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sec 40a(3) regarding fixed assets

C.A. ANKIT SINGHAL (CA PRACTICE) (52 Points)

09 September 2009

please tell me whether purchase of fixed assets in cash above rs.20000 is disallowed u/s 40A(3), in income tax act,1961. please tell me the answer in detail with proof

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16 Replies

Manmohan ACA, CS (Chartered Accountant ) (14243 Points)
Replied 09 September 2009

No it is not applicable on Purchase of fixed assets or any other depreciatable assets.

Read section 40A(3) carefully

40A(3)

(a) Where the assessee incurs any expenditure in respect of which payment is cheque drawn on a bank or account payee bank draft, no deduction shall be allowed in respect of such expenditure;

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VARUN (PCC STUDENT) (523 Points)
Replied 09 September 2009

sec 40A(3) applies to expenditures which are revenue in nature... so expense incurred for purchasing fixed assets are disallowed to be debitted to P&L A/c but u can claim the depreciation of that asset ....

Regards

Varun Makhija

(Guest)

Do you ever debited your fixed asset in P/L.........................no.

Sec 40a(3) is related to p/l items only.

even if you purchase fixed asset in cash exceeding 20000 still you can charge depreciation.

so there should not be any question regarding disallowance

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Raj Singh (Accountant) (47 Points)
Replied 09 September 2009

these guys are right Sec 40(A)3 is applicable only for revenue expenses not for capital expenses.

vishal (student) (83 Points)
Replied 10 September 2009

your answer is right but interpritation is wrong...........

suppose i charge depreciation amount to rs30000 which is an exp. disallowed but pgbp head says if any payment made in excess of 20000 for the purpose it is allowed for sec 32 which is depreciation

vishal jain

9907416559

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sivaram (Asst Mgr-Taxation) (6918 Points)
Replied 10 September 2009

go with Vishals Comments.Foe example you purchase scientific equipments in excess of Rs 20000/= in cash though scientific equipments are allowed under sec 35 because it voilates 40 A(3) it will be disallowed

Chintan Vasa (CA Final Student M.Com) (1241 Points)
Replied 10 September 2009

The interpretation of the section can be done in other way also. The section talks about Expenditure . However it doesnt mention whether it should be capital expenditure or revenue expenditure. This is just a view. Practically it is applcable to revenue expenditure only however it should be kept in mind that there is no clarification in the section itself.

Dharmesh k. Dubey (Student) (188 Points)
Replied 10 September 2009

hi frndz,

sec 40 (a) (3) applies only to items which are debited to p& l , however purchase of fixed asset is not debited to P & l . nd if v tak about depreciation then depreciaiton is charged on assets hold by the assesse even if he is not the owner of the asset. u cn disallow an expenditure only if otherwise it is allowed , so i think sec 40 (a) (3) does not apply to purchase of fixed assets .

Pammi Srivastav (Assistant Finance Officer ) (84 Points)
Replied 15 September 2009

Depreciation is non-cash charge and it is allowed even if asset is purchased by paying cash.

CA.TAPAS DALAR (CHARTERED ACCOUNTANT) (130 Points)
Replied 11 June 2010

when we purchase a fixed asset we do not charge the expenses to p& l Account but we simply provide depreciation on it on a periodic basis according to the rate applicable, hence there is no question of disallowing the amount spent on purchase of fixed asset whether purchased on cash or through cheque etc... so no question arises of disallowing such expenses.

so far as providing depreciation is concerned, it is provided on any fixed asset worth more than Rs.5000/-, irrespective of the fact that the asset is purchased by cash or cheque or through exchange of any other property or through business acquisition etc... hence depreciation is allowed in Income Tax Act as per the rate prescribed....

Conclusion: capitalise the Fixed Asset with the amount paid as consideration for acquiring it through any mode. And provide depreciation as per the rate provided in the income Tax Act...

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Sunshine (Helping All) (10575 Points)
Replied 11 June 2010

section 40 A(3) is applicable for all expenses u/s 28 to 37..i.e items of p/l account....so we can purchase fixed assets in cash as we dont have to debit fixed assets in p/s account...depreciation is a non-cash item so no ques of this section arising...nowhere in sec 32 its written abt the mode of purchase of fixed asset in order to be eligible to claim dep....so it wont be disallowed even if the fixed asset is purchased in cash.........thats my opinion.,..m just an ipcc student so might be incorrect...plz bear with me..thank u

Dhruv (article) (100 Points)
Replied 13 June 2010

As per IT act asset will be capitalised and depriciation ( which is chargeable in p&l and deductible u/s 32) will be disllowed under 40A(3) ... purchase ia allowable

Kshitij Sharad Shah (Chartered Accountant) (22 Points)
Replied 23 May 2012

Section 40A(3) – Capital Assets

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.