Section 40A(2)(b)

Section 40A(2)(b) — the law in short

What the courts have decided on section 40A(2)(b), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• PCIT v Future First Info Services P Ltd High CourtHelps taxpayerHigh Courts differ
  The AO says I short-deducted TDS on director remuneration. Can he disallow the payment under 40(a)(ia)?
  No. The Delhi High Court held that where there is short deduction of tax at source, disallowance cannot be made under s.40(a)(ia) and the correct course open to the officer is to invoke s.201.
• Patel Kenwood P Ltd v ITO ITATHelps taxpayerNo later treatment found
  The AO disallowed rent I pay to relatives just because they are related. Is that enough?
  No. When s.40A(2)(b) is invoked the onus to prove unreasonableness lies on the Assessing Officer alone, and identifying the payee as a related person does not discharge it. The partial disallowance of rent fell because the officer produced no conclusive evidence that the payment exceeded fair market value.
• Raipur Steel Casting India (P) Ltd v PCIT ITATHelps taxpayerUnder appeal
  The Commissioner has issued me a s.263 notice saying the Assessing Officer should have referred my s.40A(2)(b) payments to the TPO. Clause (i) of s.92BA was omitted in 2017. Can he still revise?
  No. Clause (i) of s.92BA was omitted by the Finance Act 2017 with effect from 1 April 2017 without any saving clause, and an omission is not a repeal, so s.6 of the General Clauses Act does not preserve anything built on it. The Tribunal held the provision must be treated as never having existed, and the Commissioner's revision order founded on a failure to refer specified domestic transactions to the TPO was quashed, the jurisdiction exercised being, in the order's own register, null in the eye of law.
• Statutory position — s.194C: one per cent for an individual or HUF and two per cent for everyone else, the thirty thousand and one lakh thresholds, and the material-bought-from-a-third-party carve-out that takes a contract outside "work" CBDT Circulars & InstructionsCuts both ways
  I pay a fabricator to make parts to my drawings and I pay lorry owners to move my goods. Do I deduct under section 194C, at what rate, and at what figure does the obligation start — is it thirty thousand rupees or one lakh?
  Both figures are live and they do different jobs. Section 194C(5) says no deduction is to be made where the single sum credited or paid does not exceed thirty thousand rupees, and its proviso says that once the aggregate of such sums in the financial year exceeds one lakh rupees you must deduct under the section anyway. So a single bill of Rs 35,000 is caught on its own, and a run of Rs 12,000 bills is caught the moment the year's total passes Rs 1,00,000. The rate is one per cent where the payee is an individual or a Hindu undivided family and two per cent in every other case. Whether the fabrication is "work" at all depends on whose material is used: manufacturing to your specification out of material bought from you (or from an associate of yours) is "work"; the same job done out of material the fabricator bought from anyone else is expressly excluded, and that exclusion is the line between section 194C and a contract for sale. All of this is the 1961 Act, which the CBDT's own transition FAQ says stands repealed on 1 April 2026: for a credit or payment on or after that date the corresponding provision is section 393(1) of the Income-tax Act, 2025, which carries the same rates and the same two figures.
• Statutory position — s.92BA: clause (i) was OMITTED with effect from 1 April 2017, so a s.40A(2)(b) payment is no longer a specified domestic transaction — what survives, the twenty crore threshold, and clause (va) added for s.115BAB companies CBDT Circulars & InstructionsCuts both ways
  The TPO has been asked to benchmark our payments to related parties under s.40A(2)(b). Is that still a specified domestic transaction at all?
  No. Clause (i) of s.92BA — "any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of sub-section (2) of section 40A" — was OMITTED by Act No. 7 of 2017 with effect from 1 April 2017, and the omitted words are set out in an amendment footnote, so there is no doubt what went. What survives is: clause (ii), any transaction referred to in s.80A; clause (iii), any transfer of goods or services referred to in s.80-IA(8); clause (iv), any business transacted between the assessee and another person as referred to in s.80-IA(10); clause (v), any transaction referred to in any other section under Chapter VI-A or s.10AA to which s.80-IA(8) or (10) applies; clause (va), any business transacted between the persons referred to in s.115BAB(6), inserted by Act No. 46 of 2019 with effect from 1 April 2020; and clause (vi), any other transaction as may be prescribed. The whole definition applies only "where the aggregate of such transactions entered into by the assessee in the previous year exceeds a sum of twenty crore rupees" — the word "twenty" having been substituted for "five" by the Finance Act, 2015 with effect from 1 April 2016.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.