Depreciation under Income Tax Act, 1961 - SIRC · PDF fileDepreciation under Income Tax Act,...

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April 2017

Depreciation under Income Tax Act, 1961


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Discussion points

§ Concept of depreciation

§ Practical Issues on depreciation:

q Goodwill

q Non-compete fees

q Software

q UPS, printers, scanners

q Additional Depreciation

q Leasing Transactions

q Assets owned by charitable trusts

• Carry Forward of Unabsorbed depreciation

• ICDS Impact

• Others


Concept of depreciation

4©2017 Deloitte Haskins & Sells LLP

Concept of depreciation

Section 32 of Income Tax Act, 1961 (‘Act’) provides for depreciation.

Section 32(1) provides that depreciation in respect of-

i. buildings, machinery, plant or furniture, being tangible assets;

ii. know-how, patents, copyrights, trade marks, licenses, 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-

iii. 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;

iv. in the case of any block of assets, such percentage on the written down value thereof as may be prescribed.


Salient features of depreciation

Ownership.

• Owned wholly or partly by the assesse. Even fractional ownership is recognised for the claim of depreciation.

• Certain exceptions

Ø Capital expenditure on leased premises

Ø Beneficial ownership

Ø Leasing transactions

Used for the purpose of business

• Usage includes ‘passive use’ or ‘potential use’ and not necessarily ‘actual use’

Used during the relevant year

• Depreciation is allowed so long as the block is in use or available.

• Only exception is where the whole factory or unit is closed for the whole year

Asset must fall under the eligible class of asset

• Tangible assets – building, machinery, plant or furniture

• Intangible assets – know-how, patents, copyrights, licenses, franchises or any other similar business or commercial rights


Salient features of depreciation

• Depreciation is a mandatory allowance for all persons engaged in business/ profession.

• Depreciation can be claimed only on a block of asset and not on individual assets.

• Depreciation is calculated from the date the asset being put to use and not the from the date of acquisition or ready to use;

• Depreciation shall be calculated only on WDV basis.

− Provided, in case of undertaking engaged in generation and distribution of power, SLM method may be adopted.

• In case where an asset acquired during the previous year, is put to use for a period of less than 180 days during that previous year, depreciation on such asset shall be restricted to 50% of the amount calculated at the percentage prescribed.


Actual cost for claiming depreciation shall be Cost of asset as reduced by deduction already claimed under section 35

Asset already used for scientific research

Actual Cost

Section 43 of the Act defines “actual cost”

“actual cost means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority”

W.e.f 1.4.2018, if assessee incurs any expenditure for acquisition of any asset or part thereof, payment of which has been done by modes other than by Cheque or bank draft or electronic clearing system and such payment exceeds Rs.10,000 in a day, then such expenditure will be ignored for determining actual cost.

Actual cost for claiming depreciation shall be Cost to previous owner as reduced by any depreciation already claimed on the asset

Asset acquired by gift or inheritance

Actual cost shall be whichever is less:

i. Cost at which assessee first acquired the asset as reduced by depreciation already allowed/ allowable to him under the Act.

iii. Price at which asset was reacquired

Asset sold and re-acquired


Actual Cost

If the resulting company is an Indian company, the actual cost to resulting company shall be the cost net of depreciation as if the de-merged company would have continued to hold the asset.

Assets acquired by de-merger

Before the Asset is put to use: Actual cost shall include interest paid.

After Asset is put to use: Interest shall be charged to P&L a/cInterest paid on acquisition of asset

Actual cost shall be cost of acquisition as reduced by any credit available on excise duty or additional duty paid as per Customs Tariff Act.

