HOW TO CALCULATE “ACTUAL COST” FOR THE PURPOSE OF “BLOCK OF ASSETS”

Section-43(1) of the Income Tax Act, 1961 provides the provisions for ascertainment of “Actual cost” of assets.

“Actual Cost” means the actual cost of the assets to the assessee, reduced by that portion of the cost which has been met by any other person or authority.

We will understand the definition by an example:-

Suppose, a person purchased a machinery for Rs. 10, 00,000. He spent Rs. 50,000 towards installation and transportation of machinery. Further, he was allowed a subsidy of 25% of purchase cost by the state government under a scheme.

Ans: In this example, cost of machinery will be as follows:-

The Government has been striving towards eliminating cash economy to curb black money. To fulfill this objective and to promote use of banking channels for business transactions, the government brought a proviso in section-43(1) which is as follows:-

• This proviso is applicable where a taxpayer makes acquisition of an asset or part thereof.
• It provides that payment towards an asset should be made through banking channels like account payee cheque or draft or use of RTGS/NEFT/ECS etc.
• If the taxpayer makes payment of consideration for asset in cash, it should not be more than Rs. 10,000 to a person in a single day.
• If the proviso is violated and payment is made for more than Rs. 10,000 in cash in a day, such expenditure shall be ignored for the purpose of determining the actual cost of asset;
• The limit of Rs. 10,000 is for a day. Therefore, the taxpayer can make payment in a series of installments below Rs 10,000 in more than one day.

We will understand this provision with an example:-

A taxpayer purchases a machinery for Rs. 10,00,000 on 01-04-2020 and makes payment as follows:-

• Rs. 7,00,000 by cheque on 01-04-2020
• Rs. 3,00,000 by cash on 02-04-2020

In this example, since, the buyer has paid Rs. 3, 00,000 in cash which violates the proviso, the actual cost of machinery will be considered as Rs. 7, 00,000 only.

Further, considering the provisions of Section 269ST of the Act, the seller of machinery will be liable for a penalty u/s 271DA equal to 100% i.e. Rs. 3, 00,000 for accepting cash of Rs. 2 Lakhs or more.

Suppose, in the above example, the payment for consideration has been made by buyer as follows:-

• Rs. 7,00,000 by cheque on 01-04-2020
• Rs. 1,90,000 by cash on 02-04-2020
• Rs. 10,000 by cash on 03-04-2020
• Rs. 50,000 by cash on 04-04-2020
• Rs. 45,000 by cash on 05-04-2020
• Rs. 5,000 by cash on 06-04-2020

In this case,

Actual cost for the buyer shall be: - Rs. 7, 00,000 + 10,000+ 5,000 = Rs. 7, 15,000. Payments exceeding Rs. 10,000 shall be ignored for calculating actual cost.

However, the seller shall be liable for penalty u/s 271DA read with section 269ST @ 100% of cash payment received i.e. Rs. 3,00,000 as section-269ST disallows payment in cash Rs. 2,00,000 or more against a single transaction.