Expenses Disallowed Under PGBP
When calculating profits and gains from business or profession (PGBP), certain expenditures are disallowed and must be added back to the net profit. Understanding these disallowed expenses is crucial for accurate tax reporting and compliance.
What are Expenses Disallowed Under PGBP?
Expenses that are disallowed under the PGBP head are those that cannot be claimed as deductions while computing the taxable income of a business. These expenses are specified under Section 37 of the Income Tax Act, 1961, and are considered either non-business or personal in nature, or they do not meet specific criteria set out by the tax authorities.
Certain expenditures are disallowed when computing profits and gains from business or profession. These expenses must be added back to the net profit. The disallowance primarily occurs for two reasons:
- Failure to deduct the required tax on certain expenditures.
- The expenditure does not relate directly to the business or profession.
Disallowed expenditures attract tax at a 30% rate (25% for certain companies), along with interest, penalties, and prosecution provisions.
Disallowed Expenses for TDS Default
The Income Tax Act disallows certain expenses if the TDS deductible on payments is not deducted appropriately. The following table summarizes the repercussions under various TDS default scenarios:
Click here to know the difference between IT and TDS.
TDS Default on Payments (Other than Salaries) Outside India or to a Non-Resident/Foreign Company
Nature of Default | Current Year Deductibility | Deductibility in Subsequent Years |
Tax deductible but not deducted | 100% disallowed | Allowed in the year of deduction and deposit |
Tax deducted but not deposited before the due date or I.T. return date | 100% disallowed | Allowed in the year of deposit |
TDS Default on Payments to Residents (Including Salaries)
Nature of Default | Current Year Deductibility | Deductibility in Subsequent Years |
Tax deductible but not deducted | 30% disallowed | Allowed in the year of deduction and deposit |
Tax deducted but not deposited before the due date or I.T. return date | 30% disallowed | Allowed in the year of deposit |
Relief for Non-Deduction of TDS
In cases where TDS is required but not deducted, relief can be claimed if the following conditions are met:
- The recipient files their return of income on time.
- The payment is accounted for in the recipient’s return.
- The recipient pays taxes on the declared income.
- A certificate from a Chartered Accountant is obtained and uploaded with the return.
Disallowed Expenditures for Equalization Levy Default
Expenses are disallowed if there is a default in deducting or depositing the equalization levy:
Nature of Default | Current Year Deductibility | Deductibility in Subsequent Years |
Non-deduction of equalization levy | 100% disallowed | Allowed in the year of deduction |
Non-deposit before due date or IT return filing | 100% disallowed | Allowed in the year of deposit |
Disallowed Expenditures for Payment in Cash
Payments exceeding ₹10,000 made in cash for services or goods are disallowed unless made through an account payee cheque, bank draft, or electronic clearing system. However, certain exceptions apply as per Rule 6DD. The following table lists exceptions where cash payments exceeding ₹10,000 are allowed:
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Other Disallowed Expenses
Apart from TDS and equalization levy defaults, other disallowed expenses include:
- Non-deduction of securities transaction tax.
- Fringe benefits tax.
- Wealth tax for prior years.
- Income tax.
- Provident fund payment without tax deduction.
Latest Updates
Clarification on Proposed Section 115BBH in Budget 2022
- Losses from Virtual Digital Currency: Losses incurred from one virtual digital currency cannot be set off against income from another digital currency.
- Infrastructure Cost for Mining Crypto Assets: Such costs will not be treated as the cost of acquisition.
Union Budget 2022 Outcomes
- Tax on Virtual Digital Assets: Income from the transfer of virtual digital assets like crypto and NFTs will be taxed at 30%.
- No Deduction Except Cost of Acquisition: No deductions will be allowed except for the cost of acquisition while reporting income from the transfer of digital assets.
- Non-Set-off of Digital Asset Losses: Losses from digital assets cannot be set off against any other income.
- Tax on Gifting of Digital Assets: Gifting of digital assets will attract tax in the hands of the receiver.
In conclusion, understanding and correctly identifying disallowed expenses is essential for compliance and accurate tax reporting under PGBP. Businesses must ensure proper documentation and adherence to tax regulations to optimize tax liability and avoid penalties.
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