Excise duty paid on acquisition of asset

If the amalgamated company is an Indian company, the actual cost to amalgamated company shall be the cost net of depreciation as if the amalgamating company would have continued to hold the asset

Assets acquired by amalgamation

Actual cost for claiming depreciation shall be Cost of Building as reduced by depreciation which would have been allowable if it had ben used for business or profession since its acquisition

Building already used for personal purpose

In case where the transferee is an Indian company and the subsidiary is an wholly-owned subsidiary of the holding company (Sec.47), Actual cost shall be cost net of depreciation as if the transferor company would have continued to hold the asset.

Assets acquired from holding/subsidiary company


Actual Cost

Actual cost shall not include the portion of cost of asset which is relatable to the subsidy or grant or reimbursement provided by Central or State Government or any other authority.

Subsidy received on part of asset

Actual cost shall be Cost to the assessee net of depreciation as if the asset was used in India since its date of acquisition

Asset acquired outside India by a non-resident

Actual cost shall be “NIL”Asset eligible for deduction u/s 35AD


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Block of Asset Old rates w.e.f 1.4.2017

Buildings 5% / 10% /100% 5% / 10% / 40%

Furniture & Fittings 10% 10%

Plant & Machinery 15% 15%

Vehicles 15% 15%

Computers including computer software

60% 40%

Energy Saving devises, Water Treatment Plant, etc

80% / 100% 40%

Intangible Assets 25% 25%

Rates of depreciation

*W.e.f 1.4.2017, the maximum ceiling of depreciation eligible for claim on assets has been restricted to 40% of WDV.


Practical Issues on Depreciation


Issues

Depreciation Claim

Issues in relation to

Depreciation

Depreciation on leasing transactions

Claim of depreciation on Goodwill

Claim of additional depreciation

Claim of depreciation on computer software and UPS/Scanners and

printers

Claim of depreciation on Non-compete feeOther issues

Carry forward of unabsorbed depreciation

Depreciation claim by Charitable trusts


Depreciation on Goodwill


The term goodwill has not been defined under the Act. The meaning is to be derived from various judicial precedents:

•Wood V.C. in Churton v. Douglas [1859] John 174Every positive advantage that has been acquired by the old firm in carrying on its business, whether connected with the premises in which the business was previously carried on or with the name of the old firm, or with any other matter carrying with it the benefit of the business.

• CIT v. Hindustan Coco Cola Beverages P. Ltd. [2011] 331 ITR 192 (Delhi)Goodwill conveys a positive reputation built by a person/company/business concern over a period of time

• DCIT v. Worldwide Media P. Ltd. [2014] 030 ITR (Trib) 0181-Mum ITATThe goodwill is a kind of benefit arising from the reputation of a brand or business which is generated with the passage of time. Goodwill is a generic term which has a very wide meaning and is generated while carrying on the business and the brand value associated with the products

• Khushal Khemgar Shah v. Mrs. Khorshed Banu Dadiba Boatwalla - AIR 1970 SC 1147Goodwill is the benefit and advantage of the good name, reputation and connection of a business. It is the attractive force which brings in customers. It is the magnetic quality of a particular trade or business which attracts customers to it as a matter of course.

• CIT v. MIS Bharti Teletech Ltd [2015] 60 taxmann.com 166 (Delhi)Goodwill, when appositely understood, does convey a positive reputation built by a person/company/business concern over a period of time

Issues on DepreciationGoodwill-Definition


Issues on DepreciationDepreciation on Goodwill

Facts Ruling Observation

• Pursuant to a scheme of Amalgamation, assets and liabilities of YSN Shares & Securities (P) Ltd were transferred to and vested in the assessee company. The excess consideration paid by the assessee company over the value of net assets acquired was termed as ‘goodwill’

• The extra consideration was paid towards the reputation of amalgamating Company in order to retain its existing clientele

• Goodwill would fall under the expression `any other business or commercial right of a similar nature'

• The principle of ejusdem generis would strictly apply while interpreting the aforesaid expression which finds place in Explanation 3(b)

• Explanation 3 states that the expression "asset" shall mean an intangible asset, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature.

