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Facts
The assessee, an individual running Rocky Transport and Crane Services, filed his income tax return for AY 2015-16, which was accepted u/s 143(3). Subsequently, the AO passed an order u/s 154, disallowing Rs. 6,55,650 for cash payments made for capital assets, alleging contravention of Section 40A(3). The assessee argued that Section 40A(3) was inapplicable as no deduction was claimed for these capital expenditures, but the CIT(A) upheld the disallowance.
Held
The Tribunal held that Section 40A(3) applies solely to revenue expenditure claimed as a deduction for computing business profits, not to capital expenditure that is capitalized and for which no deduction is claimed. The specific provision to disallow cash payments for capital assets (2nd proviso to Section 43) was introduced by the Finance Act, 2017, effective from AY 2018-19, and therefore did not apply to AY 2015-16. Consequently, the disallowance made under Section 40A(3) was deleted.
Key Issues
Whether disallowance under Section 40A(3) of the Income Tax Act, 1961 is applicable to cash payments made for the acquisition of capital assets, when such expenditure is not claimed as a deduction from taxable income.
Sections Cited
250, 40A(3), 154, 139(4), 143(3), 43, 43(1), 37, 35AD, 32, 6DD, 28, 43D
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
Before: Shri George George K, Vice- & Shri Inturi Rama Rao
:Asst.Year 2015-2016 Sri.Julius Ruben The Assistant Commissioner XXI/2(A), HMT Colony PO v. of Income-tax Seaport Airport Road Corporate Circle 1(1) Ernakulam – 683 503. Kochi. PAN :ACMPR3368L. (Appellant) (Respondent) Appellant by : Sri.A.Gopalakrishnan, CA Respondent by : Smt.Leena Lal, Senior AR Date of Date of Hearing :14.05.2025 Pronouncement :16.05.2025 O R D E R
Per George George K, Vice-President :
This appeal at the instance of assessee is directed against the order of the National Faceless Appeal Centre / Commissioner of Income Tax (Appeals) [hereinafter “CIT(A)”], dated 16.01.2025, passed u/s.250 of the Income-tax Act, 1961 (hereinafter “the Act”) The relevant assessment year is 2015-2016.
The solitary issue that is raised is whether the CIT(A) has erred in upholding the addition of Rs.6,55,605 u/s.40A(3) of the Act made by the Assessing Officer (hereinafter “the AO”) in an order passed u/s.154 of the Act.
. Sri.Julius Ruben. 3. Brief facts of the case are as follows: The assessee is an individual. The assessee runs a proprietory concern by the name Rocky Transport and Crane Services. For the assessment year 2015-2016, the return of income was filed u/s.139(4) of the Act on 04.12.2015 declaring total income of Rs.49,02,700. The assessment was selected for complete scrutiny and assessment was passed u/s.143(3) of the Act on 12.12.2017 accepting the returned income declared by the assessee.
Thereafter, the AO passed an order u/s.154 of the Act, making a disallowance of Rs.6,55,650 being cash payments made for purchase of capital assets alleging contravention of sec.40A(3) of the Act. In this context, it is to be mentioned that the assessee had made payments for capital assets purchased by cash. The assessee did not claim any deduction against the cost of capital assets purchased for Rs.6,55,650. The assessee during the rectification proceedings u/s.154 of the Act, submitted that since the assessee had not claimed deduction in computing of taxable income, the provisions of sec.40A(3) of the Act has no application. However, the contentions of the assessee was rejected and AO passed order u/s.154 of the Act, on 28.12.2021.
5. Being aggrieved by the order passed u/s.154 of the Act, the assessee filed appeal before the first appellate authority. The CIT(A) upheld the addition made by the AO in order passed u/s.154 of the Act. The CIT(A) held that sec.40A(3) of the Act talks about “any expenditure” and thus it includes capital expenditure also.
“1. The order of the Ld. Commissioner of Income Tax (Appeals) in so far as these are against the appellant is opposed to law, weight of evidence, probabilities, facts and circumstances of the appellant's case 2. The Hon. Commissioner of Income Tax (Appeals) grossly erred in not providing to the appellant an opportunity for a personal hearing, as required by the National Faceless Appeal Scheme 2021 (S.O. 5429 (E), Notification No. 139/2021/F.No 370142/66/2021- TPL), dated December 28, 2021. This was despite the appellant's request in the response dated 12-12-2023, in the CBDT Portal as per acknowledgement no. 550120841121223.
