Every business wants to claim the maximum possible deduction while computing taxable profits. But the Income Tax Act does not leave this entirely to an assessee’s discretion. Even after an expense qualifies under the general provisions for business deductions, three specific sections can still knock it out entirely: Section 40, Section 40A, and Section 43B. These are the special disallowances, and they override the deductions otherwise available under the general business-expense provisions, regardless of how genuine or business-related the expense actually was. For B.Com students preparing for exams or eventually filing tax returns for a client, this is one of the most exam-relevant and practically useful parts of the syllabus.

Table of Contents

Why these three sections override everything else

The general deduction provisions allow a wide range of business expenses, from rent and repairs to bad debts and depreciation. Sections 40, 40A, and 43B act as a filter on top of these provisions. Even if an expense would otherwise qualify, it gets disallowed if it falls into one of the specific categories these sections list, most of which are linked to TDS compliance, reasonableness of related-party payments, or the timing of actual payment.

One point worth flagging for currency: the Income Tax Act, 1961 has been replaced by the Income Tax Act, 2025 for income earned from 1 April 2026 onwards, and provisions have been renumbered as part of that recodification. Most B.Com syllabi and textbooks still refer to Sections 40, 40A, and 43B as they existed under the 1961 Act, and the substance of these rules has been carried forward largely unchanged, so this article uses the familiar numbering.

Payments to non-residents without TDS: Section 40(a)(i)

If a business pays interest, royalty, fees for technical services, or any other taxable sum to a person outside India or to a non-resident, and fails to deduct tax at source on it, the entire expense is disallowed. The same disallowance applies if TDS was deducted but not deposited with the government within the prescribed time.

Say a company pays royalty of ₹5 lakh to a foreign consultant and skips the TDS deduction. That entire ₹5 lakh gets added back to taxable profit for that year. The good news is that this disallowance is not permanent. If the TDS is deposited in a later year, the expense becomes deductible in the year the tax is actually paid, though the business still faces interest and penalty for the delay.

The lighter treatment for payments to residents

Where a similar default happens on payments to a resident, such as commission, brokerage, rent, or fees for professional or technical services, the disallowance is capped at 30 percent of the expense rather than the full amount. So if a business pays ₹5 lakh in professional fees to a resident consultant without deducting TDS, only ₹1.5 lakh gets disallowed, not the full sum. This softer treatment for residents, compared to the 100 percent disallowance for non-residents, has actually been debated in cross-border tax circles as creating a disparity in outcomes despite similar defaults.

Salary, taxes, and penalties that fail the compliance test

Salary payable outside India or to a non-resident is treated strictly. If tax has not been deducted or deposited on such salary, the deduction is denied in full. What surprises many students is how unforgiving the timing rule is here: if the TDS is deposited even a single day after the due date, the entire salary payment gets disallowed for that year.

A few other everyday items also fall outside the deduction net under these special provisions:

  • Income tax paid by the assessee on their own income is never a deductible business expense. It is an application of profit, not a cost of earning it.
  • Fines and penalties paid for breaking a law, such as a customs penalty or a pollution-control fine, cannot be claimed as a deduction, since allowing this would effectively let the government subsidise the cost of non-compliance.

When the employer picks up the tax on a perquisite

Employers sometimes agree to pay the tax on a non-monetary perquisite given to an employee, such as free accommodation or a company car, rather than passing that tax burden onto the employee. This tax amount is exempt in the employee’s hands under Section 10(10CC), but the flip side is that the employer cannot claim this tax payment as a deductible business expense. It is treated as an application of the employer’s income rather than a genuine cost of running the business.

Curbing excess and cash: Section 40A

Section 40A works alongside Section 40 but focuses on two different risks: overpayment to related parties and untraceable cash transactions.

Where a business pays a relative, a director, or a related concern an amount that the Assessing Officer considers excessive or unreasonable compared to the fair market value of the goods or services, the excess portion can be disallowed. This is meant to stop businesses from artificially shifting profits to family members or associated entities through inflated invoices.

