Related Party Transaction section(40)A (2)of Income Tax Act,1961
According to Income Tax Act,1961 any expenditure incurred for business purpose during the relevant period are allow in various sections but there are certain exception section 40 A (2) deal with payment made to related party.
Section 40A (2) provides power to the income tax officer that in case any expenditure has been incurred and payment has been made to related party or is to made certain specified person and assessing officer feel that such expenditure is unreasonable and excessive with regard to the fair market value of the goods, services or facilities provided, he may disallow such expense as he considers to be excessive or unreasonable.
Example
If an assessee purchase goods from specified person for Rs.6,75,000 and debits the said amount in the Profit and Loss Account.
But the fair market value of such goods is only Rs.4,50,000. This means, the assessee should be debited only Rs. 4,50,000 in the Profit and Loss A/c.
Therefore, according to section 40A(2) of Income Tax Act, 1961, excess amount of Rs.2,25,000 is to be added back to net profit while computing business income of the assessee.
Further transactions undertaken by the assessee with the below mentioned specified person which is treated as expenditure for the assessee, will be regarded as related party transactions and such transactions are required to be reported in clause 23 of FORM 3CD.
Definition of relative
Relative in relation to an individual means the spouse, brother or sister or any lineal ascendant or descendant of that individual.
Meaning of substantial interest in a business or profession
A person shall be deemed to have a substantial interest in business or profession if
- In a case where the business or profession is carried on by a company, such person is at any time during the previous year, the beneficial owner of equity shares carrying not less than 20% of the voting power and
- In any other case, such person is, at any time during the previous year, beneficially entitled to not less than 20% of the profits of such business or profession
Conclusion:
Section(40) A (2) is deal with any transaction incurred with related party during the relevant year assessing officer has power to disallow to the expenditure to the extend excessive and unreasonable with regard to the fair market value of the goods, services or facilities provided, he may disallow such expense as he considers to be excessive or unreasonable.