Disallowance of fixed asset

[A RAVINDRA]

If a fixed asset worth say 250000/- is purchased by cash payment, will the depreciation be disallwed on the ground that the asset is procured through cash payment exceeding Rs 20000/-. Please clarify

[DEV KUMAR KOTHARI]

Cost of assets purchased is not 'any expenditure', which is debited in P & l a/c or claimed otherwise. Depreciastion is a statutory allowance allowable on assets owned and used for business or profession.. Therefore, S. 40A (3) shluld not be applied. However, use of words 'no deduction shall be allowed in respect of such expenditure' can embrance within itself, depreciation allowance also, if a vie wis taken that 'any expenditure' includes even capital expenditure. and depreciation is considered as a deduction i.r.o. such expenditure. So bettere to avoid cash payments.

The sum of Rs.250000 is not 'any expenditure'of revenue nature. It is not debited in P & l a/c. Depreciastion is allowed as per law if assets is owned and used for business or profession.Therefore, S. 40A (3) sholuld not be applied. However, use of words 'no deduction shall be allowed in respect of such expenditure' will cause litigation becasue the AO will take viee that 'any expenditure' includes even capital expenditure and depreciation being a deduction i.r.o. such expenditure, S. 40A (3) is applicable. Suggestion -avoid cash payments.

Let us discuss this from a logical angle while considering our argument. Generally such high value items are always advised to be transacted through acocunt payee cheque. Since in your case, the asset is procurred through cash payment exceeding Rs 20,000, you are exposed to the risk of attracting the provisions of sec 40A (3) unless you can justify for the circumstances necessitating the payment otherwise than by account payee cheque. You may refer to Rule 6DD for the cases and circumstances for no disallowance. Since the amount paid would be disallowed not allowing it as an expense,you can argue that the amount otherwise is being treated as 'capital item' and hence the depreciation on the amount capitalised can be argued to be sustainable. You can refer case laws for the same. The reasoning you may adopt is suppose hypothetically,in the year you claim business having commenced commercially, hence the loss should be allowed as a business loss, but suppose assessing officer disagrees to the same and does not allow the loss, then the expenses are capitalised on the gound of being treated as preoperative expenses.

[DEV KUMAR KOTHARI]

The purchase is of fixed asset of Rs.2,50,000/- it may be very difficult to establish bonafides for exceptional circumstances for payment in cash. Suppose you made payment on a Sunday- question will arise why payment was not made earlier or later. If there is no bank at delivery place, the question can be raised why payment could not be made when the venodr has bank account (most likely) at some other place, urgency of cash payment or non acceptance of cheque/ DD payment is also difficult to establish in such cases. So better to make payment by A/c payee cheque or DD.

[SUNILKUMAR GUPTA]

No . Depreciation will not be disallowed. Because Rule 6DD does not apply to purchase of Fixed Assets. Hence you can buy fixed assets in cash without any limit and claim depreciation.

AI Summary

Section 40A(3) challenge to depreciation: cash purchase of fixed asset may risk disallowance absent genuine exceptions.
Depreciation is a statutory allowance on assets owned and used for business and is not ordinarily a revenue expenditure; therefore disallowance for cash payments should not automatically apply. Nonetheless, the provision barring deductions for certain cash payments may be construed to encompass capital expenditure and related depreciation, enabling an assessing officer to challenge the allowance. Practical responses include capitalising the amount and claiming depreciation, invoking prescribed exceptions to cash payment disallowance, and avoiding high value cash payments by using account payee cheque or DD due to difficulty proving bona fides.