• A reading the words "any other business or commercial rights of similar nature" in clause (b) of Explanation 3 indicates that goodwill would fall under the expression "any other business or commercial right of a similar nature".

• In the circumstances, we are of the view that "goodwill" is an asset under Explanation 3(b) to section 32(1) of the Act.

Supreme Court in the case of Smifs Securities 342 ITR 302 (SC) has held that `Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act and is eligible for depreciation.



In the following cases, various Tribunals and Courts by following the decision of Supreme Court in the case of Smif Securities has held that depreciation is allowable on goodwill.

MIS Bharti Teletech Ltd (IT APPEAL NO. 496 OF 2014) (Delhi HC)

Payments to the retiring partners for acquiring commercial rights which were in the nature of intangible assets over and above the capital and disclosed as goodwill. The depreciation on such goodwill is an allowable deduction.

Swastik Industries v. Income-tax Officer [2015] 041 ITR (Trib) 0277 (Ahd)

As in accordance with the decision of Supreme Court , it has held that `Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act and is eligible for depreciation.

PPG Asian Paints P. Ltd. v. Asst. CIT (LTU) [2015] 43 ITR (Trib) 307 (Mum)

The consideration paid towards network and other facilities constituted business or commercial rights similar to the intangible assets enumerated under section 32 and allowable to depreciation.

St. Angelo's Computers Ltd. v. Income-tax Officer [2015] 044 ITR (Trib) 0112

The goodwill which was included as part of take over of a computer training concern is eligible for depreciation u/s 32 of the Act.



Decision of Bangalore Tribunal in the case of United Breweries Ltd. V ACIT [ITA No. 722/Bang/2014]

• The company merged with three of its subsidiaries and had accounted Goodwill being the difference between consideration paid and the fair value of net assets taken over.

• The Assessing Officer disallowed the depreciation on Goodwill on the ground that there is no Goodwill if proper valuation is assigned to the tangible asset and land. CIT(A) upheld the decision of Assessing Officer.

• As per fifth proviso to Section 32(1)(ii) of the Act, the depreciation allowable to amalgamated and

amalgamating company shall by the deduction calculated at prescribed rates as if the amalgamation had not taken place.

• Reference drawn to explanation 3 of section 43(1) of the Act, where-in the Assessing Officer, if not satisfied with the valuation of assets transferred, can determine the value of such assets.

• The ITAT held that depreciation could not be allowed on Goodwill recorded pursuant to amalgamation of subsidiary into the company, but restricted the depreciation on Goodwill to the extent the same was available to the amalgamating company.

Facts

Ruling of ITAT



Decision of Pune Tribunal in the case of Cosmos Co-operative Bank Limited

• Assessee claimed the excess of liabilities of the merged banks over the realizable value of assets

taken over as revenue loss. AO & CIT(A) disallowed the claim

• Before the ITAT the assesse raised an alternative claim to allow depreciation u/s.32(1)(ii), stating that acquisition of new client base, operational branches and new money market resulted in business advantage which is in the nature of ‘business or commercial rights’

• The Tribunal relying on the decision of the Delhi High Court in the case of Areva T & D and the decision

of the ITAT, Hyderabad in the case of SKS Micro Finance Ltd, held that the business advantage detailed are liable to be considered as’ business or commercial rights’ and allowed depreciation on the same.

It may be noted that in the said case, the assesse followed the ‘Pooling of interest method’ and not the ‘Purchase Method’ and no Intangible asset was accounted in the books of account.

Facts

Ruling of ITAT


Depreciation on Non-compete fee


Participation in similar business

Directly or indirectly

solicit client

Influence the

customer

Influence clients

Involve in business

with competitor

Involve in business of same nature

Non-Compete fee

Payment made by the transferee (payer) of a

business to its transferor (receiver) for restricting the receiver

from

Issues on DepreciationNon-Compete fee definition


Issues on DepreciationDepreciation on Non-Compete fee

Eligible for depreciation at 25%?

