09 June 2012
Suppose some asset is purchased in cash for Rs. 2,00,000/- Section 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 Here the term used is no deduction so all deductions from section 30 to 38 are covered. Means depreciation is also not allowed. Agree?
Secondly, suppose the above mentioned assets is get constructed through contractor for which payment is made to contractor of Rs. 1,00,000/- without making TDS thereon u/s. 194C. Now section 40 will also disallow deduction claimed under section 30 to 38 because of non deduction of tax at source. that means depreciation u/s. 32 will be disallowed. right?
10 June 2012
Depreciation will be allowed as it is not paid in cash and its calculated on fixed assets.But Provision of tds will apply here and you have to pay tds on payment made to contractor
11 June 2012
Section 40A(3) provides for disallowance of expenditure incurred in cash in excess of the specified limit.
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.
Tax department will obviously try to take other view and therefore this issue can lead to litigation.
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