Expenses or payments not deductible in certain circumstances
[As per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 36(1) of Income Tax Act 2025
36(1) The provisions of this section shall have effect irrespective of anything to the contrary contained in any other provision of this Act relating to computation of income under the head “Profits and gains of business or profession”.
Section 36(2) of Income Tax Act 2025
36(2) If the assessee incurs any expenditure for which payment has been or is to be made to any “specified person”, which in the opinion of the Assessing Officer is excessive or unreasonable having regard to the––
- (a) fair market value of the goods, services or facilities; or
- (b) legitimate needs of the business or profession of the assessee; or
- (c) benefit derived by or accruing to the assessee therefrom,
- so much of the expenditure as considered excessive or unreasonable by him shall not be allowed as a deduction.
Section 36(3) of Income Tax Act 2025
36(3) For the purposes of sub-section (2),––
- (a) “specified person”,––
- (i) in relation to an assessee mentioned in column B of the Table below, shall be the person referred to in column C thereof:—
Table
| Sl. No. | Assessee | Specified person |
|---|---|---|
| A | B | C |
| 1. | Individual. | Any relative of the assessee |
| 2. | Company. | Any director of the company or his relative |
| 3. | Firm. | Partner of the firm or its relative |
| 4. | Association of persons | Member of the association or its relative. |
| 5. | Hindu undivided family. | Member of the family or his relative. |
- (ii) shall mean any person being an individual or company or firm or association of persons or Hindu undivided family having substantial interest in the business or profession of the assessee, or any director, partner, member thereof or any relatives of such individual, director, partner, member or any other company in which the first mentioned company has substantial interest;
- (iii) shall mean a company, firm, association of persons, or Hindu undivided family whose director, partner or member has substantial interest in the business or profession of the assessee, or any director, partner or member thereof and their relatives, as the case may be;
- (iv) shall mean any person carrying on a business or profession, in which assessee, being––
- (A) an individual or his relative; or
- (B) a company, its directors or their relatives; or
- (C) a firm, its partners or their relatives; or
- (D) an association of persons, its members or their relatives; or
- (E) a Hindu undivided family, its members or their relatives,
- has substantial interest in the business or profession of such person;
(b) a person is deemed to have “substantial interest in the business or profession” if, at any time during the tax year, such person is—
- (i) the beneficial owner of shares (not being shares entitled to fixed rate of dividend with or without a right to participate in profits) carrying at least 20% of the voting power, in case of assessee being a company; and
- (ii) entitled to at least 20% of the profits of the business or profession in any other case, at any time during the tax year.
Section 36(4) of Income Tax Act 2025
36(4) Where any expenditure is incurred by the assessee and payment or aggregate of payments made in a day to a person is exceeding ten thousand rupees and is not through specified banking or online mode, then the expenditure by way of such payments shall not be allowed as deduction.
Section 36(5) of Income Tax Act 2025
36(5) Where any deduction was made in any preceding tax year for a liability incurred for any expenditure and payment in respect of such liability is made during a subsequent tax year and if such payment or aggregate of payments made in a day to a person exceeds ten thousand rupees and is not through specified banking or online mode, such payment shall be deemed to be the income under the head “Profits and gains of business or profession” in such subsequent tax year.
Section 36(6) of Income Tax Act 2025
36(6) For the purposes of sub-sections (4) and (5), the figure “ten thousand rupees” shall be read as “thirty-five thousand rupees” in case the payment is made for plying, hiring or leasing of goods carriages.
Section 36(7) of Income Tax Act 2025
36(7) The provisions of sub-sections (4) and (5) shall not be applicable in cases and circumstances, as prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors.
Section 36(8) of Income Tax Act 2025
36(8) Nothing (with reference to mode of payment) contained in any other law in force or in any contract, shall apply in respect of any payment which has been made through specified banking or online mode, in compliance of sub-sections (4) to (7), and no plea shall be allowed to be raised, in any suit or other proceeding on the ground that the payment was not made or tendered in cash or in mode other than through specified banking or online mode.
FAQs on Section 36 of Income Tax Act 2025
- What does Section 36 of the Income Tax Act, 2025 deal with?
It outlines circumstances where business or professional expenses are not allowed as deductions while computing income. - Does Section 36 override other provisions?
Yes, Section 36(1) overrides all contrary provisions related to business income computation.
- What happens if I pay excessive amounts to a related party?
The excess portion may be disallowed as a deduction if deemed unreasonable by the Assessing Officer. - Who is considered a “specified person”?
It includes relatives, partners, directors, members, or any person having substantial interest in the assessee’s business. - What is “substantial interest”?
Holding ≥ 20% of voting power (for companies) or entitlement to ≥ 20% of profits (others) anytime during the tax year. - How is fair market value relevant here?
Payments above the fair market value of goods/services may be considered excessive and disallowed.
- Are cash payments above ₹10,000 deductible?
No. Any payment exceeding ₹10,000 in a day to a person (not through banking or online mode) is not deductible. - What is the cash payment limit for transport-related expenses?
For plying, hiring, or leasing goods carriages, the limit is ₹35,000. - What happens if I previously claimed a deduction but paid in cash later?
That payment will be added back as business income in the year it’s made in violation of Section 36(5). - What are “specified modes” of payment?
Payments must be made via banking channels or online methods—cash is not acceptable above prescribed limits. - Are there exceptions to the cash payment rule?
Yes. Sub-section (7) allows exceptions based on prescribed conditions like lack of banking facilities or business expediency.
- Can a contract require cash payment despite this section?
No. Section 36(8) states that contractual or legal provisions requiring cash payments cannot override the law. - Can a taxpayer challenge disallowance for cash payments in court?
Not successfully, if the payment was made in cash in violation of the section—even if allowed under contract or state law. - Does the ₹10,000 limit apply per invoice or per day?
It applies per person, per day, not per invoice. - What documentation is needed to support electronic payments?
Maintain banking records, UTR numbers, or payment confirmations to prove compliance with specified modes.
Section 36 of the Income Tax Act, 2025 aims to prevent tax avoidance by disallowing certain deductions. It restricts deductions for excessive payments to related parties, mandates non-cash payments for expenses over specified thresholds, and provides detailed definitions of “specified persons” and “substantial interest.”
Violations, especially related to cash transactions or unreasonable payments, can lead to disallowance or income additions. These provisions ensure transparency, traceability, and fairness in computing business or professional income under the Act.
