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Case law › Income-tax Act 2025 › Chapter IV › Section 35
Chapter IVwas s.40

Section 35 of the Income-tax Act, 2025

Section 35 — Amounts not deductible in certain circumstances. Successor to s.40 of the 1961 Act.

Where this section sits

Section 35 is in Chapter IV — Computation of Total Income, which runs from section 13 to section 95.

← Section 34  ·  Section 36 →

What this section does

The section overrides the rest of Chapter IV-D and lists what may not be deducted under "Profits and gains of business or profession".

Clause (a) blocks tax on income: tax paid on income, tax paid by an employer referred to in Schedule III (Table: Sl. No. 10), and tax paid in another country for which relief is eligible under section 159 or 160 — including any surcharge or cess on such tax, by whatever name called.

Clause (b) blocks amounts on which tax was not withheld. Sub-clause (i) disallows 30% of a sum payable to a resident on which tax is deductible under Chapter XIX-B where it was not deducted, or was deducted but not paid up to the due date in section 263(1); item (A) allows that 30% in the year the tax is later paid, and item (B) deems deduction and payment on the date the payee filed his return where the assessee is not deemed to be an assessee in default under section 398(2). Sub-clause (ii) disallows the whole of any interest, royalty, fees for technical services or other chargeable sum payable outside India, or payable in India to a non-resident which is not a company or to a foreign company, with the same two reliefs in items (I) and (II). Sub-clause (iii) disallows payments to a provident or other employee fund unless effective arrangements secure deduction under Chapter XIX-B from payments out of the fund chargeable under "Salaries".

Clause (c) disallows salary payable outside India or to a non-resident where the tax deductible under Chapter XIX-B was not deducted or, after deduction, not paid. Clause (d) disallows any royalty, licence fee, service fee, privilege fee, service charge or other charge levied exclusively on, or appropriated directly or indirectly from, a State Government undertaking by the State Government.

Clause (e) governs a firm assessable as such. Remuneration to a non-working partner is disallowed outright. Remuneration to a working partner and interest to any partner are disallowed if not authorised by the partnership deed applicable for the period, or if authorised but relating to a period prior to that deed or not authorised by the earlier deed. Aggregate remuneration to working partners is disallowed to the extent it exceeds, on the first Rs 6,00,000 of book profit (Rs 3,00,000 in case of a loss) or 90% of the book profit, whichever is higher, plus 60% of the balance. Interest to a partner is capped at 12% simple interest per annum, with rules in items (A) and (B) for a partner in a representative capacity. Sub-clause (v) defines "book profit" as net profit per the profit and loss account computed under Chapter IV-D, increased by partner remuneration already deducted, and "working partner" as an individual actively engaged in conducting the firm's affairs.

Clause (f) does the parallel job for an association of persons or body of individuals other than a company, co-operative society or society registered under the Societies Registration Act, 1860, disallowing interest, salary, bonus, commission or remuneration to a member, with netting of interest and representative-member rules.

Why it is there

Two kinds of payment are kept out of the deduction column. Tax itself, including foreign tax for which relief is separately available, so the same levy is not both relieved and deducted. And payments made without the withholding the Act requires — the disallowance is what makes deduction at source happen, which is why it lifts once the tax is paid. Clauses (e) and (f) address a different mischief: a firm or association can otherwise turn taxable profit into deductible payments to its own partners or members.

Who it applies to

The figures, and what each one turns on

Read the condition in the same row. A figure quoted without it is a wrong answer with a citation attached.
WhatFigureThe condition on itWhere
Disallowance for non-deduction or non-payment on a sum payable to a resident30% of the sumTax deductible under Chapter XIX-B not deducted, or deducted but not paid up to the due date specified in section 263(1)Clause (b)(i)
Amount allowed back when the tax is later paid30% of such sumAllowed in computing income of the tax year in which the tax has been paidClause (b)(i)(A)
Disallowance on sums payable abroad or to a non-residentThe whole sumInterest, royalty, fees for technical services or other chargeable sum payable outside India, or in India to a non-resident which is not a company or to a foreign companyClause (b)(ii)
Ceiling on aggregate remuneration to working partners, first slabOn the first Rs 6,00,000 of book profit — Rs 3,00,000 or 90% of the book profit, whichever is higherRs 3,00,000 is the figure in case of a loss; the remuneration must also be authorised by the deedClause (e)(iii)(A)
Ceiling on aggregate remuneration, balance60% of the balance of the book profitApplied to book profit beyond the first Rs 6,00,000Clause (e)(iii)(B)
Ceiling on interest to a partner12% simple interest per annumInterest as authorised by the partnership deed; the excess is not deductibleClause (e)(iv)

What this means in practice

The two limbs of clause (b) bite differently and that difference decides most cases: a resident payee costs the payer 30% of the sum, a payment abroad or to a non-resident costs all of it. Neither disallowance is permanent — items (A) and (I) restore the deduction in the year the tax is paid, and items (B) and (II) deem it deducted and paid on the date the payee filed his return where section 398(2) protects the payer. On the firm side three conditions must all hold: the partner must be a working partner as defined, the payment must be authorised by a deed covering the period it relates to, and the aggregate must stay inside the clause (e)(iii) slab, computed on book profit after adding back remuneration already debited. A clause (e) disallowance does not end with the firm — section 288 (Table: Sl. No. 1) lets the partner's own assessment be amended to match.

