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40A(3)

Ashish Sharma (Service) (1028 Points)

23 April 2010

Dear Sir,

Expenses by Director before incorporation for Assets, Rent of premises and salaries of some employees, what will be the procedure for claiming that all expenses from company and the assets and rent agreement is in the name of Director still not changed what will be consequence, can we pay amount in cash exceeding 20000/- for all of above

pls. confirm.

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Dhruv (Chartered Accountant) (308 Points)
Replied 23 April 2010

Expenses by Director before incorporation for Assets - Is it of capital nature? Capital expenditure does not come under the purview of Section 40A(3), and if it pertains to incorporation expenses, they need to be capitalized at first and then written off.

Rent of premises - Will come under the purview of 40A(3), since it's a form of revenue expenditure

salaries of some employees - Same treatment as rent of premises

Ashish Sharma (Service) (1028 Points)
Replied 23 April 2010

Dear Dhruv,

As the one of the Director has submitted the detail of all his expenses and bills for assets in his name used in company. Now I want to know what will be the Procedure to named assets in company.

Dhruv (Chartered Accountant) (308 Points)
Replied 23 April 2010

Depends on what kind of asset it is ? Machinery or Land ?

Ashish Sharma (Service) (1028 Points)
Replied 23 April 2010

Its Machineries

Dhruv (Chartered Accountant) (308 Points)
Replied 23 April 2010

Two or three ways :

1. You don't really need to transfer the assets to the company, just let the company 'hire' the assets, and pay hire charges to the directors ( owner of the assets). The problem in this case will be that you will have to deduct TDS.

2.Transfer the asset from the director to the company, this will involve capital gains. Since the director is giving to the company, the sale value in the hands of the director that will be taxed is the FMV (fair market value of the machine).

3. Allot shares against the asset transfered in name of the company. Basically assign equity shares to the director against the asset acquired by the company. You can circumvent capital gains in this case.

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Ashish Sharma (Service) (1028 Points)
Replied 23 April 2010

Dear Dhruv,

Thanks, all these ways are capable to make director Jump.n actually i am thinking as like rent agreement and other expense assets purchased by him for company like computer, printer, furniture also come in the name of company by accepting its pre expenses and we will paid him for that.

Max Payne (employed) (2569 Points)
Replied 23 April 2010

Hi Ashish

I dont think u can avoid CG by alloting shares.

That is only for succession of a proprietorship by a company covered u/s 47(xiv). Not for transfer of assets from a proprietor to his one man company.

And I suggest you to trnasfer the assets to company by sale deed

(if u can keep the director outside VAT)

And as per my opinion, the FMV could be very close to, but below the price paid by the director,

for the assets. After all, it has become second hand.

i suggest that u got thru explanations 1 to 4 to section 43(5) to give you the idea of the value which can be depreciated....

And 40A(3), there is no easier way to circumvent than by splitting the payments to different people on different days....

Make a sub-lease agreement with the director Ok, but there also TDS may come like Dhruv has said.