Related Party Transactions – Section 40A(2) of Income Tax Act,1961

• December 13, 2020
• CA Chandan Agarwal's Office

Introduction

Section 40A(2) of Income Tax Act, 1961 deals with payments to relatives and associated persons.

It provides that where the assessee incurs any expenditure in respect of which payment is to be made to a specified person and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as deduction.

For example if an assessee purchases goods from specified person for Rs.25,000 and debits the said amount in the Profit and Loss Account. But the fair market value of such goods is only Rs.20,000. This means, the assessee should have charged only Rs. 20,000 in the Profit and Loss A/c.

Therefore, according to section 40A(2) of Income Tax Act, 1961, excess amount of Rs.5,000 is to be added back to net profit while computing business income of the assessee.

Read more on: https://taxguru.in/income-tax/related-party-transactions-section-40a2-income-tax-act-1961.html