DISALLOWANCE OF DEPRECIATION – Sailesh Bhandari & Associates

Disallowance of depreciation is a provision in the Income Tax Act that allows the government to disallow the depreciation claimed by taxpayers on certain types of assets. This can happen if the asset is not used for business purposes, if it is not used in India, or if it is not used for a long enough period of time.

The disallowance of depreciation can have a significant impact on a taxpayer’s bottom line, as it can increase their taxable income. This is because depreciation is a deduction that can be used to reduce taxable income. If depreciation is disallowed, then the taxpayer will have to pay more tax.

There are a number of reasons why the government might disallow depreciation. One reason is to prevent taxpayers from claiming deductions for assets that are not actually used for business purposes. Another reason is to discourage taxpayers from investing in assets that are not located in India. Finally, the government may also disallow depreciation in order to raise revenue.

The disallowance of depreciation is a complex topic, and there are a number of factors that can affect whether or not depreciation will be disallowed. If you are unsure whether or not you can claim depreciation on an asset, you should consult with a tax advisor.

Here are some specific examples of when depreciation can be disallowed:

If an asset is not used for business purposes. For example, if you buy a car for personal use, you will not be able to claim depreciation on it.
If an asset is not used in India. For example, if you buy a machine that is used in your US business, you will not be able to claim depreciation on it for Indian tax purposes.
If an asset is not used for a long enough period of time. The Income Tax Act specifies a minimum period of time that an asset must be used in order to be eligible for depreciation. If an asset is not used for this minimum period, then depreciation will be disallowed.

If you think that you may be eligible to claim depreciation on an asset, you should consult with a tax advisor to make sure that you are following the correct rules.

EXAMPLES FOR DISALLOWANCE OF DEPRECIATION:

Section 37(4) of the Income Tax Act, 1961 allows a deduction for expenditure incurred by an assesses on the following items:

Taxes and duties, including customs duties, excise duties, sales tax, octroi, and entry tax.
Legal charges, including court fees, stamp duty, and fees paid to lawyers.
Rent paid for premises used for the purposes of the business or profession.
Interest on loans taken for the purposes of the business or profession.
Repairs and maintenance of premises used for the purposes of the business or profession.
Insurance premium paid for the purposes of the business or profession.
Depreciation on assets used for the purposes of the business or profession.

The deduction under section 37(4) of the Income Tax Act, is available to all assesses, regardless of the state in which they are located. However, there are some specific states in India where the deduction is more commonly claimed, such as:

TamilNadu: Salem is the financial capital of India, and there are many businesses and professionals located there. As a result, the deduction under section 37(4)of the Income Tax Act, is commonly claimed by taxpayers in TamilNadu.
TamilNadu: Thoothukudhi is the commercial capital of TamilNadu, and there are many businesses and professionals located there. As a result, the deduction under section 37(4) of the Income Tax Act is commonly claimed by taxpayers in TamilNadu.
Tamil Nadu: Madurai is the capital of Tamil Nadu, and there are many businesses and professionals located there. As a result, the deduction under section 37(4)of the Income Tax Act, is commonly claimed by taxpayers in Tamil Nadu.

It is important to note that the deduction under income tax section 37(4)of the Income Tax Act, is subject to certain conditions. For example, the expenditure must be incurred wholly and exclusively for the purposes of the business or profession. Additionally, the expenditure must be supported by documentary evidence.

If you are an assesses who is considering claiming a deduction under section income tax

CASE LAWS OF DEPRECIATION

Disallowance of depreciation under income tax case laws are cases in which the courts have ruled that the taxpayer’s claim for depreciation was disallowed. There are a number of reasons why a taxpayer’s claim for depreciation may be disallowed, including:

The asset may not be used for business purposes.
The asset may not be depreciable.
The taxpayer may not have met the requirements for claiming depreciation.
The taxpayer may have made a mistake in calculating the depreciation.

In some cases, the disallowance of depreciation may lead to the imposition of a penalty. The penalty for disallowance of depreciation is typically 20% of the amount of depreciation that was disallowed.