An example

Illustrative only, and invented for this page. The figures are chosen to show the rule biting, not taken from any real matter.

A firm's book profit, after adding back partner remuneration already debited, is Rs 5,00,000. The deed authorises remuneration to two working partners and interest at 15% on partner capital of Rs 10,00,000. The remuneration ceiling is the higher of Rs 3,00,000 or 90% of Rs 5,00,000, that is Rs 4,50,000, so remuneration of Rs 6,00,000 suffers a Rs 1,50,000 disallowance. Interest of Rs 1,50,000 is cut to the 12% figure of Rs 1,20,000, disallowing a further Rs 30,000.

Where you meet this section

As additions in the scrutiny assessment of a business or a firm — clause (b) disallowances follow a comparison of the expense ledger with the tax deducted at source statements, and clause (e) disallowances follow a reading of the partnership deed. A partner meets it second-hand, through a section 288 amendment of his own assessment.

The words themselves

30% of any sum payable to a resident, on which tax is deductible at source under Chapter XIX-B and during the tax year, such tax has not been deducted or, after deduction, has not been paid up to the due date specified in section 263(1)
Section 35(b)(i), Income-tax Act, 2025.
on interest to any partner as authorised by the partnership deed, exceeding 12% simple interest per annum
Section 35(e)(iv), Income-tax Act, 2025.

What people get wrong

What this replaced, and what changed

1961 provisionWhat changed in the move
s.401. The non obstante clause widens. S.40 overrode only 'sections 30 to 38'; s.35 overrides 'any other provision of Chapter IV-D', which is the whole business-income computation code. 2. Three clauses are simply not carried forward: s.40(a)(ib) (consideration for a specified service on which equalisation levy was deductible), s.40(a)(ic) (fringe benefit tax) and s.40(a)(iia) (wealth-tax). The equalisation-levy disallowance is the live one of the three - there is no successor to it in s.35. 3. The elaborate five-limb Explanation to s.40(a)(iib) defining 'State Government undertaking' (corporation under a State Act, company with more than 50% State-held equity, and so on) is not reproduced in s.35(d), which simply says 'a State Government undertaking by the State Government'. 4. The definitional Explanations under s.40(a)(ia) - 'commission or brokerage', 'fees for technical services', 'professional services', 'work', 'rent', 'royalty', each borrowed from a TDS section - are not carried into s.35(b)(i); the 2025 Act relies on the definitions in s.402 instead. 5. S.40(a)(iii) required that 'the tax has not been paid thereon nor deducted therefrom'; s.35(c) recasts this as 'on which tax is deductible at source under Chapter xix-B and such tax has not been deducted or, after deduction, has not been paid', aligning it with the other TDS limbs. 6. 'whichever is more' in the partner-remuneration slab becomes 'whichever is higher' - no change of meaning. 7. The 30% limb now says the failure must occur 'during the tax year', a phrase s.40(a)(ia) did not use.

How we established this. Read s.35 of the 2025 Act against s.40 of the 1961 Act. Both are the 'amounts not deductible' provision for business income and both are drafted as a non obstante list. The clause a practitioner calls 40(a)(ia) is recognisable word for word in s.35(b)(i): 1961 - 'thirty per cent of any sum payable to a resident, on which tax is deductible at source under Chapter xvii-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139'; 2025 - 'thirty per cent of any sum payable to a resident, on which tax is deductible at source under Chapter xix-B and during the tax year, such tax has not been deducted or, after deduction, has not been paid up to the due date specified in section 263(1)'. The first proviso to s.40(a)(ia), restoring thirty per cent in the year the tax is paid, becomes item (A); the second proviso, deeming deduction and payment where the assessee is not an assessee in default under the first proviso to s.201(1), becomes item (B) with s.398(2) substituted for s.201(1). The rest maps limb for limb: s.40(a)(i) to s.35(b)(ii); s.40(a)(iv) to s.35(b)(iii); s.40(a)(iii) to s.35(c); s.40(a)(ii) with Explanation 3 (surcharge and cess) and s.40(a)(v) to s.35(a); s.40(a)(iib) to s.35(d); s.40(b) with its Explanations to s.35(e), carrying the same Rs. 6,00,000 / Rs. 3,00,000 / 90% / 60% slabs and the same 12% interest ceiling and the same definitions of 'book profit' and 'working partner'; s.40(ba) with its three Explanations to s.35(f).

Rules that serve this section

Rules of the Income-tax Rules, 2026 that work section 35. Where the rule’s own heading names the section we say so; the rest are marked on reading the rule, which is our derivation and not the department’s. A rule that serves the section silently and that we have missed will not appear here.

All of them are in the Rules 2026 index.

Circulars of the Board on this section

A circular binds the department, not you and not a court. Every one below was written under the 1961 Act; it reaches this section because the department’s own concordance carries the provision it names to this one.

See every circular and notification on this section, or the circulars index.

Case law carried across

Read this before you rely on it. Every decision below was decided under the Income-tax Act, 1961. It appears here because it is tagged to a 1961 provision that the department’s own mapping carries to section 35. That is an inference we have drawn, not a holding on the new section: where the words changed in the move, the reasoning may not survive. Treat this as the place to start looking, not as authority on the 2025 Act.

Explainers

Read with

What this page does not tell you. It does not reproduce the section. Everything above was written from the section’s own text as the Income Tax Department publishes it — the text is here, and nothing here is advice on your facts. Where a figure matters, read the sub-section it comes from.