Section 35: amounts not deductible in certain circumstances

Taxes and cess on income are never deductible

Section 35(a) disallows any amount paid on account of tax on income, tax paid by the employer as referred to in Schedule III (Sl. No. 10), or tax paid in another country for which relief is available under sections 159 or 160 - and this includes any surcharge or cess on such tax, whatever it may be called.

Disallowance for non-deduction or late deposit of TDS

Section 35(b) disallows 30% of any sum payable to a resident on which tax was deductible at source under Chapter XIX-B, if the tax was not deducted, or was deducted but not deposited by the due date under section 263(1). If the tax is later deducted (in a subsequent year) or deposited after the due date, that 30% becomes deductible in the year the tax is actually paid.

For payments to a non-resident or foreign company (interest, royalty, fees for technical services, or other sums chargeable under the Act, payable outside India or in India), the entire sum - not just 30% - is disallowed if TDS was not deducted or deposited by the due date, with similar relief once the tax is deducted/paid.

Payments to a provident or other employee welfare fund are disallowed unless the assessee has made effective arrangements to ensure TDS is deducted at source on payments from the fund that are taxable as "Salaries".

Section 35(c) similarly disallows any salary payment payable outside India or to a non-resident, if tax deductible at source on it has not been deducted, or has been deducted but not deposited.

Payments to or from State Government undertakings

Section 35(d) disallows amounts paid by way of royalty, licence fee, service fee, privilege fee, service charge or any similarly named fee/charge that is levied exclusively on, or appropriated directly or indirectly from, a State Government undertaking by the State Government.

Restrictions on partnership firm remuneration and interest

Section 35(e) disallows a firm's expenditure on remuneration to a non-working partner entirely, and disallows remuneration/interest to any partner that is not authorised by, or does not follow, the partnership deed applicable for that period.

Even when authorised, the aggregate remuneration to all working partners is deductible only up to specified limits based on "book profit" (defined in the section), and interest to any partner is deductible only up to 12% simple interest per annum.

Similar restriction for associations of persons and bodies of individuals

Section 35(f) applies a parallel disallowance to interest, salary, bonus, commission or remuneration paid by an association of persons or body of individuals (other than a company, co-operative society, or society registered under the Societies Registration Act, 1860) to its own members, with specific rules for netting interest paid and received between the entity and a member.

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