ISLAMABAD: The Federal Board of Revenue (FBR) has explained that it is mandatory to purchase immovable property or any other asset through banking channel.
The FBR issued explanation to the Finance Act, 2019 on Tuesday regarding purchase of assets through banking channel under Section 75A of Income Tax Ordinance, 2001.
The FBR said that a new section 75A has been introduced in the Ordinance which requires that no person shall purchase immovable property having fair market value greater than Rs.5,000,000 or any other asset having fair market value more than Rs.1,000,000 otherwise than by a crossed cheque drawn on a bank or through crossed demand draft or crossed pay order or any other crossed banking instrument showing transfer of amount from one bank account to another bank account.
Fair market value of immovable property shall be the value notified by the Board under sub-section (4) of section 68 or the value fixed by provincial authority for the purpose of stamp duty, whichever is higher.
In case the transaction is not through banking channel as specified above,-
(a) such person cannot claim deductions mentioned in sections 22,23,24 & 25 on such assets. Hence, no deduction for depreciation, initial allowance, intangibles and pre-commencement expenditure shall be allowable for assets purchased otherwise than through banking channel as specified above;
(b) the amount of purchased through cash which was required to paid through banking channel as stated above, shall not be treated as cost as per section 76 for computation of any gain in sale of such asset.
Further, any person purchasing immovable property having fair market value greater than five million through cash or bearer cheque shall pay a penalty of 5% of the value of property determined by the Board under sub-section (4) of section 68 or the value determined by the provincial authority for the purposes of stamp duty, whichever is higher.
The above provisions of law are illustrated through the following examples.
Mr A is deriving income from business and has declared taxable income as under.
Cost of sales: 70,000,000.
Breakup of cost of sale
Initial depreciation on machinery: 10,000,000.
Normal depreciation of machinery: 6,000,000.
Fuel and utilities: 14,000,000.
Gross profit: 30,000,000.
Admin & distribution expenses: 10,000,000
Taxable income: 20,000,000
Mr. A had bought machinery of Rs40 million for the year through cash. As per section 75A, business deduction under section 22 & 23 pertaining to initial depreciation of Rs10,000,000 and normal depreciation of Rs6,000,000 shall not be admissible. Hence, Rs16,000,000 will be added in taxable income resulting in taxable income of Rs36,000,000.
Mr. A subsequently sells the machinery after three years at Rs12,000,000. For the purpose of computing gain, the cost of the asset has to be deducted from the sale price but in this case, the machinery was purchased through cash, hence, the cash amount cannot be treated as cost. Resultantly, Rs12,000,000 will be treated as gain chargeable to tax under the head “income from business”.
Mr. B derives income from salary only. He has purchased immovable property through cash and the FBR value of the property is Rs8,000,000 but the DC value of property for the purpose of stamp duty is Rs6,000,000. As per serial No. 21 of section 182, penalty at 5 percent of FBR value of property of DC value, whichever is higher, is to be imposed. In this case, the FBR value of property is greater than DC value, hence penalty shall be imposed at 5 percent of Rs8,000,000 at Rs400,000.