Section 35 — Amounts Not Deductible | ITA 2025

Section 35 — - AMOUNTS NOT DEDUCTIBLE

Section 35 is the master disallowance provision under PGBP -- substantive equivalent of 1961 ss. 40 / 40A / 40(b) consolidated. The opening words 'Irrespective of any other provision of Chapter IV-D' make this a NON-OBSTANTE clause overriding all other PGBP-deduction provisions. Six broad categories: (a) tax paid on income / employer-paid tax / foreign tax for which relief is eligible; (b) TDS-default disallowance (30% for resident payments; 100% for non-resident payments) -- the section 40(a)(ia) / 40(a)(i) regime now consolidated; (c) salary outside India / NR-payment without TDS; (d) State-Govt-undertaking levies; (e) partner remuneration / interest in firm beyond statutory ceilings; (f) AOP / BOI member payments. Practitioner-grade rule: every PGBP deduction claimed must be tested against s. 35 disallowance grid before final allowance.

Statutory text — Income-tax Act, 2025

Marginal note -- Amounts not deductible in certain circumstances

Irrespective of any other provision of Chapter IV-D, the following amounts shall not be allowed as deduction in computing the income chargeable under the head “Profits and gains of business or profession”:—

(a) any amount on account of—

(i) tax paid on income; or

(ii) tax paid by employer referred to in Schedule III (Table: Sl. No. 10); or

(iii) tax paid in any other country for which relief is eligible under section 159 or 160, and shall include any surcharge or cess on such tax, by whatever name called;

(b) (i) 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), so, however, that—

(A) where in respect of any such sum, tax is deducted in any subsequent year, or is deducted during the tax year but paid after the due date specified in section 263(1), 30% of such sum shall be allowed as a deduction in computing the income of the tax year, in which such tax has been paid;

(B) where the assessee is required to and fails to deduct whole or any part of the tax under Chapter XIX-B on any such sum but he is not deemed to be an assessee in default under section 398(2), then for the purposes of this sub-clause, the assessee shall be deemed to have deducted and paid the tax on such sum on the date on which the return has been filed by the payee referred to in section 398(2);

(ii) any interest, royalty, fees for technical services or other sum charge- able under this Act which is payable—

(A) outside India; or

(B) in India to a non-resident (which is not a company) or to a foreign company, 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), so, however, that —

(I) where in respect of any such sum, tax is deducted in any sub- sequent year, or is deducted during the tax year but paid after the due date specified in section 263(1), such sum shall be allowed as a deduction in computing the income of the tax year, in which such tax has been paid;

(II) where the assessee is required to and fails to deduct whole or any part of the tax under Chapter XIX-B on any such sum but he is not deemed to be an assessee in default under section 398(2), then for the purposes of this sub-clause the assessee shall be deemed to have deducted and paid the tax on such sum on the date on which the return has been filed by the payee as referred to in section 398(2);

(iii) any payment to a provident or other fund established for the benefit of employees of the assessee, unless the assessee has made effective arrangements to secure that tax shall be deducted at source under Chapter XIX-B from any payments made from the fund which are chargeable to tax under the head “Salaries”;

(c) any payment chargeable under the head “Salaries”, payable outside India or to a non-resident 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;

(d) any amount—

(i) paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called, which is levied exclusively on; or

(ii) which is appropriated, directly or indirectly, from, a State Government undertaking by the State Government;

(e) the expenditure incurred by a firm, assessable as such—

(i) in the nature of salary, bonus, commission or remuneration, by whatever name called (herein referred as remuneration) to a partner, who is not a working partner; or

(ii) on the remuneration to a working partner, and interest to any partner, if it is—

(A) not authorised by the partnership deed applicable for the period for which such remuneration or interest is paid; or

(B) authorised by and is as per the terms of partnership deed but relates to the period prior to the date of such partnership deed, or which was not authorised by the earlier partnership deed; or

(iii) on the aggregate remuneration to all working partners as author- ised by the partnership deed, exceeding the amount computed as under:—

(A) on the first ` 600000 of the book profit or in case of a loss, ` 300000 or at the rate of 90% of the book profit, whichever is higher;

(B) on the balance of the book profit, at the rate of 60%; or

(iv) on interest to any partner as authorised by the partnership deed, exceeding 12% simple interest per annum, so, however, that—

(A) where an individual is a partner in a firm, on behalf, or for the benefit, of any other person (such partner and the other person being herein referred to as “partner in a representative capacity” and “person so represented”, respectively),—