The cash payment ceiling

Any single payment exceeding ₹10,000 made in cash to one person in a day is disallowed in full (the limit is ₹35,000 for payments to transport operators for plying, hiring, or leasing goods carriages). This provision exists to push businesses toward traceable banking channels and discourage the use of unaccounted cash.

Section 43B: deductions only on actual payment

Most businesses maintain accounts on a mercantile or accrual basis, where an expense is booked the moment the liability arises, whether or not cash has actually changed hands. Section 43B carves out specific categories where this accrual comfort does not apply. These items can be deducted only in the year they are actually paid, irrespective of when the liability was incurred:

  • Any tax, duty, cess, or fee payable under any law, such as GST, customs duty, or municipal property tax
  • Employer’s contribution to provident fund, superannuation fund, gratuity fund, or similar employee welfare funds
  • Bonus or commission paid to employees
  • Interest on loans or borrowings from public financial institutions and scheduled banks
  • Leave encashment paid to employees
  • Payments to Indian Railways for using their assets
  • Payments to micro and small enterprises beyond the 15-day or 45-day limit prescribed under the MSMED Act

There is a practical relief built into this section: if the payment is made on or before the due date for filing the income tax return under Section 139(1), the deduction can still be claimed for that year even though the actual cash outflow happened after the year ended. Miss that window, and the deduction only becomes available in the year the payment is finally made, not retrospectively.

For instance, if a company’s GST liability for FY 2025-26 remains unpaid on 31 March 2026 but is cleared before the return filing due date, the deduction is still allowed for FY 2025-26. If it is paid only in, say, October 2026, the deduction shifts entirely to FY 2026-27.

Interest and remuneration to partners: Section 40(b)

Partnership firms and LLPs often pay their partners both interest on capital and remuneration for actively running the business. Section 40(b) caps how much of this the firm can actually deduct, even where the partnership deed permits higher payments.

Conditions that must be met

Three conditions apply before any deduction is allowed:

  • The payment must be authorised by the partnership deed, and only for the period after the deed permits it
  • Remuneration is allowed only for a working partner actively involved in the business, not a sleeping or nominal partner
  • Interest on capital is capped at 12 percent per annum; anything paid above this rate is disallowed for the excess portion

Remuneration limits based on book profit

The ceiling on deductible remuneration is tied to the firm’s book profit. As per the limits revised by the Finance (No. 2) Act, 2024, applicable from FY 2024-25 onwards, the slabs work as follows:

Book profit slab Maximum deductible remuneration
First ₹6,00,000 of book profit (or in case of a loss) Higher of ₹3,00,000 or 90% of book profit
Balance book profit beyond ₹6,00,000 60% of the balance

Consider a firm with a book profit of ₹10 lakh. On the first ₹6 lakh, the allowed amount is 90 percent, or ₹5.4 lakh. On the remaining ₹4 lakh, 60 percent is allowed, adding ₹2.4 lakh. The total deductible remuneration works out to ₹7.8 lakh. If the deed authorises the partners to draw ₹9 lakh in total, the excess ₹1.2 lakh gets disallowed in the firm’s hands, even though the partners have already received the full amount in cash.

One nuance students often miss: remuneration that gets disallowed in the firm’s hands under this section is not taxed again in the partner’s hands, since it was never really a deductible expense for the firm to begin with. Only the allowed portion is taxable as business income for the partner.

Putting it all together

The common thread across Sections 40, 40A, and 43B is compliance discipline. Section 40 punishes TDS defaults, particularly on cross-border payments. Section 40A discourages unreasonable related-party payments and untraceable cash dealings. Section 43B forces certain statutory and employee-related dues onto a cash basis rather than allowing indefinite accrual. For a B.Com student, the exam-friendly way to remember this is: TDS defaults, excessive or cash payments, and unpaid statutory dues are the three broad triggers behind almost every special disallowance in this chapter.

