respondent By: Shri C. K. Singh, D.R. Date Of Hearing: 16 05 2019 Date Of Pronouncement: 16 05 2019 O R D E R Per A. D. Jain, V.P.: This Is Assessee’S Appeal Against The Order Of The Ld. Cit(A)-I, Kanpur Dated 23/3/2018 For Assessment Year 2013-14, Taking The Following Grounds Of Appeal:- 1. Because On The Facts & In The Circumstances Of The Case, The Ld. Cit (Appeals) Has Erred In Confirming The Addition Of Rs.7,30,696/- Made As Expenditure Incurred In Relation To Income Not Includible In Total Income Of Appellant By Invoking The Provisions Of Section 14A Of The Income Tax Act, 1961 Read With Rule 8D Of The I. T. Rules 1962, Even Though These Provisions Are Not Applicable In The Case Of Appellant. 2. Because On The Facts & In The Circumstances Of The Case, The Ld. Cit (Appeals) Has Erred In Confirming The Addition! Disallowance Of Rs.9,18,359/- Being 1/10Th Of Rs.91,83,586/- Debited Under Head Other Expenses In The Profit & Loss Account, Made By The Assessing Officer On Ad Hoc Basis By Treating It As Non Business

For Appellant: Shri Jagdish, AdvocateFor Respondent: Shri C. K. Singh, D.R
Section 14ASection 40A