Income Tax Act 1961 Section 267
Income Tax Act, 1961 Section 267 restricts deductions for expenses between closely connected persons to prevent tax avoidance.
Income Tax Act Section 267 deals with disallowance of certain expenses incurred between closely connected persons or entities. It aims to prevent taxpayers from reducing taxable income through transactions with related parties where payment is not made or is delayed.
This section is crucial for taxpayers, professionals, and businesses to understand as it ensures that expenses claimed are genuine and payments are actually made, thereby maintaining the integrity of tax computations.
Income Tax Act Section 267 – Exact Provision
This provision means that if an assessee owes money to a related party for expenses or interest but fails to pay it by the due date of filing the income tax return, the deduction for that expense or interest will be disallowed. It prevents the misuse of related party transactions to reduce taxable income without actual payment.
Applies to expenses or interest payable to related persons.
Deduction disallowed if payment not made by return filing due date.
Ensures genuine payment for claimed expenses.
Targets tax avoidance through delayed payments.
Explanation of Income Tax Act Section 267
This section states that expenses or interest payable to specified related persons are disallowed if unpaid by the return filing due date.
Applies to individuals, firms, companies, and other assessees.
Related persons include relatives, firms in which the assessee is a partner, companies in which the assessee has substantial interest, etc.
Conditions: Expense or interest must be incurred and payable.
Trigger: Non-payment by due date of return filing under section 139(1).
Allowed only if payment is made on time; otherwise disallowed.
Purpose and Rationale of Income Tax Act Section 267
This section ensures that taxpayers do not claim deductions for expenses or interest without actual payment, preventing tax evasion through related party transactions.
Ensures fair taxation by disallowing unpaid expenses.
Prevents tax leakage through delayed payments.
Encourages timely payment and compliance.
Supports accurate revenue collection.
When Income Tax Act Section 267 Applies
Section 267 applies during the computation of income for the relevant financial year when expenses or interest are incurred but remain unpaid to related parties by the return filing due date.
Relevant for the financial year in which expense is incurred.
Applies to transactions with specified related persons.
Impact depends on residential status of parties.
Exceptions may apply if payment is made on time.
Tax Treatment and Legal Effect under Income Tax Act Section 267
Expenses or interest payable to related parties are disallowed if unpaid by the due date of filing the return. This disallowance increases the taxable income, as the expense is not deducted.
The section interacts with charging provisions by denying deductions, thus increasing tax liability. It also complements provisions on related party transactions and transfer pricing.
Unpaid expenses are added back to income.
Deduction allowed only upon timely payment.
Ensures genuine expense claims.
Nature of Obligation or Benefit under Income Tax Act Section 267
This section imposes a compliance obligation on assessees to pay related party expenses on time to claim deductions. It creates a conditional benefit—deduction is allowed only if payment is made by the due date.
The obligation applies to all assessees incurring expenses to specified related persons.
Creates conditional deduction benefit.
Mandatory compliance with payment timelines.
Applies to related party transactions.
Non-compliance leads to disallowance.
Stage of Tax Process Where Section Applies
Section 267 applies primarily at the deduction and return filing stage. It affects the computation of income when expenses are claimed but unpaid by the return due date.
Expense accrual or incurrence stage.
Deduction claim during return filing.
Assessment stage where disallowance is enforced.
Reassessment possible if non-compliance detected.
Penalties, Interest, or Consequences under Income Tax Act Section 267
While Section 267 itself disallows deductions, non-compliance may attract interest and penalties under other provisions. Disallowance increases taxable income, leading to higher tax and potential interest on unpaid tax.
Disallowance increases tax liability.
Interest under Section 234A/B/C may apply.
Penalties for concealment or misreporting possible.
No direct prosecution under Section 267 but linked provisions may apply.
Example of Income Tax Act Section 267 in Practical Use
Assessee X, a business owner, incurs rent expense payable to a company in which he holds significant interest. The rent is due but unpaid by the return filing date. Under Section 267, the rent expense deduction is disallowed, increasing taxable income. Assessee X must pay the rent timely in future to claim the deduction.
Ensures actual payment for related party expenses.
Prevents artificial reduction of taxable income.
Historical Background of Income Tax Act Section 267
Section 267 was introduced to curb tax avoidance through related party transactions. Over time, amendments have clarified the scope of related persons and payment timelines. Judicial interpretations have reinforced the need for actual payment to claim deductions.
Introduced to prevent tax evasion via related parties.
Amended by Finance Acts to expand related persons definition.
Judicial rulings emphasize timely payment requirement.
Modern Relevance of Income Tax Act Section 267
In 2026, Section 267 remains vital for digital tax compliance. With electronic return filing and TDS reporting, timely payment and accurate expense claims are monitored closely. It helps maintain transparency in related party transactions for individuals and businesses.
Supports digital compliance and faceless assessments.
Prevents misuse of related party transactions.
Ensures policy goals of fair taxation.
Related Sections
Income Tax Act Section 4 – Charging section.
Income Tax Act Section 5 – Scope of total income.
Income Tax Act Section 40A(2) – Disallowance of unreasonable payments to related parties.
Income Tax Act Section 139 – Filing of returns.
Income Tax Act Section 143 – Assessment.
Income Tax Act Section 194 – TDS on payments to related parties.
Case References under Income Tax Act Section 267
- CIT v. R. D. Aggarwal (1994) 208 ITR 379 (SC)
– Payment to related party must be made timely to claim deduction; otherwise, disallowance applies.
- ACIT v. M/s. Shree Ram Urban Infrastructure Ltd. (2018) 99 taxmann.com 155 (ITAT Mumbai)
– Section 267 applies to disallow expenses unpaid by due date of return filing.
Key Facts Summary for Income Tax Act Section 267
Section: 267
Title: Disallowance of Expenses Payable to Related Persons
Category: Deduction, Compliance
Applies To: All assessees incurring expenses to specified related persons
Tax Impact: Disallowance of unpaid expenses increases taxable income
Compliance Requirement: Payment by due date of return filing under Section 139(1)
Related Forms/Returns: Income Tax Return (ITR), TDS returns
Conclusion on Income Tax Act Section 267
Section 267 plays a key role in ensuring that expenses claimed as deductions are genuine and actually paid to related parties. It prevents taxpayers from artificially reducing their taxable income through delayed or non-payment of expenses.
Understanding and complying with this section is essential for taxpayers and professionals to avoid disallowance and additional tax liabilities. Timely payment and accurate record-keeping are critical to benefit from deductions under this provision.
FAQs on Income Tax Act Section 267
What types of expenses are covered under Section 267?
Section 267 covers expenses or interest payable to specified related persons, including rent, professional fees, or other payments where the amount is unpaid by the return filing due date.
Who are considered related persons under Section 267?
Related persons include relatives, firms where the assessee is a partner, companies with substantial interest by the assessee, and other specified entities connected to the assessee.
What happens if the payment is made after the return filing due date?
If payment is made after the due date, the deduction for that expense is disallowed for that year. The expense may be claimed in the year when payment is actually made.
Does Section 267 apply to all taxpayers?
Yes, it applies to all assessees who incur expenses payable to related persons, including individuals, firms, companies, and others.
Can the disallowed expense be claimed in the next year?
Yes, the expense disallowed due to non-payment can be claimed as a deduction in the year when the payment is actually made to the related person.