Section 40A (2) (b) of the Act:

a. Directors of Taxpayer Company and relatives of such Directors. No Transaction with them.
b. An individual who holds 20% or more equity in the Taxpayer and relatives of such an individual. No
Transaction with them.
c. Company holding 20% or more equity in the Taxpayer i.e. and any director of such Company & relatives
of such director. No Transaction with them.
d. Companies whose 20% or more shares are held by such a company that holds more than 20% equity in
the Taxpayer i.e. down the line branches (No Transaction with them).
e. Company of which a director has substantial interest in the taxpayer than any director of such company
and relative of the director. No Transaction with them.
f. Companies in which the Taxpayer holds 20% or more equity. No Transaction with them.
g. Companies in which director or relative of the director of Taxpayer holds 20% or more equity.
Under normal circumstances, immediate holder of shares is regarded as beneficial owner and applicability of
Section 40A (2) (b) is restricted to that immediate holder of shares. The fact that immediate holder is beneficial
owner of share and its right is not constrained in any manner needs to be demonstrated by facts.
Judicial precedents suggest that capital expenditure payments eligible for depreciation are not covered under
section 40A (2) of the Act. Further, depreciation is not a deduction but an allowance. Relying on the intent to
apply DTP provisions to expenditure covered under section 40A (2), capital expenditures eligible for depreciation
may be excluded by taxpayers.
DTP provisions cover payments for expenditure. Expenditure means capital as well as revenue expenditure.
Further, the revised ICAI Guidance Note (August 2013) suggests that the provisions are applicable to expenditures
which are capital in nature and ranking for 100% deduction under provisions such as section 35(2AB), 35 or 35AD
of the Income-tax Act, 1961 (the Act).
Alternatively, section 92(2A) read with section 92BA of the Act covers allowance for expenditure which could be
interpreted to include depreciation for capital expenditure. As mentioned earlier, capital expenditures ranking
for 100% deduction would anyways, be covered under DTP provisions.
CIT v. Plasmac Machine Mfg. Co. Ltd. [1993] 201 ITR 650 (Bombay HC), Sumilon Industries Ltd v. Income tax
Officer (ITA Nos 3296 &3297/
Ahd/2008), Challapalli Sugars Ltd. v. CIT [1974] 98 ITR 167 (SC), CIT v. Mahendra Mills [2000] 243 ITR 56 (SC),
Epicenter Technologies (P)
Ltd. vs. ACIT (ITA 8335/Mum/2004) [2009-TIOL-07- ITAT -MUM], SMS Demag (P) Ltd. vs. DCIT [2010] 38 SOT 496
(Delhi), M/s. Crescent
Chemsol Pvt. Ltd. v. ACIT [ITA No. 1497/Mum/2010 dt. March 9, 2011], Calcutta Insurance Ltd. v. Commissioner
of Income-tax [1952] 21 ITR
404, V Kay Translines (P) Ltd. v. Income-tax Officer [2011-TIOL-318-ITAT-Mum]

Related Parties as per AS-18

1. Company controlling the reporting enterprise directly or indirectly through intermediaries. (Holding &
Ultimate Holding Companies)?
2. Company controlled - directly or indirectly through intermediaries by the reporting enterprise.
(Subsidiary and Ultimate Subsidiary)
3. Company under common control directly or indirectly through intermediaries with the reporting
enterprise. (Fellow Subsidiary)?
4. Associates and joint ventures of the reporting enterprise. (downstream)
5. Investing party or venturer in respect of which the reporting enterprise is an associates or a joint venture.
(upstream)
6. Individual and relatives of any such individual owning directly or indirectly voting power that gives them
control or significant influence over the enterprise.
7. Key management personnel and their relatives.
8. Enterprise over which such individual or key personnel are able to exercise significant influence.
Control refers to:
1. Ownership, directly or indirectly, of more than one half of the voting power of an enterprise, or
2. Control of the composition of the board of directors, or
3. Substantial interest in voting power and the power to direct, by statute or agreement, the financial
and/or operating policies of the enterprise.
An enterprise is considered to control the composition of the board of directors of a company, if it has the power,
without the consent or concurrence of any other person, to appoint or remove all or a majority of directors of
that company.
An enterprise is deemed to have the power to appoint a director if any of the following conditions is satisfied:
(a) A person cannot be appointed as director without the exercise in his favor by that enterprise of such a power
as aforesaid; or
(b) A persons appointment as director follows necessarily from his appointment to a position held by him in that
enterprise; or
(c) The director is nominated by that enterprise; in case that enterprise is a company, the director is nominated
by that company/subsidiary thereof.
Significant Influence refers to:
An enterprise is considered to have a substantial interest in another enterprise if that enterprise owns, directly or
indirectly, 20 per cent or more interest in the voting power of the other enterprise. Similarly, an individual is
considered to have a substantial interest in an enterprise, if that individual owns, directly or indirectly, 20 per
cent or more interest in the voting power of the enterprise.
Significant influence may be exercised in several ways, for example, by representation on the board of directors,
participation in the policy making process, material inter-company transactions, interchange of managerial
personnel, or dependence on technical information. Significant influence may be gained by share ownership,
statute or agreement. As regards share ownership, if an investing party holds, directly or indirectly through
intermediaries, 20 per cent or more of the voting power of the enterprise, it is presumed that the investing party
does have significant influence, unless it can be clearly demonstrated that this is not the case. Conversely, if the
investing party holds, directly or indirectly through intermediaries, less than 20 per cent of the voting power of
the enterprise, it is presumed that the investing party does not have significant influence, unless such influence
can be clearly demonstrated. A substantial or majority ownership by another investing party does not necessarily
preclude an investing party from having significant influence.