Section 40 a(3) in connection with 44ad

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Querist : Anonymous

Querist : Anonymous (Querist)

27 December 2014 Assessee is doing trading business. In the FY 12-13 he has filed Income Tax return U/s.44AD on presumptive basis. In FY 12-13 he paid cash by way of depositing in bank account of single supplier Rs.10,00,000 on 05-07-2012 which is covered by 40A(3). No 40A(3) addition is made since return is filed under S.44AD. But the said purchase is lying as stock in trade at the year end. In the Financial Year 13-14 his case come under tax audit. Is tax auditor required to disallow Rs.10,00,000 under 40A(3) if that goods is sold.

CA Kumar Mukesh

CA Kumar Mukesh (Expert)
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28 December 2014
Section 44AD is independent section and overrides the all provisions of section 28 to 43C of Income Tax. If someone opted for the section 44AD it is assumed that assessee has complied with all provisions of section between 28 to 43C. if on the base year assessee has complied with section 44AD, then it cannot be said that assesee has violated the section 40A(3A) for the matter cover under section 44AD.

Therefore, there would be no dis allowance under section 40A(3A)

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Querist : Anonymous

Querist : Anonymous (Querist)

28 December 2014 As per my understanding S.40A(3A) will come when liability is incurred in a Previous year and payment is made in any subsequent year which is exceeding Rs.20,000. But in my case payment is already made in FY 2012-13 and it is lying as stock in trade. For FY 13-14 it will come as opening stock in debit side of P&L. In that year goods is sold. So whether the opening stock which we are treating as expense for FY 13-14 will come under S.40A(3) in FY 13-14 for tax audit purpose.

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CA PARAS BAFNA

CA PARAS BAFNA (Expert)
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28 December 2014 No, 40A(3) has its dominance at the time when the payment of expenditure is made in cash, which has already been made in the FY 2012-13. So, the relevant expenditure was incurred in the FY 2012-13 and not in FY 2013-14.

Hence, in FY 2013-14, there will be no incidence of disallowance when the stock will be sold.
.

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CA Kumar Mukesh

CA Kumar Mukesh (Expert)
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28 December 2014 It is inappropriate to apply section 40A(3A) in which section 44AD apply.

Further, as you rightly mentioned that 40A(3A) applicable on cash payments of liabilities of expenses created in previous year for which expenses has been claimed.
In your your case by making payment for stock you are creating asset (stock) not liability.
And Section 44A(3A) is not applicable on using asset in next and claim the usage as expenses.

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Querist : Anonymous

Querist : Anonymous (Querist)

28 December 2014 I have doubt in another view.

In FY 2012-13 a company has incurred Rs.1,00,000 AMC charges which is paid by way of cash to the party on 05.09.2012. In which Rs.40,000 is prepaid. So we will show Rs.40,000 as current asset. In FY 2012-13 the tax auditor has to disallow how much?.
If he has to disallow Rs.60,000 under S.40A(3) then in the next FY he has to disallow Rs.40,000?. In this case also first we charge Rs.1,00,000 to P&L account and then we will transfer Rs.40,000 to prepaid expenses. Clarify me.

CA PARAS BAFNA

CA PARAS BAFNA (Expert)
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31 December 2014 Taking this query as a new query-
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In case Tax audit is conducted for the FY 2012-13 (AY 2013-14), the Tax auditor has to disallow the "expenditure" of Rs 60000/-.
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At the time of conducting the Tax Audit for AY 2014-15, the Tax auditor has to disallow Rs. 40000/- as the said amount has been paid in cash on a single day, even though in the preceding previous year.
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