Purchase of assets through banking channel
Purchase of assets through banking channel: 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 the 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 persons 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 purchase 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.
Example 1
Mr. A is deriving income from business and has declared taxable income as under:-
Sales 100,000,000
Cost of sales 70,000,000
Breakup of cost of sales
initial depreciation on machinery 10,000,000
Normal depreciation on machinery 6,000,000
Salaries 40,000,000
Fuel & 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 Rs.40 million for the year through cash. As per section 75A, business deductions under section 22 & 23 pertaining to initial depreciation of Rs.10,000,000 and normal depreciation of Rs.6,000,000 shall not be admissible. Hence, Rs.16,000,000 will be added in taxable income resulting in taxable income of Rs.36,000,000.
Mr. A subsequently sells this machinery after three years at Rs.12,000,000. 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, Rs.12,000,000 will be treated as gain chargeable to tax under the head “Income from Business”.
Example 2
Mr. B derives income from salary only. He has purchased immovable property through cash and the FBR value of the property is Rs.8,000,000 but the DC value of property for the purpose of stamp duty is Rs.6,000,000. As per serial No.21 of section 182, penalty @ 5% of FBR value of property or 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 @ 5% of Rs.8,000,000 at Rs.400,000.
These explanations have been issued by FBR after the Finance Act 2019 approved / passed from the parliament of Pakistan.
