ITAT Deletes ₹6.55 Lakh Disallowance u/s 40A(3) as Payments Were Related to Capital Assets, not Revenue Expenses [Read Order]

The Cochin Bench of Income Tax Appellate Tribunal (ITAT) deleted a disallowance of ₹6.55 lakh under section 40A(3) of Income Tax Act,1961, holding that the cash payments were made for capital assets and not revenue expenses.

Julius Ruben,appellant-assessee, ran a proprietary business called Rocky Transport and Crane Services. For the assessment year 2015-16, he filed his return on 04.12.2015, declaring income of ₹49,02,700. The case was taken up for scrutiny, and the assessment was completed on 12.12.2017, accepting the returned income.

Later, the Assessing Officer(AO) passed a rectification order under section 154, disallowing ₹6,55,650 for cash payments made to buy capital assets, citing section 40A(3). The assessee explained that no deduction was claimed on this amount, so section 40A(3) should not apply. However, the AO rejected the explanation and passed the order on 28.12.2021.

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The assessee challenged the order before the Commissioner of Income Tax(Appeals)[CIT(A)], who upheld the disallowance, holding that section 40A(3) applies to “any expenditure,” including capital expenses.

The assessee aggrieved by the order of the CIT(A) appealed before the tribunal.

The two member bench comprising George George K (Vice President) and Inturi Rama Rao (Accountant Member) heard both sides and reviewed the records. During the assessment year 2015–16, the assessee purchased capital assets worth ₹6,55,650 through cash payments. These included items like an air conditioner, mobile phone, car accessories, and a laser range finder. Except for one payment of ₹30,000 for hire charges, none of the amounts were claimed as deductions in the profit and loss account.

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The appellate tribunal noted that these were fixed assets, which were capitalized in the books and not treated as business expenses. Since no deduction was claimed, section 40A(3) did not apply.

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The bench also referred to the Finance Act, 2017, which clarified that section 40A(3) applied only to revenue expenses. To cover cash payments for capital assets, section 43 was amended from assessment year 2018–19 onwards. Since this amendment did not apply to the year under consideration, the disallowance could not be sustained.

The tribunal also found that the case laws relied upon by the CIT(A) dealt with stock-in-trade, not capital assets, and were not relevant in this case.The ITAT held that section 40A(3) was not applicable and deleted the disallowance of ₹6,55,650.

Therefore, the appeal filed was allowed.

To Read the full text of the Order CLICK HERE

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