In the following cases courts/ Tribunals has held that that non-compete fee paid by taxpayer, as a part of bundle of other intangible rights obtained on purchase of a business division, is eligible for depreciation under section 32 of the Income-tax Act, 1961.

• Madras High Court in the case of Pentasoft Technologies Limited vs. DCIT.

• Karnataka High Court in the case of CIT vs. Ingersoll Rand International Rand Ltd

• Pune Tribunal in the case of ACIT vs. Johnson Matthey Chemical India Pvt. Ltd in ITA No.1317/PN/2010

Against:

• Delhi High Court in the case of Sharp Business System vs. CIT(3) (2012) 27 taxmann.com 50 (Delhi)

Revenue/ Capital Expenditure?

Revenue Expenditure:

• Madras High Court in the case of Carborandum Universal Ltd. V JCIT [2012] 26 taxmann.com 268 (Madras)

• Supreme Court in the case of Commissioner of Income-tax vs. Coal Shipments (P.) Ltd. 82 ITR 902

Capital Expenditure:

• Chennai Tribunal in the case of M/s. Medicorp Tech. India Ltd. (2009) 122 TTJ (Chennai) 394.


Depreciation on Computer Software/ UPS/ Printer


Issues on DepreciationDepreciation claim on computer software and UPS/printers/ scanners

Claim of depreciation at 60% on Computer software instead of 25%

Claim of depreciation at 60% on UPS/printers and scanners instead of 15%

Claim of depreciation at higher rate by grouping in different block

of assets

• The UPS/ printers/ scanners attached to computers and which form part of the computer system setup are grouped under computers.

• Depreciation is claimed at 60%.

• Dispute- To be categorized as P&M and are eligible for depreciation only at 15%

• Judicial Precedents:ü Favourable ruling-

Chennai Tribunal in the case of Sundaram Asset Management Co.Ltd v. DCIT 2013) 36 CCH 299.

ü Against ruling- Madras HC in the case of Dinamalar vs. ITO, Thirunelveli (2016) 74 taxmann.com 14 (Madras)

• The computer software/ Software licenses purchased are grouped under computers and depreciation claimed at 60%.

• Dispute- To be categorized as software and are eligible for depreciation only at 25%

• Judicial Precedents:ü Favourable ruling- • Hyderabad Tribunal in the case of

Ushodaya Enterprises Ltd. v ACIT [2015] 60 taxmann.com 85

• ACIT vs. Zydus Infrastructure (P.) Ltd. [2016] 72 taxmann.com 199 (Ahmedabad - Trib.)


Additional Depreciation


Issues on depreciation claimBalance of additional depreciation claimed in subsequent years

Provisions as per Section 32(1)(iia) of the Income Tax Act, 1961:

“in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing or in the business of generation, transmission or distribution of power, a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed as deduction.”

As per section 32(1)(ii) , where an asset was put to use for a period of less than 180 days in the year it was acquired, additional depreciation was restricted only to fifty percent of the amount calculated in that previous year.

Subsequently, Finance Act, 2015 inserted the third proviso to section 32(1)(ii) with effect from 01.04.2016 stating that, where only fifty percent of additional depreciation was utilized in the year the asset was acquired and put to use for a period of less than 180 days, the balance fifty percent of the additional depreciation can be utilized in the immediately succeeding previous year.

Whether the proviso can be considered retrospective?


Balance of additional depreciation claimed in subsequent years Judicial Precedents

Case Reference Judgment

DCIT v/s. Cosmo Films Ltd. [2012] 24 taxmann.com 189 (Delhi ITAT)

The extra depreciation allowable under section 32(1)(iia) is an extra incentive which has been earned and calculated in the year of acquisition but restricted for that year to 50 per cent on account of usage. The said earned incentive must be made available in the subsequent year.

