Tuesday, January 10, 2012

DEPRECIATION – ALLOWABLE AMOUNT AND ACTUAL ALLOWANCE AGAINST CHARGEABLE PROFITS

 
DEPRECIATION – ALLOWABLE AMOUNT AND ACTUAL ALLOWANCE AGAINST CHARGEABLE PROFITS OR GAINS two important concepts in section 32 on the Income-tax Act, 1961.

References and links:

Section 32 of Income-tax act, 1961.

Article by author titled "Chargeable profits and gains in the context of depreciation allowance" published in (1996) 86 Taxman 184 (Mag.).

Depreciation:

Readers are well aware about concept of depreciation of assets in commercial world and also about depreciation allowable under the provisions of the income-tax act, 1961.Therefore, a detailed discussion is not considered necessary.

Scope of this write-up:

Scope of this write-up is limited to two aspects:

Amount of depreciation allowable, and amount which can be allowed in any year and balance un-allowed deprecation which is carried forward under the provisions of Income-tax Act to form part of current depreciation of subsequent year.

Depreciation allowable:

On reading of section 32(1) along with the relevant rules and the appendix to the income Tax Rules which prescribes rate of depreciation we find that the allowance for depreciation of various eligible assets is to be worked out at prescribed rates on SLM or WDV basis as may be applicable in case of an assessee. The allowance for deprecation of assets is calculated from year to year and it can be called a regular and continuing allowance. Whereas, some other allowances like initial allowance or additional allowance are allowed in the initial year as an incentive. Terminal deprecation may be allowed in the year when asset ceases to be in use or when block of asset ceases to be block of asset etc. Those deductions cannot properly be called as allowance for depreciation of assets because initial or additional allowance is allowed as an incentive and terminal allowance is in nature of obsolescence allowance.

What is allowable, and what can be allowed?:

We find that what is allowable as allowance for deprecation is to be computed in terms of sub-section (1) of the section 32.

We also find that what can be allowed in a given year is to be computed in accordance with sub-section (2) of section 32 and what remains un-allowed due to inadequate chargeable income is to be carried forward.

Relevant portion of these sub-sections are reproduced below with highlights in context of the scope of this write-up:

Depreciation.

32. (1) [In respect of depreciation of—

(i) buildings, machinery, plant or furniture, being tangible assets;

(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998,

owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed—]

[(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed;]

(ii) 3[in the case of any block of assets, such percentage on the written down value thereof as may be prescribed:]

xxxx

(2) Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73, the allowance or the part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years.]

Quantification is in sub-section (1):

We find that the quantification of depreciation allowable is to be made in accordance with sub-section (1) whereas actual allowance will be made under sub-section (2).

As per sub-section (2) deprecation is to be actually allowed in the assessment of assessee. And that deprecation is to be allowed to the extent of chargeable profits or gains.

The amount which can be allowed is thus restricted to the amount of profit or gains which are chargeable to tax.

Chargeable profit or gain or income:

In a detailed article the author has expressed his views that Chargeable income in the context of Section 32 of the Income-tax Act, 1961 means `total income', computed after allowing deductions under chapter VIA in an article published at (1996) 86 Taxman 184 (Mag.) entitled "Chargeable profits and gains in the context of depreciation allowance". In that article, detailed discussions have been made on related provisions. It is also pointed out that under the provisions of the Income-tax act, 1922 the scheme was different. Under old provisions it was mandatory to deduct depreciation while computing business income. Whereas in the 1961 Act the scheme is different, and amount of allowable deprecation is to be deducted from `chargeable income'.

In context of computation provisions allowable amount of depreciation can be computed when section 32 or section 57 is applicable that is when a business or profession is carried or when certain types of income are earned which may fall under the head `income from other sources'.

However, depreciation can actually be allowed only against chargeable profits or gains that means against `total income' which is worked out after deductions under chapter VIA are deducted from the gross total income. Deprecation is therefore, allowable against `total income', irrespective of heads of income under which different computations are made.

The amount of allowable deprecation or any part of it which cannot be allowed due to absence or inadequacy of chargeable profit or gains becomes part of deprecation of subsequent year.

Depreciation which is carried forward is considered as actually allowed for the purpose of computing written down value (WDV). However, in view of author the concept of year wise `unabsorbed deprecation' was applicable only during assessment years 1997-98 to 2001-02 when a limit of eight years was applicable for carry forward and set off of deprecation also.

For a detailed discussions readers are advised to read the earlier article published as (1996) 86 Taxman 184 (Mag.) entitled "Chargeable profits and gains in the context of depreciation allowance".