What do you think? If a business genuinely could not pay its GST dues on time because of a temporary cash crunch, does it seem fair that the deduction gets pushed to a later year even though the expense was clearly incurred? And should the disallowance rate for TDS defaults on payments to residents and non-residents really differ as sharply as 30 percent versus 100 percent?

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References
  1. https://www.incometax.gov.in/iec/foportal/help/all-topics/e-filing-services/objective-and-scope-new-act
  2. https://cleartax.in/s/section-40-a-i-income-tax-act
  3. https://cleartax.in/s/section-40-of-income-tax-act
  4. https://www.taxmanagementindia.com/visitor/detail_manual.asp?ID=1135
  5. https://www.manipalcigna.com/blog/section-43b-of-income-tax-act
  6. https://taxguru.in/income-tax/enhanced-limits-partners-remuneration-section-40b-194t.html
  7. https://taxadda.com/remuneration-and-interest-to-partner-section-40b/

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Income Tax Law and Practice

1 Basic Concepts-I

  1. Broad Mechanism of Income Tax in India
  2. Concept of Income
  3. Definition of Person
  4. Definition of Assessee
  5. Permanent Account Number
  6. Assessment Year
  7. Previous Year
  8. Taxation of Previous Year’s Income during the Same Year
  9. Concept of Total Income
  10. Accounting Method

2 Basic Concepts-II

  1. Agricultural Income
  2. Definition of Agricultural Income
  3. Kinds of Agricultural Income
  4. Instances of Non-agricultural Income
  5. Partly Agricultural Income
  6. Integration of Agricultural Income with Non-agricultural Income
  7. Concept of Casual Income
  8. Examples of Casual Income
  9. Incomes Not Treated as Casual Income
  10. Capital and Revenue Receipts
  11. Determine the Nature of a Receipt
  12. Examples of Capital and Revenue Receipts

3 Residential Status and Tax Liability

  1. Importance of Residential Status
  2. Categories of Residential Status
  3. Rules for Determining Residential Status
  4. Scope of Total Income on the Basis of Residence
  5. Kinds of Incomes
  6. Income Received in India
  7. Income Deemed to be Received in India
  8. Incomes Accruing or Arising in India
  9. Income Deemed to Accrue or Arise in India
  10. Incidence of Tax

4 Exempted Incomes

  1. Meaning of Exempted Income
  2. List of Exempted Incomes
  3. Certain Exempted Incomes in the Hands of an Individual
  4. Exempted Incomes of Certain Institutions and Funds
  5. Income of Charitable and Religious Trusts and Political Parties
  6. Exempted Income for Non-Citizen And/or Non-Resident Assessee

5 Salaries-I

  1. Meaning of Salary
  2. Some Important Points Regarding Salary
  3. Definition of Salary for Different Purposes
  4. Salary or Wages
  5. Encashment of Earned Leave on Retirement
  6. Bonus, Fees, Commission, Profit in Lieu of Salary
  7. Pension
  8. Annuity
  9. Gratuity
  10. Compensation on Retrenchment
  11. Voluntary Retirement
  12. Advance Salary

6 Salaries-II

  1. Perquisites
  2. Valuation of Perquisites for Specified Employees
  3. Fully Exempted Perquisites (Tax Free Perquisites)
  4. Deduction from ‘Salaries’

7 Salaries-III

  1. Provident Fund Schemes
  2. Statutory Provident Fund
  3. Recognized Provident Fund
  4. Unrecognized Provident Fund
  5. Public Provident Fund (PPF)
  6. Approved Superannuation Fund
  7. Tax Treatment of Provident Fund
  8. Certain Other Aspects of Taxable Salary
  9. Deduction under Section 80C
  10. Gross Qualifying Amount

8 Income from House Property

  1. Income from House Property
  2. Exempted Incomes from House Property
  3. Some Important Points
  4. Annual Value
  5. Computation of Annual Value
  6. Deductions from Annual Value
  7. Loss under the Head ‘Income from House Property’
  8. Computation of Taxable Income from House Property