Here are some examples of disallowance of depreciation case laws:

In the case of K. L. Bhasin & Co. v. Commissioner of Income Tax, the Supreme Court of India ruled that the taxpayer’s claim for depreciation on motor cars that were used for both business and personal purposes was disallowed. The court held that the taxpayer had not met the requirements for claiming depreciation on assets that were used for both business and personal purposes.
In the case of Santosh Synthetics, Ulhasnagar v. Assesses, the Income Tax Appellate Tribunal (ITAT) ruled that the taxpayer’s claim for depreciation on machinery that was put to use for less than 180 days in a year was disallowed. The ITAT held that the taxpayer had not met the requirement that assets must be used for at least 180 days in a year in order to be eligible for depreciation.
In the case of Zila Sahkari Bank Ltd v. DCIT, the ITAT ruled that the taxpayer’s claim for depreciation was disallowed because the depreciation figure was not reflected in column no. 45 of the taxpayer’s income tax return (ITR). The ITAT held that the taxpayer had not complied with the requirements for claiming depreciation and that the disallowance was justified.

BASIC CONCEPTS FOR COMPUTATION OF DEPRECIATION ALLOWANCE

Depreciation is the allocation of the cost of a tangible asset over its useful life. It is a method of accounting for the against income tax decline in value of an asset over time. Depreciation is allowed as a deduction for income tax purposes.

The basic concepts for the computation of depreciation allowance are:

Cost of the asset: The cost of the asset is the first step in calculating depreciation under income tax this includes the purchase price of the asset, as well as any costs incurred to get the asset ready for use, such as transportation and installation costs.
Useful life: The useful life of an asset is the estimated number of years that the asset will be used under income tax act 1961. This is determined by factors such as the type of asset, the way it is used, and the expected rate of wear and tear.
Salvage value: The salvage value of an asset is the estimated value of the asset at the end of its useful life. This is usually a small fraction of the original cost of the asset.

Once the cost, useful life, and salvage value of an asset have been determined, the depreciation allowance can be calculated using one of the following methods under income tax act 1961:

Straight-line depreciation under income tax act 1961: Straight-line depreciation is the simplest method of depreciation. It allocates an equal amount of depreciation expense to each year of the asset’s useful life.
Declining balance depreciation under income tax act 1961: Declining balance depreciation allocates a larger amount of depreciation expense to the early years of the asset’s useful life. This method is often used for assets that have a high rate of wear and tear in the early years under income tax act 1961.
Sum-of-the-years’ digits depreciation under income tax act 1961: Sum-of-the-years’ digits depreciation allocates a greater amount of depreciation expense to the early years of the asset’s useful life, but not as much as declining balance depreciation. This method is often used for assets that have a high rate of obsolescence.
Units of production depreciation under income tax act 1961: Units of production depreciation allocates depreciation expense based on the number of units produced by the asset. This method is often used for assets that have a high rate of wear and tear based on usage.

The depreciation allowance is calculated by multiplying the depreciation method by the cost of the asset, the useful life of the asset, and the salvage value of the asset under income tax act 1961. The depreciation allowance is then deducted from the income of the business each year to reduce the taxable income.

EXAMPLES FOR CONCEPTS OF DEPRECIATION ALLOWANCE

Cost of the assetunder income tax act 1961: The cost of the asset is the initial amount that the business paid to acquire it. This includes the purchase price, as well as any installation or transportation costs.
Useful lifeunder income tax act 1961: The useful life of an asset is the number of years that it is expected to be used in the business. This is typically determined by factors such as the type of asset, the way it is used, and the expected rate of technological obsolescence.
Salvage valueunder income tax act 1961: The salvage value of an asset is the amount that the business expects to be able to sell it for at the end of its useful life. This is typically a very small fraction of the original cost of the asset.

Once the cost, useful life, and salvage value of an asset are known, the depreciation allowance can be calculated using one of the following methods:

Straight-line depreciation under income tax act 1961: This is the simplest method of depreciation. The depreciation allowance is calculated by dividing the cost of the asset by its useful life. This results in a constant depreciation expense each year.
Declining balance depreciationunder income tax act 1961: This method allows for a faster depreciation expense in the early years of the asset’s life. The depreciation allowance is calculated by multiplying the cost of the asset by a declining balance factor. The declining balance factor is typically two times the straight-line depreciation rate.
Sum-of-the-years’ digits depreciationunder income tax act 1961: This method results in a depreciation expense that is higher in the early years of the asset’s life and lower in the later years .The depreciation allowance is calculated by multiplying the cost of the asset by a fraction. The fraction is equal to the number of years of remaining life divided by the sum of the years of useful life.
Units of production depreciationunder income tax act 1961: This method allows for a depreciation expense that is based on the actual use of the asset. The depreciation allowance is calculated by multiplying the cost of the asset by the number of units produced during the year.

FAQ QUESTIONS FOR CONCEPTS COMPUTATION OF DEPRECIATION ALLOWANCE

What is depreciationunder income tax act 1961?