Apollo Tyres Ltd vs. ACIT, Kochi [2014] 45 taxmann.com 337 (Cochin Tribunal)

In terms of section 32(1)(iia), there is no restriction on assessee to carry forward additional depreciation and, thus, where only 50 per cent of additional depreciation is allowed in year of purchase of machinery as it was put to use for less than 180 days during said year, balance 50 per cent of additional depreciation can be claimed in subsequent assessment year.

Universal Cables Ltd vs. DCIT [57 taxmann.com 95] Kolkata Tribunal

If plant and machinery acquired during previous year and is put to use for a period of less than 180 days in that previous year and in that case, assessee is entitled for additional depreciation under section 32(1)(iia) in subsequent assessment year also.


Balance of additional depreciation claimed in subsequent years Judicial Precedents

Case Reference Judgment

CIT vs. Shri. T.P Textiles (P) Ltd [2017] 79 taxmann.com 411 (Madras High Court)

In view of section 32(1)(iia), there is no limitation placed on assessee in claiming balance additional depreciation in assessment year which follows assessment year in which machinery has been bought and used for less than 180 days.

Chennai Tribunal ruling- M/s. Automotive Coaches & Components Ltd., vs. DCIT in ITA No.1789/Mds/2014

Relying on the decision of the Karnataka High Court in the case of CIT vs. Rittal India Private Limited 66 taxmann.com 4 held that the assessee would be entitled to claim the remaining 10% of the additional depreciation on the assets put to use in the previous assessment year for less than 180 days.

Contrary view by Chennai Tribunal in the case of Brakes India Ltd vs DCIT (LTU) 144 ITD 0403 where in the Tribunal has held that in the subsequent year where the balance of the additional depreciation is claimed as expenditure, the plant or machinery is no longer new. It ruled that “the intention of the Legislature was to give such additional depreciation for the year in which assets were put to use and not for any succeeding year. There is nothing in the statute which allows carry forward of such depreciation. There cannot be any presumption that unless it is specifically denied, carried forward has to be allowed.


Depreciation on Leasing transactions


Issues on depreciation claimDepreciation on Leasing Transactions

A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time.

Operating LeaseRisk and rewards does not transfer to Lessee

Depreciation can be claimed by Lessor

Lessee can claim lease rentals as revenue

Finance LeaseRisk and rewards transfer to Lessee

Depreciation can be claimed by Lessor/ Lessee?

Judicial Precedents



Claim of depreciation on asset taken on finance lease

• As per the Accounting Standard 19 (“AS 19”), in a finance lease transaction, the lessee is required to capitalize the asset in its books of account.

• After the issuance of AS 19 issued by the ICAI, the Central Board of Direct Taxes vide Circular No. 2/2001 dated 9 February 2001 has clarified that capitalization of assets acquired under the finance lease by the lessees in their books of account will not have any bearing on the allowance of depreciation on those assets under section 32 of the ITA and also states that the ownership of the asset is determined by the terms of contract between the lessor and the lessee.

• The above circular indicates that the owner is entitled to depreciation, whether he is lessee or lessor, depending upon the terms of the contract.



Judicial Precedents on claim of depreciation

Mumbai Tribunal in J.M.Shares and Stock Brokers 2007) 109

ITD 329 (Mum Lessee was to bear all the risk, pay all taxes, cess and charges, etc. in respect of the vehicles, to insure vehicles, and that the lessor intended to sell leased assets at the expiry of lease period and was not interested in taking back vehicles from the lessee. Hence lessor was not entitled for depreciation claim.

Mumbai Tribunal in Housing Development & Finance Corpn. Ltd (2006) 98 ITD 319 (Mum)

After considering the agreement between the lessor, lessee (RPL) and the supplier of plant & machinery, Tribunal held that it is not a case of genuine lease and in reality it is a case of financing arrangement between the parties. Hence, the claim of depreciation by the lessor was not accepted.

