Every business incur expenses to generate income. These business expenditures are deducted out of total revenues to calculate taxable income under the head “profits and gains of business or profession”.
However, for calculating tax liability of your business or profession, you are required to comply various provisions of Income Tax Act 1961.
Certain expenditures are specifically disallowed while calculating tax liability of your business or profession.
In some other cases, you need to satisfy certain conditions to get the expenses as tax deductible.
In this article, we have listed certain expenses disallowed while computing tax liability of your business or profession.
Following expenses are disallowed while calculating business income taxable under the head “profits and gains of business or profession”:
- Personal expenses – Section 37(1)
- Advertisement expenses incurred by advertising in souvenir, brochure, pamphlet etc of political parties – Section 37(2B).
- Rates or taxes levied on profit or gains of business or profession – section 40(a)(ii).
- Tax of the employee paid by the employer u/s 10(10cc).
- Fines and penalties paid for violation or infringement of any law – Section 37(1)
While calculating taxable income under the head “profits and gains from business or profession ” you are not allowed to claim capital expenses as tax deductible in the year of payments.
Capital expenses are recorded as assets and the entire cost is recovered by charging depreciation over a period of time based on its use. Examples of capital asset includes computers, plant and machinery, furniture etc.
Expenses can also be disallowed in following cases where tax has not been deducted or deducted but not deposited with the government.
- Any payment made to a resident on which tax has to be deducted as per different sections of income tax act, but it’s not deducted or after deduction, it has not been deposited with the government on or before the due date of filing as specified under section 139(1) – section 40(a)(ia).
- Interest, royalty, fees for technical services or other similar sum payable to a non-resident or foreign company on which tax has to be deducted but TDS amount not deducted or after deduction it has not been deposited with the government on or before the due date of filing as specified in section 139(1).
- Salaries paid to a non-resident without deduction of tax at source – 40(a)(iii).
Please remember, as a general rule, you can’t deduct expenses if you don’t have record to show that the expenditures are genuine and incurred for your business. Or else, expenses will be considered as bogus expenditure.
For better compliance, you can hire a tax expert to manage your day to day operations and maintain books of account as required by tax laws.