(I) interest paid by the firm to such individual otherwise than as partner in a representative capacity, shall not be taken into account for the purposes of this clause;

(II) interest paid by the firm to such individual as partner in a representative capacity and interest paid by the firm to the person so represented shall be taken into account for the purposes of this clause;

(B) where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person;

(v) in this clause—

(A) “book profit” means the net profit, as shown in the profit and loss account for the relevant tax year, computed as per Chapter IV-D as increased by the aggregate amount of the remuneration to all the partners of the firm, if such amount has been deducted while computing the net profit;

(B) “working partner” means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner;

(f) the expenditure incurred by an association of persons or a body of individuals (other than a company, or a co-operative society or society registered under the Societies Registration Act, 1860 (21 of 1860), or under any law corresponding to that Act in force in any part of India) in the nature of interest, salary, bonus, commission or remuneration, by whatever name called, made to a member of such association or body,

provided that—

(i) where the interest has been paid by the association or the body to its member and such member has also paid interest to the associ- ation or the body, then only such excess interest, if any, paid by the association or body shall not be allowed under this clause;

(ii) where an individual is a member of an association or a body on behalf, or for benefit of any other person, such member and any other person shall be referred as “representative member” and “person so represented”, respectively, then, the provisions of this clause—

(A) shall not be applicable in respect of interest paid to or received from, such individual otherwise than in his capacity as a representative member;

(B) shall be applicable in respect of interest paid to or received from, an individual in his capacity as a representative member and, the person so represented;

(C) shall not be applicable in respect of interest paid to a member,

otherwise than as representative member, on behalf or for the benefit of any other person. Expenses or payments not deductible in certain circumstances.

Corresponding provision — 1961 regime

INCOME-TAX ACT, 2025	INCOME-TAX ACT, 1961
INCOME-TAX ACT, 2025 -- s. 35	INCOME-TAX ACT, 1961
s. 35(a) -- Tax on income / employer-paid tax / foreign tax (with s. 159/160 relief)	1961 s. 40(a)(ii)/(iia)/(iib) and s. 40(a)(v)
s. 35(b)(i) -- 30% disallowance for TDS-default on payments to RESIDENT	1961 s. 40(a)(ia) [FA 2014 30% restriction]
s. 35(b)(ii) -- 100% disallowance for TDS-default on interest / royalty / FTS / other to NR / outside India	1961 s. 40(a)(i)
s. 35(b)(iii) -- Disallowance for unsecured PF contributions (no TDS undertaking)	1961 s. 40(a)(iv)
s. 35(c) -- Salary outside India / to NR without TDS	1961 s. 40(a)(iii)
s. 35(d) -- State-Govt-undertaking levies (royalty / licence fee / privilege fee)	1961 s. 40(a)(iib) [FA 2013]
s. 35(e) -- Firm partner remuneration / interest beyond statutory caps	1961 s. 40(b)
s. 35(f) -- AOP / BOI member remuneration / interest	1961 s. 40(ba)

STATUTORY ARCHITECTURE -- THE NON-OBSTANTE OVERRIDE

The opening words 'Irrespective of any other provision of Chapter IV-D' make s. 35 SUPERIOR to ss. 28-34 (general PGBP-deduction provisions including ss. 32 specified deductions, 33 depreciation, 34 amortisations). An expense passing the 'wholly and exclusively' test under s. 28 / a clause of s. 32 may STILL be disallowed if it falls within the s. 35 grid. Architecture: (I) Pure category disallowance (a, c, d) -- expense not deductible regardless of facts. (II) Conditional disallowance (b) -- TDS-default triggers proportionate / full disallowance, with cure-mechanism. (III) Quantitative ceiling (e, f) -- partner / member remuneration disallowed beyond statutory limits. Practitioner workflow: every P&L expense head goes through s. 35 grid in tax-audit Form 3CD; sample testing in CARO / IT-audit; AO scrutiny under s. 142(1)/143.