9 Income from Profits and Gains of Business or Profession-I

  1. Meaning of Business or Profession or Vocation
  2. Basis of Charge
  3. General Principles for Calculating Business and Profession Income
  4. Computation of Income from Business or Profession
  5. Specific Deductions-I: Rent, Rates, Taxes, Repairs, and Insurance for Buildings
  6. Repairs and Insurance of Machinery, Plant & Furniture
  7. Depreciation
  8. Incentive for Acquisition and Installation of New Plant or Machinery in the Notified Backward Areas in Certain States

10 Income from Profits and Gains of Business or Profession-II

  1. Tea Development Account, Coffee Development Account and Rubber Development Account
  2. Site Restoration Fund
  3. Expenditure on Scientific Research
  4. Amortisation of Spectrum Fee for Purchase of Spectrum
  5. Amortisation of Telecom License Fees
  6. Deduction in Respect of Expenditure on Specified Business
  7. Expenditure by Way of Payments to Association and Institutions for Carrying Out Rural Development Programmes
  8. Weighted Deduction of 100% for Expenditure Incurred on Agricultural Extension Project
  9. Weighted Deduction of 100% for Expenditure Incurred by a Company on Skill Development Project
  10. Amortization of Certain Preliminary Expenses
  11. Amortization of Expenditure in Case of Amalgamation or Demerger
  12. Amortization of Expenditure Incurred Under Voluntary Retirement Scheme
  13. Other Deductions
  14. General Deductions

11 Income from Profits and Gains of Business or Profession-III

  1. Special Disallowances under the Act
  2. Deemed Profits Chargeable to Tax
  3. Maintenance of Books of Account
  4. Compulsory Audit of Accounts
  5. Estimated Income Method for Computing Business Income

12 Capital Gains

  1. Concept of Capital Asset
  2. Transfer of Capital Asset
  3. Computation of Capital Gains
  4. Cost of Acquisition
  5. Cost of Improvement
  6. Indexed Cost of Acquisition and Improvement
  7. Capital Gains Exempt from Tax
  8. Tax on Short term capital gain on Transfer of Equity Shares
  9. Tax on Long Term Capital Gain on Transfer of Listed Securities
  10. Computation of Taxable Income from Capital Gains

13 Income from other Sources

  1. Income Chargeable Under the Head Income from Other Sources
  2. Deductions Allowed
  3. Dividends
  4. Winnings from Lotteries, Crossword Puzzles, Horse Races, Card Games, etc. (Casual Incomes)
  5. Interest on Securities
  6. Income from Letting out of Plant, Machinery or Furniture
  7. Income from Composite Letting of Machinery, Plant, Furniture and Building
  8. Contributions Received from Employees
  9. Receipts without Consideration
  10. Family Pension Received by the Legal Heirs of a Deceased Employee
  11. Receipt of Shares by a Firm or a Company
  12. Share Premium in Excess of Fair Market Value
  13. Interest on Compensation or on Enhanced Compensation

14 Aggregation of Incomes (Clubbing of Incomes and Deemed Incomes) and Set off and Carry Forward of Losses

  1. Aggregated Income
  2. Deemed Incomes
  3. Clubbing of Incomes
  4. Income of Minor Child
  5. Income from Converted Property
  6. Income from the Accretion to Assets
  7. Clubbing of Negative Incomes
  8. Set off and Carry Forward of Losses
  9. Inter-source adjustment
  10. Inter-Head adjustment
  11. Set off of losses of General Business
  12. Set off of losses of Speculation Business
  13. Set off of losses of Specified Business
  14. Set off of losses under the head Capital Gains
  15. Set off of losses from Owning and Maintaining Race Horses
  16. Set off of losses of Lottery, Betting, Gambling, Cross Word, Puzzles or Card Games