Mumbai Special Bench in Indusind Bank Ltd (2012) 19

taxmann.com 173

The terms of the contract made it evident that the lessee is the owner of the asset and declined the claim of depreciation by the lessor on the leased asset. The Special Bench decided the case relying on the decisions of the Supreme Court in the case of Asea Brown Boveri Ltd. v. Industrial Finance Corpn. of India [2006] 154 Taxman 512(SC).

Rajasthan HC in Shree Rajasthan Syntex Ltd (2009)

178 Taxman 33 (Raj.)

The High Court held that the lessor is entitled to claim depreciation based on the fact that on termination of the lease, the leased plant and machinery were to be returned to the lessor in the condition in which they were taken, except normal wear and tear.



Supreme Court decision in the case of ICDS Ltd (2013) 350 ITR 527 (SC)

Ruling-

Lessor can claim depreciation on the assets leased if the following criteria are fulfilled:

ü The lessor should be the exclusive owner of the asset at all points of time;

ü If the lessee committed a default, the lessor should be empowered to re-possess the asset (and not merely recover money from the customer);

ü At the conclusion of the lease period, the lessee should be obliged to return the vehicle to the lessor;

ü The lessor should have the right of inspection of the asset at all times.


Depreciation claim by Charitable Trusts


Issues on depreciation claimClaim of depreciation by Charitable Trusts

Provisions as per Section 11(6) of the Act w.e.f 1.4.2015

“In this section where any income is required to be applied or accumulated or set apart for application, then, for such purposes the income shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under this section in the same or any other previous year.”

Acquisition of capital asset considered for application of income, eligible for depreciation?

Yes No

Prior to 1st April 2015 After 1st April 2015

The amended provisions is applicable from AY 2015-16


Co-brandLogo

Co-brandLogo

Co-brandLogo

Co-brandLogo

CIT Vs Raipur Pallottine Society [1989] 180 ITR 579 (MP)

• Charitable trust is entitled to depreciation in respect of asset owned by it.

• Objective of depreciation is to spread the expenditure over the life period of asset.

• It is necessary to allow depreciation as deduction to preserve the corpus of the trust.

CIT Vs Society of the Sisters of St. Anne [1984] 146 ITR 28 (Karn)

• Depreciation on the assets of the trust is a necessary deduction in order to arrive at the income available for application to charitable and religious purposes.

• The amount of depreciation debited to the accounts of a charitable institution is to be deducted to arrive at the income available for application to charitable and religious purposes.

Issues on depreciationClaim of depreciation by Charitable Trusts

CIT Vs Market Committee, Pipli [2011] 330 ITR 16 (P&H)

• The income of the assessee being exempt, the assessee was only claiming that depreciation should be reduced from the income for determining the percentage of funds which had to be applied for the purposes of the trust.

• No double deduction claimed by the assessee. It could not be held that double benefit was given in allowing the claim for depreciation for computing income for purposes of section 11.

CIT Vs Institute of Banking [2003] 264 ITR 110 (Bom)

• The assessee is eligible for depreciation on the assets, the cost of which had been fully allowed as application of income under section 11 in the past years.

Judicial Precedents prior to amendment


Unabsorbed Depreciation


Provisions under section 32(2) of the Act

In case the depreciation claim for the current year is in excess of the profits and gains of that year, the balance/excess can be carried forward to the subsequent years for an indefinite period.

The carried forward unabsorbed depreciation can be set-off as per section 72(2) & 72(3). The treatment of unabsorbed depreciation in case of amalgamation or demerger is governed by section 72A.

Issues on depreciation claimCarry forward of Unabsorbed Depreciation

SalaryCapital Gains

Profits & Gains from Business or Profession

Income from Other

Sources

Income from House

Property

Set-off of unabsorbed depreciation against the heads of Income


Period Permissible period to c/fd

Eligibility to set off against the other income of same yr

Eligibility to set off against the other income of foll yr

Up to FY 1995-96 Indefinite Yes Yes

FY 1996-97 to 2000-01 Foll 8 years Yes No

FY 2001-02 onwards Indefinite Yes Yes

Carry forward of Unabsorbed Depreciation Section 32(2) – Legislative Background

• Special Bench, Mumbai Tribunal in the case of Times Guaranty Ltd held that the unabsorbed depreciation relating to respective period can be set off in accordance with the provisions of section 32(2) as applicable to that period and not in accordance to the provisions applicable in year of set off.