CLAUSE (a) -- TAX PAID ON INCOME (THREE LIMBS)

Three sub-limbs: (i) Tax on INCOME -- income-tax itself is not deductible. Codifies CIT v. Mahaveer Drilling Co (Cal HC) and the broad principle that income-tax is appropriation of post-tax profit, not business expense. Includes any surcharge or cess (the cess controversy between Sesa Goa (Bom HC) and IT department was resolved in favour of disallowance by FA 2022 retro). (ii) Tax PAID BY EMPLOYER on perquisite salary [referenced in Schedule III Table Sl. No. 10] -- the employer-paid tax under Eli Lilly principle (typical for cross-border employees / expat). The employer cannot deduct this as business expense; it is treated as appropriation. (iii) Tax paid IN ANY OTHER COUNTRY for which RELIEF is eligible under s. 159 (DTAA relief) or s. 160 (unilateral relief). The logic: if foreign tax is creditable against Indian tax via DTAA / unilateral, allowing it as deduction in addition would be double-relief. NB: foreign tax NOT eligible for relief (e.g., refundable / non-creditable foreign tax) IS deductible -- not caught by clause (a)(iii). Includes 'any surcharge or cess on such tax, by whatever name called' -- closes any gap. Practitioner alert: Indian companies operating abroad must classify foreign tax into 'creditable' (DTAA / unilateral) and 'non-creditable' (typically transactional taxes, withholding on dividend etc.); only non-creditable is deductible.

CLAUSE (b)(i) -- 30% DISALLOWANCE FOR RESIDENT TDS-DEFAULT

30% of any sum payable to a RESIDENT, on which TDS is deductible under Chapter XIX-B, is disallowed if: (i) tax NOT deducted; OR (ii) tax deducted but NOT paid up to the due date specified in s. 263(1) [equivalent of 1961 s. 200 due date for TDS deposit]. CURE MECHANISM (clause b(i)(A)): if TDS is deducted in any SUBSEQUENT year, OR deducted in tax year but paid AFTER s. 263(1) due date, then 30% is allowed as deduction in the YEAR OF PAYMENT of TDS. Effectively defers but does not lose the deduction. DEEMING-PROVISION (clause b(i)(B)): if assessee fails to deduct TDS but is NOT 'assessee in default' under s. 398(2) (because the resident payee has filed return and paid tax), then assessee is DEEMED to have deducted and paid TDS on the date payee filed return. Effective payee-pays-AOK shield -- no disallowance to payer. Codifies Hindustan Coca-Cola Beverages (SC, 2007, 293 ITR 226) and post-2012 first proviso to 1961 s. 40(a)(ia). Practitioner: Form 26A certification from payee (showing return-filing and tax-payment) preserves deduction even where payer failed to TDS.

CLAUSE (b)(ii) -- 100% DISALLOWANCE FOR NR / OUTSIDE-INDIA TDS-DEFAULT

Any interest / royalty / fees for technical services / other sum chargeable under this Act, payable: (A) OUTSIDE INDIA; OR (B) IN INDIA TO A NON-RESIDENT (which is not a company) OR FOREIGN COMPANY, on which TDS deductible under Chapter XIX-B and during tax year tax not deducted / deducted but not paid by s. 263(1) due date -- 100% DISALLOWED (i.e., the entire payment is disallowed -- not 30% as for residents). CURE MECHANISM (clause b(ii)(I)): if TDS deducted in subsequent year / deducted in tax year but paid after due date, the FULL SUM is allowed in the year of TDS payment. DEEMING-PROVISION (clause b(ii)(II)): if assessee fails to deduct but is not assessee-in-default under s. 398(2) [NR-payee filed return and paid tax in India], deemed to have deducted on payee's return-filing date. The HARSHER 100% (vs 30% for residents) reflects greater audit-and-recovery difficulty for cross-border payments. CIT v. PILCOM (SC, 2020, 425 ITR 477) clarified that even multi-currency cross-border payments to NR are caught.

CLAUSE (b)(iii) -- UNSECURED PROVIDENT FUND CONTRIBUTIONS

Payment to a provident or other fund established for benefit of employees is disallowed unless assessee makes 'effective arrangements' for TDS under Chapter XIX-B on payments from the fund chargeable as 'Salaries'. Effectively: an unrecognised PF / employees-trust must have TDS-deduction protocol (typically a deed-clause requiring trustee to deduct TDS on superannuation / retirement payouts). Without such arrangement, employer's contribution to fund is disallowed. Codifies SETU Rules and the rationale that employer-fund-contribution should not escape deferred-salary-taxation.

