Microlesson · 5-min read

Section 40(a)(ii) - Income Tax Not Deductible

# Section 40(a)(ii) - Income Tax Not Allowable

## Provision

Any tax paid by the assessee is NOT allowed as deduction while computing PGBP income.

## Important Clarification

'Tax' here includes:
Tax
Surcharge
Cess (including Health & Education Cess)

## Rationale

Income tax is an appropriation of profits, not an expense incurred to earn profits.
This includes any direct tax — income tax, MAT, etc.

## Interest on Income Tax

Interest on income tax (e.g., u/s 234A/B/C, 220) is also not allowed.
Interest on a loan taken for paying income tax is also NOT allowed.

Worked example

### Example 1

Example: A company has paid income tax of ₹5,00,000 including ₹4,00,000 tax + ₹40,000 surcharge + ₹60,000 cess. None of these are deductible u/s 40(a)(ii).

⚠️ Common exam mistakes

Claiming Health & Education Cess as deduction — earlier some courts allowed cess, but Finance Act 2022 retrospectively amended (Explanation 3) to disallow it.
Claiming GST or other indirect tax — these are allowable; only direct tax (income tax) is hit by Sec 40(a)(ii).

Reference: Section 40(a)(ii) with Explanation 3 (FA 2022 retrospective) — Income Tax Act, 1961

← Previous

Section 40(a)(ia) - Disallowan

Section 40(a)(iii) - TDS on Sa

Now that you've read this — what's next?

Move from understanding → mastery in 3 clicks. Each option below picks up from this lesson's topic.

🔥 Drill 5 Qs on this → ✍️ Adaptive practice →

Start 15-min diagnostic