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Disallowance of cash??

saketh (...) (28 Points)

06 July 2013

Anil a builder bought a land in karimnagar for 50 lakhs. In FY 2012-13 he gave an advance of 30 lakhs in cash and in FY 2013-14 (April 2013) he gave remaining 20 lakhs by cheque. The land was registered in his name in May 2013 He also purchased construction materials like sand bricks cement all together for 60 lakhs. In May 2013 he gave 15 lakhs in cash as advance for those materials and balance 45 lakhs he gave in December 13 by cheque. By the beginning of FY 2014-15 (April 14) the property will be ready for sale

a) How the advance for land in cash (30 lakhs) should be treated? Whether it should be disallowed or not and if so, in which year should it be disallowed?

b) How the advance for materials in cash (15 lakhs) should be treated? In which year should it be disallowed?

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4 Replies

C.A. Jignesh N. Mehta (C.A.) (1030 Points)
Replied 07 July 2013

There are two possibilities for above.

1. Whether the property is capital asset.

2. Whether the property is stock in trade.

Now,

If it is case 2, then the amount paid in cash will be disallowed in the year you claim it as expenses.

If it is case 1, then the amount paid for land and materials in cash are for capital assets and cannot be treated as expenditure for the purpose of section 40A(3). Hence should not be disallowed.

However the same is prone to litigation.

Swami Ayyappa Nuli (TAX ADVISOR & CONSULTANT AT G.S.T SUVIDHA CENTER) (1372 Points)
Replied 07 July 2013

hi,in ur case i thought the following assertions are correct

a)LAND

as Anil is a builder,it would be stock in trade. in such case any payment for a bill wheather it is advance or final payment any payment made in excess of 20000 would be disallowed.in ur case as such payment involves two financial years,u can claim deduction in respect of advance made in financial year 2012-13 and in second year once bill issued by the seller and entire advance amount of 30 lakhs is relating to one bill ,then advance of rs 30lakhs should be shown as income in financial year 2013-14

b)MATERIAL

same provisons will apply if it would be a capital asset