Depreciation is the allocation of the cost of a tangible asset over its useful life. It is a way of accounting for the fact that assets lose value over time due to wear and tear, obsolescence, or other factors.

What are the different types of depreciation methodsunder income tax act 1961?

There are four main types of depreciation methodsunder income tax act 1961:

Straight-line depreciation under income tax act 1961: This is the simplest method of depreciation. The asset is depreciated evenly over its useful life.

Declining balance depreciation under income tax act 1961: This method depreciates the asset at a faster rate in the early years of its life.

Sum-of-the-years’ digits depreciation under income tax act 1961: This method depreciates the asset based on the sum of the years of its useful life.

Units of production depreciation under income tax act 1961: This method depreciates the asset based on the number of units it produces.

What factors are considered in computing depreciation allowanceunder income tax act 1961?

The following factors are considered in computing depreciation allowanceunder income tax act 1961:

* The cost of the asset

* The useful life of the asset

* The salvage value of the asset

* The depreciation method

What is the purpose of depreciation allowanceunder income tax act 1961?

The purpose of depreciation allowance is to spread the cost of an asset over its useful lifeunder income tax act 1961. This allows businesses to deduct the cost of the asset from their income over time, rather than all at once. This can help businesses to reduce their taxable income and save money on taxes.

What are the tax implications of depreciation allowanceunder income tax act 1961?

In most countries, depreciation allowance is a tax-deductible expenseunder income tax act 1961. This means that businesses can deduct the cost of depreciating assets from their taxable income. This can help businesses to reduce their tax liability and save money on taxes.

Here are some additional FAQs about depreciation allowance:

Can I depreciate an asset that I leaseunder income tax act 1961?

Yes, you can depreciate an asset that you leaseunder income tax act 1961. However, the depreciation allowance will be based on the lease term, rather than the useful life of the asset.

What happens if I sell an asset before it is fully depreciatedunder income tax act 1961?

If you sell an asset before it is fully depreciated, you will have to pay taxes on the difference between the sale price and the depreciated value of the asset.

What are the different ways to calculate depreciationunder income tax act 1961?

There are a number of different ways to calculate depreciationunder income tax act 1961. The most common method is to use the straight-line method. However, you may also choose to use the declining balance method, the sum-of-the-years’ digits method, or the units of production method.

CASE LAWS FOR COMPUTATION OF DEPREACTION ALLOWANCE

The basic concepts for computation of depreciation allowance in case laws are as follows under income tax act 1961:

The asset must be used for the purpose of business or profession. This is a fundamental requirement for claiming depreciation allowance. The asset must be used for the purpose of generating income from the business or professionunder income tax act 1961. If the asset is used for personal purposes, no depreciation allowance will be allowed.
The asset must have a limited useful lifeunder income tax act 1961. This means that the asset will eventually wear out and become obsolete. If the asset has an infinite useful life, no depreciation allowance will be allowed.
The asset must be depreciableunder income tax act 1961. This means that the asset must be capable of being physically depreciated. Intangible assets, such as goodwill, are not depreciable.
The asset must be owned by the assesses under income tax act 1961. The assesses must be the legal owner of the asset in order to claim depreciation allowance. If the asset is leased, the lessee cannot claim depreciation allowance.

In addition to these basic concepts, there are a number of specific rules and regulations that govern the computation of depreciation allowanceunder income tax act 1961. These rules and regulations are complex and can vary depending on the type of asset and the circumstances of the assesses under income tax act 1961. It is important to consult with a tax advisor to ensure that depreciation allowance is computed correctly.

Here are some important case laws that have interpreted the basic concepts of depreciation allowance under income tax act 1961:

CIT v. Associated Cement Companies Ltd. (1963) 49 ITR 317under income tax act 1961: This case held that the asset must be used for the purpose of business or profession in order to be eligible for depreciation allowance.
CIT v. Indian Iron & Steel Co. Ltd. (1970) 80 ITR 430under income tax act 1961: This case held that the asset must have a limited useful life in order to be eligible for depreciation allowance.
CIT v. Shaw Wallace & Co. Ltd. (1979) 118 ITR 542under income tax act 1961: This case held that the asset must be depreciable in order to be eligible for depreciation allowance.
CIT v. Bharat Petroleum Corporation Ltd. (2004) 268 ITR 193under income tax act 1961: This case held that the asset must be owned by the assesses in order to be eligible for depreciation allowance.

