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ejaz naiyer (C.A. FINAL) (293 Points)

03 March 2010

If payment is made in cash (more than Rs 20000), but that payment is in respect of capital goods and not in revenue nature. Will it be allowed or not?

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10 Replies

Chintan Shah (-) (534 Points)
Replied 03 March 2010

Dear Friend ejaz,

1. If the capital goods are depreciable assets than the deduction for depreciation will not be available u/s 32 since payment is made in cash exceeds 20000

2. If the capital goods relate to scientific research and 100% of the same is deductible u/s 35, no deduction wil be available under Sec 35.

3. If the capital goods is not an asset and is a stock than also the deduction will not be available u/s 37.

4. If the capital goods are capital goods which is non depriciable capital asset the question of non deduction does not arise because no deduction is available u/s 30 to 37.

Regards,

Chintan

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SAHIL (Chartered Accountant/ CFP / B.com(AF)/ NCFM) (760 Points)
Replied 03 March 2010

AGREE WITH CHINTAN..............

ejaz naiyer (C.A. FINAL) (293 Points)
Replied 04 March 2010

Thanx

Max Payne (employed) (2574 Points)
Replied 04 March 2010

Originally posted by : Chintan Shah
	Dear Friend ejaz, 1. If the capital goods are depreciable assets than the deduction for depreciation will not be available u/s 32 since payment is made in cash exceeds 20000 2. If the capital goods relate to scientific research and 100% of the same is deductible u/s 35, no deduction wil be available under Sec 35. 3. If the capital goods is not an asset and is a stock than also the deduction will not be available u/s 37. 4. If the capital goods are capital goods which is non depriciable capital asset the question of non deduction does not arise because no deduction is available u/s 30 to 37. Regards, Chintan

Depreciation is an allowance u/s 32, not an expenditure. It cannot be denied. 40A(3) denies only deduction for expenditure... disagree with reckoner

sec 35 u r correct, cos assessee is allowed deduction for capital expenditure

if deduction not allowed for expenditure, it cannot be disallowed us 40A(3)

kumarsatish022 (Professional) (165 Points)
Replied 04 March 2010

very correct if expenditure is not allowed then no question of adding it backwards exists per se , as said already

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Chintan Shah (-) (534 Points)
Replied 04 March 2010

Friends,

Depreciation is an expenditure which is allowed from the profits and gains from business and profession u./s 32. Even though it is a non cash allowance, but it is an expenditure allowable u/s 30 to 37. Hence it would be disallowed. Even though the section 40(A)(3) reas "Where the assessee incurs" it means the expenditure allowable u/s 30 to 37. So any expenditure allowable under those sections in respect of which payment has been made by cash exceeds the specified limit, it will be disallowed. Now the depreciation is a part of the actual cost of asset incurred by the assessee which is allowable under Section 32 of the Act which in this case has been paid by cash. So it will be disallowed.

Regards,

Chintan

Chintan Shah (-) (534 Points)
Replied 04 March 2010

P.S. though it is capital expenditure which is incurred, it is expenditure incurred by assessee for which payment has been made in cash, and a part of which normally is available as depreciation allowance, will now not be allowed since the entire expense has been made in cash.

The confusion arises because the expenditure is capital in nature and not revenue in nature. You cannot take deduction of any portion of the expenditure be it revenue or capital in nature if the same is paid in cash and exceeds the limit. It will be disallowed. section 40(A)(3) does not tell that the expenditure needs to be incurred in the same assessment year in which you are claiming deduction for the same. Even if the same is incurred in any prior years in effect it is hit by section 40(A)(3) since it has been paid in cash and exceeds Rs, 20000.

Nilesh (M) (23 Points)
Replied 04 March 2010

If amount paid is for capital goods then deduction available in sec.32 in form of depreciation. If the asset is used in scientific research then the entire expenses will be disallowed.

Max Payne (employed) (2574 Points)
Replied 04 March 2010

Dear Chintan,

I am not disagreeing with anything else u said.. only the depreciation.

Please see section 32, the words are that assessee shall be allowed depreciation...

Depreciation is only an estimate of the reduction in value of an asset, and the compensation opportunity cost of funds blocked in the asset*, but not an expenditure. When u buy the asset, u r incurring a capital expenditure for that, no doubt... but u are being given an allowance as depreciation for the estimated dimunition in value...

The issue, is that assessee is incurring capital expenditure, but he is not getting a deduction for that expenditure. So u cant disallow the capital expenditure for asset acquisition.

Instead, he is given an allowance to estimate the value of assets lost by their active or passive use.... hence it cannot be said that the depreciation is an expenditure for which deduction is allowed... THE DEDUCTION u/s 32 IS NOT FOR EXPENDITURE, IT IS FOR AN ALLOWANCE. Hence 40A(3) cannot affect it.

Expenditure, in the context of this section means cash outgo, even courts have upheld that..

BUT on the other hand, he is getting 100% deduction for scientific research assets, not depreciation for them! Hence, every right to disallow capital exp referred in sec 35....

*LOGIC BEHIND DENYING INDEXATION FOR DEPRECIABLE ASSETS, SEC 50 (NOT JUST BECAUSE OF THE DEEMING FICTION THAT IT IS STCG)

ejaz naiyer (C.A. FINAL) (293 Points)
Replied 05 March 2010

Dear friends,

Am overwhelmed! with emotions... when am thanking you! as you've given me your valuable time and considered my problem to be solved, guess mere words are not enough to express my gratitutde, hence ,me sending you this msg to say so.