Disallowance of advance u/s 40a(3)

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

12 March 2012 Whether advance payments made by employeer to employee above Rs 20000/- for expenses will be disallowed u/s 40A(3) of Income Tax Act 1961

CA Siddhartha Bhardwaj

CA Siddhartha Bhardwaj (Expert)
Follow

12 March 2012 Advance cannot be disallowed since it is NOT an expesne.

However, if the advance is adjusted against an expense, such expense shall be disallowed.

Querist : Anonymous

Querist : Anonymous (Querist)

12 March 2012 but we give advance for expense

Upgrade to CAclubindia Pro. Subscribe Now!

Querist : Anonymous

Querist : Anonymous (Querist)

12 March 2012 but we give advance for expense

kartik_somu

kartik_somu (Expert)
Follow

12 March 2012 yes it will get covered

Querist : Anonymous

Querist : Anonymous (Querist)

12 March 2012 Kartik_somu
Sir please will u elaborate it......

CA Siddhartha Bhardwaj

CA Siddhartha Bhardwaj (Expert)
Follow

12 March 2012 Section 40A(3) applies only to EXPENDITURE. Advance is NOT an expenditure. Advance is shown in the Balance Sheet NOT in the P&L.

So if you give an advance, Section 40A(3) is NOT attracted.

It gets attracted when the expense is actually incurred against the advance.

Querist : Anonymous

Querist : Anonymous (Querist)

12 March 2012 so in this way the purpose of sec 40A(3) will be defeated

Upgrade to CAclubindia Pro. Subscribe Now!

CA Siddhartha Bhardwaj

CA Siddhartha Bhardwaj (Expert)
Follow

12 March 2012 No it is not defeated. When you give an advance the Section is not attracted.

But when you ACTUALLY INCUR expense AGAINST the advance, the Section gets attracted.

You are not getting any benefit by giving an advance. Advance has no impact on the Profit or loss.

On the other hand expense, reduces your profits. That is why it is added back to increase the profits.

Advance is NOT claimed as a deduction therefore, it CANNOT be added back.

Eg.

Advance given on 10th March. Section 40A(3) not attracted.

Against this advance expense incurred on 25th April. NOW Section 40A(3) gets attracted and this expense shall be disallowed.

Ultimately the expense gets disallowed. So spirit of Section 40A(3) is implemented.

Querist : Anonymous

Querist : Anonymous (Querist)

12 March 2012 so in this way if i had incurred the expense of Rs 15000 on 3rd march 2011 & 18000 on 25th march 2011 and payments of Rs 33000 made on 27th march 2011 so as per ur explanation it is allowed but but it is not in actually

CA Siddhartha Bhardwaj

CA Siddhartha Bhardwaj (Expert)
Follow

12 March 2012 You are interpreting in the wrong manner. The example you have quoted is NOT of advance payment. It is an example of incurring an expense and making payment afterwards.

And moreover, in the above example, there is NO disallowance because the individual bills are less than Rs. 20,000/-

If in the above example you incurrec expense of Rs. 30,000 on 3rd March and Rs. 35,000 on 25th March and made the payment of Rs. 65,000 on 27th March, then these expenses shall be disallowed.

Both the conditions should be satisfied. Expense as well as payment should be above Rs. 20,000.

Both the transactions have to take place (expense & payment) to attract Section 40A(3).

Just incurring an expense or making an advance payment does not in itself attract Section 40A(3).

Querist : Anonymous

Querist : Anonymous (Querist)

13 March 2012 So in this way i can make payments of Rs.250000/- on 3rd march ( against expenses incurred on 1jan=18000, 5th jan=19000, 13th jan 20000, 15th jan 20000, 19th jan 15000 and so on) expenses amount against the same bill does not cross the limit of 20000 in a single day. So it means sec 40A(3) allows me to make the payments of Rs. 2.5Lakh in a single day?????????????????????????????????

Upgrade to CAclubindia Pro. Subscribe Now!

Querist : Anonymous

Querist : Anonymous (Querist)

14 March 2012 Sidharth bhardwaj i am still waiting for your answer

CA Siddhartha Bhardwaj

CA Siddhartha Bhardwaj (Expert)
Follow

14 March 2012 There are 2 situations:

1. The bills are of different parties - In this case, Section 40A(3) is NOT attracted.

2. The bills are of the same parties - In this case, Section 40A(3) is attracted.

It depends on the facts.

Querist : Anonymous

Querist : Anonymous (Querist)

14 March 2012 In my above example all bills belongs to the same party

Upgrade to CAclubindia Pro. Subscribe Now!

CA Siddhartha Bhardwaj

CA Siddhartha Bhardwaj (Expert)
Follow

14 March 2012 If all the bills belong to the same party and aggregate of payment exceeds Rs. 20,000/- then ALL the expenses shall be disallowed u/s 40A(3).

Querist : Anonymous

Querist : Anonymous (Querist)

14 March 2012 I know that but in your first example you said something else

CA Siddhartha Bhardwaj

CA Siddhartha Bhardwaj (Expert)
Follow

14 March 2012 I assumed that the bills belonged to different parties. My mistake. I should have mentioned the assumption.

Hope now u r clear that Section 40A(3) is not applicable to advance given to ANY person.

Querist : Anonymous

Querist : Anonymous (Querist)

14 March 2012 from YOUR this answer i can defeat Sec 40A(3)

CA Siddhartha Bhardwaj

CA Siddhartha Bhardwaj (Expert)
Follow

14 March 2012 Section 40A(3) cannot be defated if all the conditions are satisfied and all expenses are legally provided for.