40A[3]

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student (Querist)
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25 May 2011 Modify

[Expenses or payments not deductible in certain circumstances.

Sec 40A(3):(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 otherwise than by an account payee cheque
drawn on a bank or account payee bank draft, no deduction shall be allowed in respect
of such expenditure;

now here the word expenditure-can be interpreted as revenur or capital..But if we look at the heading of this sec it means it applies for exps only.For eg payment for fixed assets-fixed assets are of the type- capital in nature therefore theses are capital expenditure & not revenue expenditure/expnse..

Conclusion wht i think this sec applies to exps only.........whether am i right

Q2: whether dep on such asset will be allowed or not??

some authors like vinod gupta-dep on such FA [for which pymt is made in excess of 20000/-] will be allowed because in sec 40A(3) we r concerned about a particular expenditure & its payment & not with all related expenditure.therefore dep should be allowed .

But in singhania-ready reckoner[34 edition-para 49.3-2[pt 5] he stated tht dep should be disallowed .........on the other hand in his book on direct taxes CA Final-he specified the conditions of sec 40A(3) as Incurrs any exp which is otherwise deductible while computing Pgbp & 2 condition is that pymt is made i.r.of such ependiture

Therefore if we analyse above conditions----

For fixed assets -position is clear

dep on such fixed asset----(2) cond is not fulfilled that is u r not making any pymt for such depreciation

pls clarify if u have any case law on this situation..........dep on FA not covered u/s 40A(30)

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27 May 2011 Query 1-
Section 40A(3) is applicable to expenses only? It is not applicable to the purchases of Fixed Assets.

Reply -
Your observation is excellent and correct. .

CA PARAS BAFNA

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27 May 2011 Query-2

Question of applying Section 40A(3) does not arise in the case of depreciation on the fixed assets purchased in cash as-
1. Depreciation is allowed by the act against the use of an asset for the whole or part of the year, and for which the assessee is not paying any amount in cash on day to day basis.
2.The expenditure covered U/s 40A(3) is mainly forming part of the TDg & P&L A/c. As such, the amount incurred towards acquiring fixed assets is out side the perview of section 40A(3).

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