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Issues involved: Interpretation of section 40A(3) of the Income-tax Act, 1961 regarding the disallowance of depreciation on a scooter purchase exceeding Rs. 2,500 made in cash.
Summary: The appeal before the Appellate Tribunal ITAT DELHI-D involved the interpretation of section 40A(3) of the Income-tax Act, 1961 in a case where the assessee-company purchased a scooter for Rs. 4,500 in cash, leading to the disallowance of depreciation by the Income Tax Officer (ITO). The primary contention was whether the purchase of a capital asset like a scooter constituted 'expenditure' under section 40A(3) and if the provision could be applied to such transactions. Before the Commissioner (Appeals), the assessee argued that the purchase of a business asset, such as a scooter, should not be considered 'expenditure' under section 40A(3) and relied on expert opinion to support their case. However, the Commissioner (Appeals) upheld the disallowance, stating that the intention of the Legislature did not differentiate between expenditure on capital and revenue accounts. Upon hearing both parties, the Tribunal analyzed the legislative intent behind section 40A and concluded that the provision primarily focused on preventing artificial reduction of tax liability by diverting profits through excessive payments. The Tribunal held that capital expenditure should not fall within the scope of section 40A(3) and ruled in favor of the assessee, directing the deletion of the disallowance of depreciation on the scooter purchase. In light of the above analysis and considering the legislative history and purpose behind section 40A, the Tribunal allowed the appeal, emphasizing that the provision was not intended to cover capital expenditure and therefore, the disallowance was unwarranted.
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