Readers are also requested to send their views on the subject matter.

DEPRECIATION – ALLOWABLE AMOUNT AND ACTUAL ALLOWANCE AGAINST CHARGEABLE PROFITS OR GAINS two important concepts in section 32 on the Income-tax Act, 1961.
By: C.A. DEV KUMAR KOTHARI : View Profile

References and links:

Section 32 of Income-tax act, 1961.

Article by author titled "Chargeable profits and gains in the context of depreciation allowance" published in (1996) 86 Taxman 184 (Mag.).

Depreciation:

Readers are well aware about concept of depreciation of assets in commercial world and also about depreciation allowable under the provisions of the income-tax act, 1961.Therefore, a detailed discussion is not considered necessary.

Scope of this write-up:

Scope of this write-up is limited to two aspects:

Amount of depreciation allowable, and amount which can be allowed in any year and balance un-allowed deprecation which is carried forward under the provisions of Income-tax Act to form part of current depreciation of subsequent year.

Depreciation allowable:

On reading of section 32(1) along with the relevant rules and the appendix to the income Tax Rules which prescribes rate of depreciation we find that the allowance for depreciation of various eligible assets is to be worked out at prescribed rates on SLM or WDV basis as may be applicable in case of an assessee. The allowance for deprecation of assets is calculated from year to year and it can be called a regular and continuing allowance. Whereas, some other allowances like initial allowance or additional allowance are allowed in the initial year as an incentive. Terminal deprecation may be allowed in the year when asset ceases to be in use or when block of asset ceases to be block of asset etc. Those deductions cannot properly be called as allowance for depreciation of assets because initial or additional allowance is allowed as an incentive and terminal allowance is in nature of obsolescence allowance.

What is allowable, and what can be allowed?:

We find that what is allowable as allowance for deprecation is to be computed in terms of sub-section (1) of the section 32.

We also find that what can be allowed in a given year is to be computed in accordance with sub-section (2) of section 32 and what remains un-allowed due to inadequate chargeable income is to be carried forward.

Relevant portion of these sub-sections are reproduced below with highlights in context of the scope of this write-up:

Depreciation.

32. (1) [In respect of depreciation of—

(i) buildings, machinery, plant or furniture, being tangible assets;

(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998,

owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed—]

[(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed;]

(ii) 3[in the case of any block of assets, such percentage on the written down value thereof as may be prescribed:]

xxxx

(2) Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73, the allowance or the part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years.]

Quantification is in sub-section (1):

We find that the quantification of depreciation allowable is to be made in accordance with sub-section (1) whereas actual allowance will be made under sub-section (2).

As per sub-section (2) deprecation is to be actually allowed in the assessment of assessee. And that deprecation is to be allowed to the extent of chargeable profits or gains.

The amount which can be allowed is thus restricted to the amount of profit or gains which are chargeable to tax.

Chargeable profit or gain or income:

In a detailed article the author has expressed his views that Chargeable income in the context of Section 32 of the Income-tax Act, 1961 means `total income', computed after allowing deductions under chapter VIA in an article published at (1996) 86 Taxman 184 (Mag.) entitled "Chargeable profits and gains in the context of depreciation allowance". In that article, detailed discussions have been made on related provisions. It is also pointed out that under the provisions of the Income-tax act, 1922 the scheme was different. Under old provisions it was mandatory to deduct depreciation while computing business income. Whereas in the 1961 Act the scheme is different, and amount of allowable deprecation is to be deducted from `chargeable income'.

In context of computation provisions allowable amount of depreciation can be computed when section 32 or section 57 is applicable that is when a business or profession is carried or when certain types of income are earned which may fall under the head `income from other sources'.

However, depreciation can actually be allowed only against chargeable profits or gains that means against `total income' which is worked out after deductions under chapter VIA are deducted from the gross total income. Deprecation is therefore, allowable against `total income', irrespective of heads of income under which different computations are made.

The amount of allowable deprecation or any part of it which cannot be allowed due to absence or inadequacy of chargeable profit or gains becomes part of deprecation of subsequent year.

Depreciation which is carried forward is considered as actually allowed for the purpose of computing written down value (WDV). However, in view of author the concept of year wise `unabsorbed deprecation' was applicable only during assessment years 1997-98 to 2001-02 when a limit of eight years was applicable for carry forward and set off of deprecation also.

For a detailed discussions readers are advised to read the earlier article published as (1996) 86 Taxman 184 (Mag.) entitled "Chargeable profits and gains in the context of depreciation allowance".

Readers are also requested to send their views on the subject matter.

Dated: - January 7, 2012


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