The learned Commissioner of Income Tax (Appeals) grossly erred in upholding the addition of Rs. 6,55,650/- made by the Ld. Assessing Authority under section 154 of the Income Tax Act in the absence of a mistake apparent on records in the proceedings under section 143(3) of the Income Tax Act dated 12-12-2017.
4. The learned Commissioner of Income Tax (Appeals) should have understood that the payments for an aggregate amount of Rs. 6,55,650 by cash has been made towards consideration for the purchase of capital assets as per details given below and provisions of section 40A(3) are not applicable for the reason expenditure of a capital nature is not allowable and claimed as a deduction in the computation of taxable income. S. Date Name of the Description of the Whether any Amount No. person / entity to capital asset expenditure (Rs.) whom the purchased was claimed payment was as a given deduction in the P&L 1. 04.04.2014 Lulu Connect LG Air Conditioner Nil 27,000.00 2. 30.06.2014 Mobile Zone Mobile Phone Nil 20,300.00 3. 11.07.2014 Nippon Motor Advance payment for Nil 5,00,000.00 . Sri.Julius Ruben. Corporation P Ltd. the purchase of car 4. 21.07.2014 Emperor car Car accessories Nil 50,000.00 essentials 5. 31.10.2014 Indusind Industrial Laser Range Finder Nil 28,350.00 Suppliers 6. 28.06.2014 Jaims Transports Payment for hire Yes, 30,000.00 charges Rs.30,000 Total 6,55,650.00 The Ld. Commissioner of Income Tax (appeals) grossly erred in sustaining the addition of Rs. 6,55,650/- wrongly made by the assessing authority invoking the provisions of section 154 of the Act.
The Learned Commissioner of Income Tax (Appeals) failed to accept and appreciate that the Ld. Assessing Authority did not have the jurisdiction to invoke the powers vested in him under section 154 of the Act on the facts of the matters applicable in this case for the reason there is no mistake apparent on record in respect of Rs. 6,55,650/- paid by the assessee by cash for the purchase of the capital assets and against which the appellant did not claim a deduction in the computation of taxable income. The Ld. Commissioner of Income Tax (Appeals) should have held that the provisions of section 154 invoked by the Ld. Assessing Authority is legally not sustainable.
The Hon. Commissioner of Income Tax (Appeals) should have accepted that the provisions of section 40A(3) are applicable only to the extent of disallowance of such expenditure which is otherwise allowable as deduction in the computation of profits and gains from business or profession computed in accordance with the provisions of sections 28 to 43D of the Act and in the instances stated by the Assessing Officer for an aggregate amount of Rs. 6,55,650 the appellant did not claim any deduction and therefore provisions of section 40A(3) are not applicable.
7. The Hon. Commissioner of Income Tax (Appeals) grossly erred in not accepting that the expense was incurred for purchase of fixed assets which is neither income nor expenditure, but the amount debited to the fixed asset accounts. These expenses have not been claimed as an expense through . Sri.Julius Ruben. the profit and loss account and the amount of capital expenditure for Rs. 6,55,650/- should not be disallowed as the said payment was not claimed as a revenue expenditure.
8. The appellant craves leave to add, alter, delete or substitute any of the grounds urged above.”
Before the Tribunal, the assessee has filed a paper book enclosing therein brief written submissions, copy of the invoices regarding the purchase of capital assets in cash, copy of the memorandum of budget for the Finance Act, 2017, etc. In the written submission, it was stated that the cash payments were made for purchase of capital assets. It is also stated that the expenditure being capital in nature, the assessee had not claimed as deduction in computation of taxable income. It is further stated that the specific provision to disallow capital expenditure incurred in cash (as actual cost of asset) was introduced by the Finance Act, 2017 with effect from 01.04.2018, namely, 2nd proviso to sec.43(1) of the Act.
The learned Departmental Representative supported the orders of the AO and the CIT(A).
