This is a non-obstante clause. It establishes that the provisions laid out under Section 36 will apply regardless of any contrary provisions found elsewhere in the Act concerning the computation of "PGBP”.

Section 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 “PGBP”.

If an expense is allowed under general business deduction rules but is restricted by Section 36, Section 36 takes absolute precedence.

Section 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 AO 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.

Ex

An individual running a retail apparel business hires their younger brother as a social media manager and pays him a salary of ₹1,20,000 per month.

The fair market value salary for a professional with similar qualifications and experience in the open market is ₹50,000 per month.

The AO can disallow the excessive portion of ₹70,000 per month under this sub-section.

Section 36(3)

For the purposes of sub-section (2) and this sub-section

(a) “specified person” shall mean the following, –

(i) in relation to an assessee mentioned in column B of the Table below, the person referred to in column C thereof: —

Table

(ii) any person being an individual or company or firm or AOP or HUF 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) a company, firm, AOP, or HUF 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) any person carrying on a business or profession, were assessed, 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;

Section 36(3)(b)

For the purposes of sub-section (2) and this sub-section

a person is deemed to have “substantial interest in the business or profession” if—

(i) in a case where the business or profession is carried on by a company, such person is, at any time during the tax year, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) carrying not less than 20% of the voting power; and

(ii) in any other case, such person is, at any time during the tax year, beneficially entitled to not less than 20% of the profits of such business or profession.

Section 36(4)

Where in respect of any expenditure incurred by the assessee, any payment or aggregate of payments

made in a day to a person exceeds ₹10000 and

is not made through specified banking or online mode,

then the expenditure by way of such payments shall not be allowed as a deduction.

Ex

If, in respect of an expenditure of Rs.32,000 incurred by X Ltd., 4 cash payments of Rs.8,000 are made on a particular day to one Mr. Y – one in the morning at 10 a.m., one at 12 noon, one at 3 p.m. and one at 6 p.m., the entire expenditure of Rs.32,000 would be disallowed u/s 36(4), since the aggregate of cash payments made during a day to Mr. Y exceeds Rs.10,000.

Section 36(5)

Where any deduction was allowed 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 ₹10000 and

is not made through specified banking or online mode,

such payment shall be deemed to be the income under the head “PGBP” in such subsequent tax year.

Section 36(6)

For the purposes of sub-sections (4) and (5),

the figures “₹10000” shall be read as “₹35000” in case the payment is made for plying, hiring or leasing of goods carriages.

Section 36(7)

The provisions of sub-sections (4) and (5) shall not be applicable in cases and circumstances, as may be prescribed,

having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors.

Rule 26(1)

No disallowance u/s 36(4) shall be made and no payment shall be deemed to be the profits and gains of business or profession u/s 36(5) 

where a payment or aggregate of payments made to a person in a day, otherwise than by a specified banking or online mode or through such other electronic mode as provided in rule 48,

exceeds Rs.10,000, in the following cases and circumstances: -

(a) where the payment is made to-

(i) RBI or any banking company as defined in clause 5(c) of the Banking Regulation Act, 1949; or

(ii) SBI or any subsidiary bank as defined in section 2 of the SBI (Subsidiary Banks) Act, 1959; or

(iii) any co-operative bank or land mortgage bank; or

(iv) any primary agricultural credit society or any primary credit society as defined u/s 56 of the Banking Regulation Act, 1949; or

(v) LIC of India established u/s 3 of the Life Insurance Corporation Act, 1956;

(b) where the payment is made to the Government and, under the rules framed by it, such payment is required to be made in legal tender;

(c) where the payment is made by-

(i) any letter of credit arrangements through a bank; or

(ii) a mail or telegraphic transfer through a bank; or

(iii) a book adjustment from any account in a bank to any other account in that or any other bank; or

(iv) a bill of exchange made payable only to a bank;

(d) where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee;

(e) where the payment is made for the purchase of–

(i) agricultural or forest produce; or

(ii) the produce of animal husbandry (including livestock, meat, hides and skins) or dairy or poultry farming; or

(iii) fish or fish products; or

(iv) the products of horticulture or apiculture, to the cultivator, grower or producer of such articles, produce or products;

(f) where the payment is made for the purchase of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such products;

(g) where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town;

(h) where any payment is made to an employee of the assessee or the heir of any such employee,

on or in connection with the retirement, retrenchment, resignation, discharge or death of such employee,

on account of gratuity, retrenchment compensation or similar terminal benefit and

the aggregate of such sums payable to the employee or his heir does not exceed Rs.50,000;

(i) where the payment is made by an assessee by way of salary to his employee after deducting the income tax from salary in accordance with section 392, and when such employee–

(i) is temporarily posted for a continuous period of 15 days or more in a place other than his normal place of duty or on a ship; and

(ii) does not maintain any account in any bank at such place or ship;

(j) where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person;

(k) where the payment is made by an authorised dealer or a money changer against purchase of foreign currency or travellers’ cheques in the normal course of his business.

Section 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.

If a payment is made through the specified banking or online mode in compliance with sub-sections (4) to (7), then no person can challenge the validity of that payment merely because it was not paid in cash or through any other mode.

Ex

A company enters into an agreement with a transporter stating, "Freight charges shall be paid in cash."

However, u/s 36(4) to (7), the company is required to make the payment through a prescribed banking mode. Accordingly, the company pays ₹2,00,000 through bank transfer.

Later, the transporter files a case claiming, "The amount was not paid because payment was not made in cash as required by the contract."

Because of Section 36(8), such a claim will not be accepted.

The payment through bank transfer will be treated as a valid payment.

Section 36(9)

No deduction or allowance shall be allowed in respect of marked to market loss or other expected loss, except as allowable u/s 32(1)(h).