Section 36
Section 36: expenses or payments not deductible in certain circumstances
Section 36 overrides other provisions of the Act to disallow two broad categories of business expenditure: payments to related "specified persons" that the Assessing Officer considers excessive or unreasonable, and payments made otherwise than through banking or online channels once they cross a threshold.
Excessive or unreasonable payments to a specified person
Section 36(2) allows the Assessing Officer to disallow the excessive or unreasonable part of any expenditure paid or payable to a "specified person", judged against the fair market value of the goods/services/facilities, the legitimate needs of the business, or the benefit actually derived by the assessee.
Who is a "specified person"
Section 36(3) defines "specified person" broadly to include relatives and persons with a controlling or substantial interest:
| Assessee | Specified person |
|---|---|
| Individual | Any relative of the assessee |
| Company | Any director of the company, or his/her relative |
| Firm | Any partner of the firm, or his/her relative |
| Association of persons | Any member of the association, or his/her relative |
| Hindu undivided family | Any member of the family, or his/her relative |
Substantial interest and related entities
The definition also extends to any person (individual, company, firm, AOP or HUF) having a "substantial interest" in the assessee's business or profession, and to related directors, partners, members and their relatives, as well as entities in which such persons in turn have substantial interest.
A person is deemed to have "substantial interest" in a company if they beneficially own shares (other than fixed-dividend shares) carrying not less than 20% of the voting power at any time in the tax year; in any other case, if they are beneficially entitled to not less than 20% of the profits of the business or profession at any time in the tax year.
Cash payment disallowance (₹10,000 / ₹35,000 threshold)
Section 36(4) disallows any expenditure where payment (or aggregate payments in a day to one person) exceeds ₹10,000 and is not made through a specified banking or online mode.
Section 36(6) raises this threshold to ₹35,000 specifically for payments made for plying, hiring or leasing of goods carriages.
Section 36(5) applies the same disallowance retrospectively: if a deduction was claimed in an earlier year for a liability, and the actual payment made in a later year (exceeding the threshold, otherwise than by banking/online mode) is made in cash, that payment is treated as income of the assessee in the later year.
Section 36(7) allows exceptions to be prescribed, having regard to the nature/extent of available banking facilities, business expediency, and other relevant factors.
Marked-to-market losses
Section 36(9) confirms that no deduction is allowed for marked-to-market loss or other expected loss, except to the extent allowable under Section 32(1)(h).
Frequently asked questions
What is the cash payment limit before a business expense gets disallowed?
₹10,000 per day to a single person, unless paid through a specified banking or online mode. The limit is raised to ₹35,000 for payments made for plying, hiring or leasing of goods carriages.
Who counts as a "specified person" for the excessive-payment disallowance?
Relatives (for individuals), directors and their relatives (for companies), partners and their relatives (for firms), members and their relatives (for AOPs and HUFs), and, more broadly, any person or entity having a substantial interest (broadly, 20% or more voting power or profit share) in the assessee's business.
What happens if a cash payment is made in a later year for an expense already deducted earlier?
Under Section 36(5), if such a payment exceeds ₹10,000 (or ₹35,000 for goods carriages) in a day and is not made through a specified banking or online mode, it is treated as income of the assessee in the year the payment is made.
Related sections
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Review related-party and cash payments with our tax audit teamLast updated 9 September 2026