15 Deductions from Gross Total Income

  1. Deductions to Encourage Savings
  2. Deductions for Certain Personal Expenditure
  3. Deductions for Encouraging Voluntary Participation in Charitable and Socially Desirable Activities
  4. Deductions for Economic Growth
  5. Deductions in Respect of Royalty Income
  6. Deduction in Respect of Saving Bank A/C Interest
  7. Deduction in Case of Person with Disability

16 Assessment of Individuals

  1. Steps in Computation of Total Income
  2. Head wise Computation of Income
  3. Computation of Gross Total Income
  4. Deductions under Chapter VIA
  5. Some Illustrations (Computation of Total Income)
  6. Computation of Tax Liability of Individuals (with Illustrations)

17 Assessment of Firms

  1. Meaning and Definition of Partnership
  2. Essential Features of Partnership Firm
  3. Partnership Deed/Deed of Partnership
  4. Registration of Firm
  5. Non-Registration of Firm
  6. General Rules and Procedure
  7. Provisions of Section 184 Regarding Assessment of Firm
  8. Assessment in Case of Non-Compliance of Section 184
  9. Provisions of Section 40 (B) Regarding Assessment of Firm
  10. Computation of Book Profit
  11. Computation of Total Income of the Firm
  12. Computation of Tax Liability of the Firm
  13. Provisions of Alternate Minimum Tax (AMT) For Limited Liability Partnerships (LLP)
  14. Computation of Partner’s Income from The Firm
  15. Assessment of Reconstituted Firm
  16. Assessment in Case of Succession of One Firm by Another Firm
  17. Joint and Several Liabilities of Partners for Tax Payable by Firm
  18. Dissolution of A Firm or Discontinuance of Business
  19. Procedure of Tax Payment and Filing of Return of Income by Firms

18 Filing of Return and Tax Authorities

  1. Return of Income
  2. Submission of Return of Income [Section 139(1)]
  3. Due Dates for Filing the Return
  4. Central Government Empowered to Exempt any Person from the Requirement of Furnishing Return of Income [Section 139(1c)]
  5. Permanent Account Number (PAN) [Section 139(a)]
  6. Quoting of Aadhar Number [Section 139(aa)]
  7. New Scheme to Facilitate Submission of Returns through Tax Return Preparers [Section 139(b)]
  8. Selection of Correct Form of Return [Rule 12]
  9. Belated Return [Section 139(4)]
  10. Revised Return [Section 139(5)]
  11. Defective Return [Section 139(9)]
  12. Power of Board to Dispense with Furnishing Documents etc with the Return [Section 139(c)]
  13. Return of Losses [Section 139(3)]
  14. Types of Assessment
  15. E-Filing of Return [Section 139(d)]
  16. Tax Authorities
  17. Verification of Return [Section 140]
  18. Consequences of Delay in Filing Return
  19. Consequences of Incorrect Information

19 Online Filing of Returns

  1. What is Income Tax Return (ITR)?
  2. Documents required for filing ITR
  3. Advantages of filing ITR
  4. Benefits of E-Filing over Physical Filing of Returns
  5. Step to step guide for E-filing of returns
  6. Do’s and Don’ts of E-filing of Returns

20 Leading Cases Decided by Supreme Court

  1. Analysis of Bharat V. Patel Judgment, 2018 (Income from Salaries)
  2. Surya Roshni Ltd Vs. EPFO, 2019 LLR 339 (Provident Contribution on all Allowances)
  3. CIT Vs. Podar Cement (P) Ltd (House Property)
  4. Universal Plast Ltd. Vs. CIT (Income Earned by the Assessee by Leasing out Assets of Business)
  5. Shivakumar Kheny (HUF) v. ITOITA No. 792/Bang/2019 (Capital Gain)
  6. CIT vs. O. K. Arumugham Chettiar & Anr (Income from other sources)
  7. CIT v. M.R. Doshi 211 ITR 1 (Clubbing of Income)
  8. Quoting Aadhaar Mandatory for Filing Income Tax Returns and PAN Application