WRITTEN DOWN VALUE SEC (43) of the Income Tax Act, 6

The written down value (WDV) of a depreciable asset as per section 43(6) of the Income Tax Act, 1961 is defined as follows:

In the case of assets acquired in the previous year under income tax act 1961, the actual cost of the asset shall be treated as WDV.
In the case of assets acquired before the previous year, the WDV shall be the actual cost of the asset less all depreciation actually allowed under the Income Tax Act.

The WDV is used to calculate the depreciation allowance for a depreciable asset in a given year under income tax act 1961. The depreciation allowance is a deduction from the income of the assesses for the year, and it reduces the taxable income.

For example, if an asset is acquired in the previous year for Rs.100,000, and the depreciation rate is 10%, then the depreciation allowance for the first year will be Rs.10,000. The WDV of the asset for the second year will then be Rs.90,000.

The WDV of an asset is calculated separately for each block of assets. A block of assets is a group of assets that are similar in nature and are used for the same purpose under income tax act 1961. For example, all the machinery in a factory would be considered to be a single block of assets.

The WDV of a block of assets is calculated by adding the WDVs of all the assets in the block under income tax act, and then subtracting any moneys payable in respect of assets that are sold, discarded, demolished, or destroyed during the previous year.

The WDV of a block of assets is used to calculate the depreciation allowance for all

the assets in the block. The depreciation allowance is then distributed to the individual assets in the block in proportion to their respective WDVs.

WRITTEN DOWN VALUE SEC (43) 6

EXAMPLES

Written down value (WDV) under section 43(6) of the Income Tax Act, 1961 is the actual cost of an asset, less any depreciation actually allowed under the Act. The WDV is used to calculate the depreciation allowance for the current year

WRITTEN DOWN VALUE SEC (36) of the Income Tax Act, 4 EXAMPLES

Section 43(6) of the Income Tax Act, 1961, deals with the written down value of a capital asset in the case of amalgamation or demerger. It states that the written down value of the capital asset to the amalgamated or demerged company shall be the same as it would have been if the amalgamating or demerged company had continued to hold the capital asset for the purposes of its business.

Here are some examples of how section 43(6) of the Income Tax Act, 1961, applies to specific states of India:

Tamil Nadu: In Tamil Nadu, section 43(6) of the Income Tax Act, 1961, applies to amalgamations and demergers of companies that are registered in Tamil Nadu. For example, if a company that is registered in Tamil Nadu amalgamates with another company that is also registered in Tamil Nadu, the written down value of the capital assets of the amalgamating company will be the same as it would have been if the amalgamating company had continued to hold the capital assets for the purposes of its business.
Tamil Nadu: Section 43(6) of the Income Tax Act, 1961, also applies to amalgamations and demergers of companies that are registered in Tamil Nadu. For example, if a company that is registered in Tamil Nadu amalgamates with another company that is also registered in Tamil Nadu, the written down value of the capital assets of the amalgamating company will be the same as it would have been if the amalgamating company had continued to hold the capital assets for the purposes of its business.
: Section 43(6) of the Income Tax Act, 1961, also applies to amalgamations and demergers of companies that are registered in Tamil Nadu. For example, if a company that is registered in Tamil Nadu amalgamates with another company that is also registered in Tamil Nadu, the written down value of the capital assets of the amalgamating company will be the same as it would have been if the amalgamating company had continued to hold the capital assets for the purposes of its business.

WRITTEN DOWN VALUE

“Written down value” in relation to any asset, means— (a) where the asset is acquired in the previous year, the actual cost of the asset; (b) where the asset is acquired before the previous year, the actual cost to the assesses less all depreciation actually allowed to him under this Act or under any other law for the time being in force relating to income tax.

In other words, WDV is the amount that remains after the depreciation on an asset has been deducted from its actual cost. The WDV is used to calculate the depreciation for the current year.

Here are some FAQs about WDV under section 43(6) of the Income Tax Act,

What is the difference between WDV and actual cost under income tax act?

The actual cost is the price that an asset was purchased for. The WDV is the actual cost minus the depreciation that has been taken on the asset.

How is WDV calculated for assets acquired in the previous year under income tax act?

For assets acquired in the previous year, the WDV is simply the actual cost of the asset.

How is WDV calculated for assets acquired before the previous year under income tax act?

For assets acquired before the previous year, the WDV is the actual cost of the asset minus all depreciation that has been allowed on the asset under the Income Tax Act or any other law for the time being in force relating to income tax.

What happens to the WDV when an asset is sold under income tax act?

When an asset is sold under income tax act, the WDV is used to calculate the capital gains or losses. If the asset is sold for more than the WDV, then there is a capital gain. If the asset is sold for less than the WDV, then there is a capital loss.

CASE LAWS