We have heard rival submissions and perused the material on record. During the relevant assessment year 2015-2016, the assessee purchased capital assets for an aggregate amount of Rs.6,55,650. The details of the same are as under:-
S. Date Name of the Description of the Whether any Amount No. person / entity to capital asset expenditure (Rs.) whom the purchased was claimed payment was as a given deduction in . Sri.Julius Ruben. the P&L 1. 04.04.2014 Lulu Connect Air Conditioner Nil 27,000.00 2. 30.06.2014 Mobile Zone Mobile Phone Nil 20,300.00 3. 11.07.2014 Nippon Motor Advance payment for Nil 5,00,000.00 Corporation P Ltd. the purchase of car 4. 21.07.2014 Emperor car Car accessories Nil 50,000.00 essentials 5. 31.10.2014 Indusind Industrial Laser Range Finder Nil 28,350.00 Suppliers 6. 28.06.2014 Jaims Transports Payment for hire Yes 30,000.00 charges Total 6,55,650.00
The invoices clearly show that payments were made for purchase of fixed assets, which were capitalized in the books of account. The expenditure incurred, therefore, was not charged to the profits and loss account. Since the expenditure was not claimed as deduction u/s.37 of the Act, the provisions of sec.40A(3) of the Act are not applicable in respect of the said sum of Rs.6,55,650 paid by cash for the purchase of capital assets.
Further, the scope of expenditure used in sec.40A(3) of the Act was examined by the Government and in the memorandum of budget for the Finance Act, 2017, which clearly established that the existence of provisions of sec.40A(3) are applicable only to the revenue expenditure incurred in cash exceeding certain monetary threshold. It was further observed that there is no provision to disallow the capital expenditure incurred in cash and proposed to amend sec.43 of the Act. The relevant portion of the memorandum of budget for Finance Act, 2017, reads as follow:-
“Disallowance of depreciation under section 32 and capital expenditure under section 35AD on cash payment . Sri.Julius Ruben. Under the existing provisions of the Act, revenue expenditure incurred in cash exceeding certain monetary threshold is not allowable as per sub-section (3) of section 40A of the Act except in specified circumstances as referred to in Rule 6DD of the Income- tax Rules, 1962. However, there is no provision to disallow the capital expenditure incurred in cash. Further, section 35AD of the Act, inter-alia provides for investment linked deduction on the amount capital expenditure incurred, wholly or exclusively for the purposes of business, during the previous year for a specified business except capital expenditure incurred for acquisition of any land or goodwill or financial instrument. In order to discourage cash transactions even for capital expenditure, it is proposed to amend the provisions of section 43 of the Act to provide that where an assessee incurs any expenditure for acquisition of any asset in respect 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 or use of electronic clearing system through a bank account, exceeds ten thousand rupees, such expenditure shall be ignored for the purposes of determination of actual cost of such asset. It is further proposed to amend section 35AD of the Act to provide that any expenditure in respect of which payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account, exceeds ten thousand rupees, no deduction shall be allowed in respect of such expenditure. These amendments will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years.”
Accordingly, sec.43 of the Act was amended by introduction of 2nd proviso to sec.43 by Finance Act, 2018 with effect from 01.04.2019. The 2nd proviso to sec.43 of the Act, reads as follow:-
“[Provided further that where the assessee incurs any expenditure for acquisition of any asset or part thereof 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 an . Sri.Julius Ruben. account payee bank draft or use of electronic clearing system through a bank account [or through such other electronic mode as may be prescribed], exceeds ten thousand rupees, such expenditure shall be ignored for the purposes of determination of actual cost.]”
Before concluding, it is to be mentioned that the CIT(A) in the impugned order at para 5.7 and 5.11 had relied upon various judicial pronouncements in support of his conclusion that sec.40A(3) disallowance is applicable to capital expenditure also. On perusal of the judicial pronouncements relied upon by the CIT(A) in the impugned order, we find the same relates to purchase value of stock-in-trade, which will have to be taken into account while determining the profits under the principle of commercial accounting. In the present case, the purchase value of the fixed assets was capitalized in the books of account of the assessee and was not taken into account while determining the profits under the principle of commercial accounting. Therefore, the judicial pronouncements relied upon by the CIT(A) is distinguishable on fact and does not have any application to the instant case.
From the aforesaid reasoning, it is clearly discernable that the provisions of sec.40A(3) of the Act applies only to revenue expenditure claimed as deduction under the commercial accounting. The 2nd proviso to sec.43 of the Act applies from assessment year 2018-2019 and does not apply to the relevant assessment year, namely, A.Y.2015-2016. Therefore, we delete the disallowance of Rs.6,55,650 made u/s.40A(3) of the Act. It is ordered accordingly.
In the result, the appeal filed by the assessee is allowed.
Order pronounced on this 16th day of May, 2025.