18 June 2016
No, there is no such provision in the Act which disallows the depreciation if the payment for acquiring a capital asset has been made through cash. Further there is CBDT circular which clarifies that no disallowance shall be attracted u/s 40A if a capital asset has been acquired in cash.
19 June 2016
Dear Vatsal,
On the contrary to what Mr Z has said, Sec 40A(3) disallows expenses under sections 30 to 38. Therefore the depreciation in the fixed asset shall be disallowed. Though purchase of capital asset itself is an expenditure of capital nature it cannot be disallowed. However depreciation on the same shall be disallowed.
19 June 2016
I respect Kaushik Ji's opinion and yes we do have contrary opinions on this topic.
[Extracts from Circular no. 34] The provisions of section 40A(3) would apply in computing the income under the heads "Profits and gains of business or profession" and "Income from other sources" as per section 58(2). All payments in excess of Rs. 2,500 at one time whether for goods or services obtained for cash or credit, which are deductible in computing the income, have to be made by crossed cheque or bank draft. Thus, the price of goods purchased for resale or use in manufacturing process or payments for services will be covered by the provisions of section 40A(3).
However, the section will not apply to repayment of loans or payment towards the purchase price of capital assets such as plant and machinery not for resale. Official link [http://www.incometaxindia.gov.in/Communications/Circular/910110000000000043.htm]
Further, S.40A(3) says ,"Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure."
In case of a capital asset, I am claiming depreciation and not merely any deduction. Depreciation is an allowance. To disallow and deduction I should have claimed the same but I will not claim any deduction on account of purchase of a capital asset. I am going to claim depreciation.
In Madhusudan Buidcon P. Ltd. vs. ACIT (ITAT Delhi),(on deciding whether advnace payment in cash in respect of capital asset be disallowed) it held that to make any disallowance under section 40A(3), it is a precondition that the assessee must have claimed deduction, directly or indirectly, for which payment is made in cash exceeding the specified limit. But if the assessee has not claimed any deduction, directly or indirectly, even if the payment is made in cash, the provisions of section 40A(3) will become non-operative
19 June 2016
Mr Z., I agree with you on the fact that no disallowance is called for in regards to purchase of asset in cash since no expense is claimed. But depreciation is also an expense claimed, although you claim as an allowance, and it fits in the ambit of the word expenditure u/s 40A(3) from sections 30-38. But still I feel clarification is required on this topic. As for now, I'd recommend Mr. Vatsal to claim depreciation as Mr. Z has said.
Even the case laws given by Mr Z do not cover depreciation issue.
19 June 2016
Kaushik Ji, I too kinda feel the same, infact at one point I also used to hold the view that depreciation should not be available. If you refer V.K. Singhania Then in his book also he has opined that depreciation should not be available, whereas Girish Ahuja Sir is of the view that depreciation should be available. My view was that the the limit of 20,000 was set because the govt. want to have record of such transactions so that they can be traced . This is also supported by the [provisions explaining the provisions of the Finance Act] [of the year when this provision was introduced for the 1st time.] And it goes against the intent of the government that on a cash expense say 25,000 the expense will be disallowed , but If I buy a machine worth several lakhs then there shall be no disallowance. This definitely should not be the intention, but when CBDT itself saying that the provision will not apply in case of purchase of capital asset and this circular is in favour of assessee therefore advising to claim depreciation. "However, the section will not apply to repayment of loans or payment towards the purchase price of capital assets such as plant and machinery not for resale."
Thank you Sir for participating in this discussion, if you have more info to share I would be glad to read.
19 June 2016
Agreed Mr.Z. I loved this healthy discussion of ours and thank Mr. Vatsal for giving this opportunity.
Even I've referred Singhania and Ahuja and concluded that in situation where there is no case law specifying the said claim of depreciation, it'd be best to take a stand in favour of the assessee and hence recommended Mr.Vatsal to claim.
The section does not apply to repayment of principal to a finance institution but is applicable to the interest component which forms part of expense in case where payment is made to NBFC. We shall discuss over it soon once I've collected more information on the same. Thank you Mr.Vatsal, thank you Mr.Z.
19 June 2016
Section 40A(3) – Capital Assets
Section 40A(3) provides for disallowance of expenditure incurred in cash in excess of the specified limit. In this blog, I have analyzed whether such disallowance can be made in respect of capital assets purchased in cash.
Provisions
Extract of section 40A(3) is reproduced below:
“40A Expenses or payments not deductible in certain circumstances
(1) …
(2) …
(3) Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure.”
Analysis
A plain reading of this section makes it clear that this section does not provide for any addition on the income side.
This leads to 2 possible interpretations:
1) Whether the cost of acquisition for purchase of capital asset can be disallowed u/s 40A(3).
2) Whether depreciation on such capital asset can be disallowed u/s 40A(3).
Regarding question no. 1), cost of acquisition of a capital asset is normally not allowed as deduction (I am not talking about depreciation here as it is an allowance). In such cases, as the cost is not claimed as an ‘expenditure’, question of its disallowance is out of question.
Regarding question no. 2), the question that arises is whether depreciation can be considered as ‘expenditure’ as used in section 40A(3). It has been held by Hon’ble Supreme Court in the case of Pandyan Insurance Co. Ltd. reported in 55 ITR 716 that depreciation is not ‘expenditure’. Therefore, depreciation cannot be disallowed u/s 40A(3). Further, this view is fortified by the recent judgment of Delhi ITAT in the case of SMS Demag Private Limited reported in 3 taxmann.com 37. It was, inter-alia, held in this judgment that disallowance of depreciation cannot be made as a result of non deduction of TDS u/s 40(a)(i). Even though it is in relation to section 40(a)(i), the logic remains same that depreciation is not an ‘expenditure’. Therefore, disallowance u/s 40A(3) cannot apply to depreciation.
Conclusion
Cost of capital asset paid in cash cannot be disallowed u/s 40A(3) as it is not claimed as a deduction. Further, depreciation on such assets can also not be disallowed u/s 40A(3) as it is not in the nature of ‘expenditure’ as held in the judgments cited supra.
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