Cash & Capital Items: Why You Can't Claim Depreciation on Cash Purchases

When a business buys a "Capital Asset"—like a laptop, a delivery van, or a manufacturing machine—it doesn't just look at the purchase price. It looks at the Depreciation Benefit (e.g., 40% for computers), which reduces its taxable profit for years to come.

However, for Assessment Year 2026-27, a single cash payment over ₹10,000 can turn a smart investment into a tax nightmare. Under Section 43(1), cash is "Toxic" for your balance sheet. Here is why you must use digital channels for every asset acquisition.

1. The Disallowance of "Actual Cost"

In accounting, depreciation is calculated on the "Actual Cost" of the asset.

• The Law: The second proviso to Section 43(1) states that if you make a payment for an asset exceeding ₹10,000 in cash to a person in a day, such payment shall be ignored for determining the "Actual Cost."
• The Impact: If you buy a ₹5 Lakh machine and pay the full amount in cash, your "Actual Cost" for tax purposes is Zero. You cannot claim a single rupee of depreciation over the next 10 years.

2. Double Jeopardy: Section 40A(3) vs. Section 43(1)

• Section 40A(3) disallows Revenue Expenses (salaries, rent, raw material) if paid in cash above ₹10,000.
• Section 43(1) disallows Capital Expenses (asset purchase).

The Result: Whether you are buying ink for the printer (revenue) or the printer itself (capital), the ₹10,000 cash limit is the absolute ceiling for tax-efficiency.

3. The Impact on GST Input Tax Credit (ITC)

If you buy an asset in cash and don't have a valid GST Invoice showing a digital payment trail:

• You lose the Income Tax Depreciation.
• You lose the GST Input Tax Credit (18% or 28%).
• The Loss: For a ₹1 Lakh asset, you could be losing nearly ₹46,000 in combined tax benefits (Depreciation + GST Credit).

4. Second-Hand Assets and Cash

Buying "Second-hand" machinery from unorganized vendors often involves pressure to pay in cash.

• The Trap: Even if the asset is old, the Section 43(1) rule applies to you (the buyer).
• Documentation: If you buy a used car for your business, ensure the "Sale Agreement" mentions the bank transfer reference. If you pay even a ₹15,000 "advances" in cash, that ₹15,000 will be struck off from your depreciation schedule.

Legal Reference: Definition of Actual Cost

The law was amended specifically to stop the inflation of asset costs via unrecorded cash.

Section 43(1) of the Income Tax Act— "Actual cost" means the actual cost of the assets to the assessee... Provided further that where the assessee incurs any expenditure in aggregate exceeding ten thousand rupees in a day... otherwise than by an account payee cheque... such expenditure shall be ignored for the purposes of determination of actual cost.

Common Mistakes with Asset Purchases

1. Paying the "Installation Charges" in Cash: You might buy the machine by cheque but pay ₹15,000 for installation/fitting in cash. This Fitting Charge is part of the "Capital Cost." Because it was paid in cash, you lose depreciation on the installation portion.
2. Assuming the ₹2 Lakh Limit Applies: Some think that because Section 269ST (₹2 Lakh limit) exists, they can pay ₹1.5 Lakh in cash for a computer. While they won't face a 100% penalty, they will still lose the Depreciation benefit because the limit for assets is only ₹10,000.
3. Mixing Cash and Cheque: If an asset costs ₹60k, and you pay ₹11k in cash and ₹49k by cheque, your depreciable value is only ₹49k.

Conclusion

To simplify your business growth, ensure that every asset entry in your "Fixed Asset Register" is backed by a bank transaction ID. Even for small electronics or office furniture, Avoid cash if the bill is near the ₹10,000 mark.

If you are a business owner navigating cash limits, read our Revenue Expense Guide (40A(3)). If you are buying a vehicle, check our GST on Motor Vehicles Guide. For assistance with a scrutiny on high-value asset purchases, see the Faceless Assessment survival guide. For details on GST credits, read Conditions to Claim ITC.