CLAUSE (c) -- SALARY OUTSIDE INDIA / NR WITHOUT TDS

Any payment chargeable under 'Salaries' head, payable OUTSIDE INDIA or to a NR, on which TDS deductible under Chapter XIX-B and not deducted / not paid -- DISALLOWED. Distinct from clause (b)(ii) (which covers interest / royalty / FTS); clause (c) specifically targets salary payments. Common scenarios: deputation packages to expat employees overseas (where Indian employer pays salary in foreign jurisdiction); salary to NR-CEO / NR-director. TDS under s. 192 of 2025 Act / s. 192 of 1961 Act applies even to outside-India salary if employment income is sourced in India. Practitioner: cross-border employer-employee package compliance -- gross-up for tax, deduct TDS under Indian rules, deposit to Indian Treasury -- failure triggers full-salary disallowance.

CLAUSE (d) -- STATE-GOVT-UNDERTAKING LEVIES

Inserted FA 2013 to address bidding / privilege-fee structures for State-undertakings (typically liquor PSUs, mining corporations). Disallows: (i) any royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge by whatever name called LEVIED EXCLUSIVELY ON a State-Govt-undertaking by the State Government; or (ii) APPROPRIATED directly or indirectly from a State-Govt-undertaking by the State Government. Background: certain State Governments were charging exclusive 'privilege fees' from their PSUs (typically liquor distilleries / mines) and the PSUs were claiming deduction -- effectively shifting profit to State Govt without tax-payment. Anti-shifting rule. Codified post Karnataka State Beverages Corporation type structures. Practitioner relevance: State PSU tax computations -- review fee / charge / royalty paid to State Govt; if exclusive nature, disallowed.

CLAUSE (e) -- FIRM PARTNER REMUNERATION / INTEREST CAPS

FOUR sub-conditions on firm's deduction for partner remuneration / interest: (i) NON-WORKING PARTNER: ANY remuneration to non-working partner is DISALLOWED in the firm's hands. 'Working partner' = individual ACTIVELY engaged in conducting affairs of firm's business [sub-clause (e)(v)(B)]. Sleeping / silent / financier partners do not qualify. (ii) WORKING PARTNER REMUNERATION (and interest to ANY partner): (A) NOT AUTHORISED by partnership deed in force for the period; OR (B) AUTHORISED but RELATES TO PERIOD PRIOR to the date of partnership deed, or NOT AUTHORISED by earlier deed -- DISALLOWED. (iii) AGGREGATE WORKING-PARTNER REMUNERATION CEILING: (A) on FIRST INR 6,00,000 of book profit (or, in case of loss, INR 3,00,000): higher of [INR 3L or 90% of book profit]; (B) on BALANCE of book profit: 60%. Note: FA 2024 enhanced the ceiling -- 1961 s. 40(b)(v) earlier read INR 3L / 90% / 60%; 2025 Act with FA 2024 backbone reads INR 6L / 90% / 60% -- updated for inflation. (iv) INTEREST TO PARTNER: rate authorised by deed cannot exceed 12% SIMPLE per annum -- excess disallowed. Sub-clause (e)(iv)(A) and (B) clarify representative-capacity rules: where individual is partner on behalf of/for benefit of another (representative partner), interest paid to/from such partner is not double-counted. Definitions in (e)(v): 'book profit' = net profit per P&L for tax year, computed per Chapter IV-D, INCREASED by aggregate partner remuneration if deducted in P&L. Working-partner per sub-clause (B). Practitioner: review partnership deed for: (i) authorising clause; (ii) working / non-working classification; (iii) interest rate within 12%; (iv) effective-period coverage. Rectifications via deed-amendment must be PROSPECTIVE -- retroactive amendment doesn't cure pre-amendment disallowance.

CLAUSE (f) -- AOP / BOI MEMBER PAYMENTS

AOP / BOI (other than company / co-op society / society registered under Societies Registration Act 1860) cannot deduct interest / salary / bonus / commission / remuneration paid to its MEMBERS. Provisos: (i) where AOP/BOI receives interest from a member AND also pays interest to that member, only EXCESS of [paid - received] is disallowed (netting); (ii) representative-capacity rule: interest paid to/received from individual member in representative capacity is NOT subject to clause (f) (i.e., representative-capacity interest is allowed as deduction); but interest paid to representative-capacity individual AND person-represented IS subject (i.e., disallowed). Background: AOP / BOI members are essentially the AOP itself (akin to partners in firm); allowing deduction would create asymmetric tax-arbitrage. Excludes registered societies and corporates (different tax-regime). Practitioner relevance: trade associations / chamber bodies / housing societies operating as AOPs -- review payments to office-bearers; pure honorarium often re-classified.

