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)
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