• CBDT Circular No. 762, dated 18-2-1998 clarified that the brought forward unadjusted depreciation allowance up to AY 1996-97 shall be carried forward for set off against income under any head for a maximum period of eight AYs starting from AY 1997-98.

• The reason for restoration of erstwhile section 32(2) has been brought out clearly in the Memorandum to Finance Bill 2001 (Circular 14 of 2001)

• At present, various Courts/Tribunals have held that the decision of Times Guaranty is not good in law and the benefit of set off of unabsorbed depreciation should be allowed indefinitely irrespective of the year of incurrence of depreciation after the amendment made to the section by Finance Act 2001


Carry forward of Unabsorbed Depreciation Section 32(2) – Legislative Background

Gujarat High Court in the case of General Motors Ltd vs. DCIT (210 Taxman 20)

Chennai Tribunal in the case of KMC Speciality Hospitals India Ltd vs. DCIT (49 taxmann.com 534)

Judicial Precedents

“…the provisions of section 32(2) as amended by Finance Act, 2001 would allow the unabsorbed depreciation allowance available in the assessment years 1997-98, 1999-2000, 2000-01 and 2001-02 to be carried forward to the succeeding years, and if any unabsorbed depreciation or part thereof could not be set off till the assessment year 2002-03 then it would be carried forward till the time it is set off against the profits and gains of subsequent years.

“It is true that for an interregnum period, the eligibility of unabsorbed depreciation to be carried forward was limited for a period of eight years. But, the old position that unabsorbed depreciation becomes the current depreciation under section 32(2) and therefore eligible for carry forward and set off without any limitation, was restored by the amendment brought in with effect from the assessment year 2002-03.…..The interregnum restriction of limiting the claim for an eight-year period does not take away the right of an assessee to claim the balance of unabsorbed depreciation, forever. The balance of unabsorbed depreciation revives back into life and becomes eligible for carry forward and set off along with the other part unabsorbed depreciation available to the credit of the assesse”


Other issues & ICDS impact


Impact due to ICDS

Depreciation

1

2

ICDS-VII Government grantsThe refund of government grants relating to the specific asset is required to be reduced from the book value of asset and depreciation is to be calculated thereon.

ICDS -V Tangible assets The cost incurred between the period of trial run and commercial production is to be capitalised. The depreciation on the same is available as per the prescribed rates.


1

2345

Depreciation on discarded assets • Allowable as per Delhi HC in the case of CIT vs Yamaha Motor India (P) Ltd (183 taxmann.com 291)• Not eligible as per Karnataka HC in the case of CIT vs Luwa India (18 taxmann.com 365)

Trial run of machinery will be considered as put to use for the claim of depreciation• CIT vs. Mentha & Allied Products (326 ITR 297 (Allahabad HC))• Gujrat High court in the case of ACIT vs. Ashima Syntex Ltd. (2001 251 ITR 133 Guj)

Depreciation shall not allowed in case of factory lockouts. i.e where the assets of any units have not been used for even a single day in the previous year• CIT vs. Oriental Coal Co. Ltd. [1994] 76 taxmann.com 240 (Calcutta)

Depreciation shall be calculated on the revised value of fixed assets where cost of such fixed assets has been revised due to Transfer pricing adjustments made by the TPO• Delhi Tribunal in the case of Honda Motorcycles & Scooters India Pvt. Ltd. vs ACIT in ITA No.1379/Del/2011

Issues on depreciation claimOther issues


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Date post:	18-Mar-2018
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