CASE LAW -- LEADING DECISIONS

(i) CIT v. Eli Lilly & Co (India) (P) Ltd (SC, 2009, 312 ITR 225) -- employer-paid tax on expat perquisite; foundational for clause (a)(ii). (ii) Hindustan Coca-Cola Beverages P Ltd v. CIT (SC, 2007, 293 ITR 226) -- payee-pays-AOK shield; codified in clause (b)(i)(B) deeming provision. (iii) GE India Technology Centre P Ltd v. CIT (SC, 2010, 327 ITR 456) -- TDS on cross-border payments; only chargeable-under-Act payments require TDS. (iv) CIT v. Sesa Goa Ltd (Bom HC) -- cess-on-tax deductibility; legislatively reversed by FA 2022 retro to make it disallowed. (v) CIT v. PILCOM (SC, 2020, 425 ITR 477) -- TDS on cross-border match-fees to Pakistan Cricket Board; clause (b)(ii). (vi) Calcutta Export Co v. CIT (SC, 2018, 404 ITR 654) -- 30%-disallowance pre-FA 2014; ad-hoc method. (vii) CIT v. Ajit Marketing & Mfg Co Ltd (Cal HC) -- non-working partner remuneration disallowance under clause (e)(i). (viii) CIT v. Karnataka State Industrial Investment & Devlopment Corp (Kar HC) -- privilege fee analysis under clause (d). (ix) Union of India v. Cadell Weaving Mill (Bom HC) -- TDS-default cure mechanism precedent. (x) CIT v. Asea Brown Boveri Ltd (Bom HC) -- cross-border salary payment; clause (c).

PLANNING NOTES (TEN AREAS)

(i) INCOME-TAX / CESS DISALLOWANCE (a) -- post FA 2022 retro, cess is no longer deductible; review past-year claims for revision risk. (ii) FOREIGN TAX (a)(iii) -- bifurcate creditable (DTAA / unilateral via s. 159/160) from non-creditable; only non-creditable is deductible. (iii) RESIDENT TDS-DEFAULT (b)(i) -- maintain TDS-payment-by-due-date discipline; collect Form 26A from residents whose TDS missed; quarterly TDS reconciliation. (iv) NR / OUTSIDE-INDIA TDS-DEFAULT (b)(ii) -- 100% disallowance is severe; cure via subsequent year deduction; verify NR-payee's PAN / Form 10F; review TRC for DTAA benefits. (v) PF CONTRIBUTION (b)(iii) -- ensure trust-deed has TDS-deduction protocol; otherwise contribution disallowed. (vi) NR SALARY (c) -- expat / cross-border employee package compliance; gross-up + Indian-treasury TDS deposit. (vii) STATE-PSU LEVIES (d) -- review fees paid to State Govt by PSUs for 'exclusive' character; structure as general taxes (allowable) vs exclusive privilege fees (disallowed). (viii) PARTNER REMUNERATION (e) -- annual partnership-deed review; classify working / non-working partners; remuneration within statutory ceilings (FA 2024 enhanced INR 6L / 90% / 60%); interest within 12% simple. (ix) AOP MEMBER (f) -- for trade-association style AOPs, review office-bearer honoraria; representative-capacity netting rules apply. (x) FORM 3CD COMPLIANCE -- ensure tax-audit Form 3CD clauses 21(b)/(g)/(h) accurately disclose TDS-default and disallowance computations; AO scrutiny commonly targets these clauses.

CROSS-REFERENCES

Section 28 / 32 / 33 / 34 -- General and specified PGBP deductions (overridden by s. 35 non-obstante).
Schedule III Table Sl. No. 10 -- employer-paid tax on perquisite (clause a(ii)).
Section 159 / 160 -- DTAA / unilateral foreign tax relief (clause a(iii)).
Chapter XIX-B -- TDS provisions (clauses b, c).
Section 263(1) -- TDS deposit due date.
Section 398(2) -- Assessee in default.
Section 192 -- TDS on salaries.
Section 277 -- Form 26A certification from resident payee.
Section 401 / 402 -- Failure to deduct interest / penalty.
Form 3CD clauses 21(b)/(g)/(h) -- tax-audit disclosure of disallowances.
Form 26A -- resident-payee certification preserving payer's deduction.
Form 10F + TRC -- NR documentation for DTAA benefit.
Societies Registration Act 1860 -- exclusion in clause (f) (registered societies regime).

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