Section 35 is the primary "disallowance section" for business and professional income. It details specific scenarios where expenditures even if incurred legitimately for business or profession are explicitly barred from being deducted, primarily due to non-compliance with TDS mandates or statutory restrictions.

It corresponds conceptually to the old Section 40(a) of the Income-tax Act, 1961.

Section 35

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 “PGBP”

It starts with the words "Irrespective of any other provision of Chapter IV-D", meaning that even if an expenditure is otherwise allowable under another section, it will still be disallowed if it falls under Section 35

Section 35(a)

any amount on account of–

(i) tax paid on income; or

(ii) Tax paid by employer on non-monetary perquisites

tax paid by employer referred to in Schedule III (TSN 10); or; 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;

Ex

A firm finishes the financial year with a net profit and pays an income tax of ₹3,00,000, along with a 4% health & education cess of ₹12,00,00.

When calculating its taxable profits under the head "PGBP", the firm cannot debit either the ₹3,00,000 tax or the ₹12,000 cess as a business expense.

Section 35(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),

If assessee make a payment (like professional fees, rent, commission, contract payments) to a resident in India and fail to deduct TDS, or deduct it but fail to pay it to the government by the return filing due date, 30% of that expenditure will be disallowed.

Section 35(b)(i)(A)

where in respect of any such sum, tax is deducted

in any subsequent year, or

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;

Ex

Mr A pays ₹1,000,000 as rent to an Indian resident but forgets to deduct TDS.

30% (₹300,000) is added back to the business income.

If Mr. A pays the TDS in the next tax year, they can claim that ₹300,000 deduction in that next year.

Section 35(b)(i)(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 u/s 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);

Refer guide on section 398(2)

Circular No.10/2013, dated 16.12.2013

The CBDT’s view is that the provisions of section 40(a)(ia) would cover not only the amounts which are payable as on 31st March of a previous year but also amounts which are payable at any time during the year. The statutory provisions are amply clear and in the context of section 40(a)(ia), the term "payable" would include "amounts which are paid during the previous year"s

Section 35(b)(ii)

any interest, royalty, fees for technical services or other sum chargeable 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), 

If assessee make payments like interest, royalties, or technical fees to a non-resident without deducting or paying TDS, 100% of the expenditure is disallowed.

Ex

If you pay a software license fee (royalty) of ₹500,000 to a US-based entity and fail to deduct TDS, the entire ₹500,000 is disallowed as an expense.

Section 35(b)(ii)(I)

where in respect of any such sum, tax is deducted

in any subsequent year, or

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;

Section 35(b)(ii)(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 u/s 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);

Section 35(b)(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”;

Section 35(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;

Section 35(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;

This prevents State Governments from draining profits from their public sector undertakings (PSUs) via arbitrary exclusive charges to avoid paying central income tax.

Ex

If a State Government levies a unique "Exclusive Privilege Fee" of ₹50,000,000 solely on its state-owned beverage corporation, that corporation cannot claim it as a tax-deductible expense.

Section 35(e)

the expenditure incurred by a firm, assessable as such–

(i) Remuneration to non-working Partner: 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) Intt and remuneration not as per Partnership deed

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) Remuneration Ceiling for all working partner

on the aggregate remuneration to all working partners as authorised by the partnership deed, exceeding the amount computed as under: –

(iv) Interest to any partner in excess of 12% p.a.

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;

The maximum allowable deduction for interest paid on a partner's capital is 12% simple interest per annum. Anything above this is disallowed.

Remuneration or interest paid without being explicitly authorized by the partnership deed is disallowed.

Ex

Remuneration Ceiling for all working partner

A firm has a book profit of ₹10,00,000.

On the first ₹600,000: 90% is ₹540,000.

On the remaining ₹400,000: 60% is ₹240,000.

Total maximum deduction allowed for working partners' salary = ₹780,000. If the firm actually paid them ₹900,000, then ₹120,000 is disallowed.

Section 35(e)(v)(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;

Section 35(e)(v)(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;

Section 35(f)

the expenditure incurred by an AOP or a BOI (other than a company, or a co-operative society or society registered under the Societies Registration Act, 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 AOP/ BOI provided that

(i) Excess interest to be disallowed

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

(ii) In case of representative member

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.