Suggestions on Clauses 13 and 16 of Finance Bill 2017- Section 35AD and 43(1) – Cash payment exceeding Rs 10,000 to be disallowed – Exceptions contained in Rule 6DD may be extended to section 35AD and 43(1) also
In order to discourage cash transactions even for capital expenditure, the Finance Bill, 2017 proposes to amend section 43(1) 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.
Similar amendment is proposed in section 35AD. Further, cash payment limit under section 40A(3) is also proposed to be reduced to Rs.10,000.
Thus, the Finance Bill 2017 proposes to disallow even the capital expenditure incurred in cash thereby restricting the amount of allowable depreciation under section 32 with effect from 1 April 2018 i.e. AY 2018-19.
Issues
(1) There is no clarity whether disallowance will trigger if cash expenditure is incurred post 1st April 2017 or if asset is acquired after 1st April 2017.
(2) As per the language of the proposed proviso to section 43(1), it appears that whole of the expenditure for acquisition of any asset may be disallowed even if only a small part of the expenditure may have been incurred in cash. Say for example, expenditure on asset costing Rs.1 crore may be disallowed fully for depreciation purposes even if expenditure incurred in cash is only Rs. 10,000.
(3) Permissible exceptions to the provisions of section 40A(3) and (3A) have been provided in Rule 6DD of the Income-tax Rules, 1962 having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors.
(4) Since similar situations may occur in case of compliance of the proposed provisions/amendments to section 43(1)/35AD restricting the maximum amount that can be paid in cash to Rs.10,000, exceptions on the lines provided in Rule 6DD may be considered.
Suggestions:
It is suggested that:
(i) In the interest of certainty and to avoid retro-applicability of the provision, it is recommended that disallowance of depreciation should trigger only if cash expenditure as well as asset acquisition is on or after 1 April 2017.
(ii) Only such expenditure for acquisition of asset may be disallowed which has been incurred in cash and accordingly, depreciation under section 32 may be permitted for balance portion expended in non-cash mode.
(iii) Exceptions on the lines contained in Rule 6DD may also be provided with respect to the proposed amendments in section 35AD and 43(1) which proposes to restrict the maximum amount that can be paid/ incurred in cash to 10,000.
