Rise of American Accounts. "Hollywood. "
Profit and Gains of Business or Profession -Depreciation
Depreciation [ Section 32 ]
Depreciation on business assets is fully allowed under Income-tax Act.
Depreciation is decrease in the value of an asset due to its wear and tear caused by its use and passage of time. It is debited to profits and loss account. It is calculated on block of assets basis.
Block of Assets. [ Section 2(11) ] Means a group of assets falling within a class of assets comprising Tangible assets being building , machinery, plant, etc. In tangible assets being know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature.
The word ' know-how ' means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of mines, oil well or other sources of mineral deposits ( including searching for discovery or testing of deposits for winning access thereto. [ Section 32(1) ]
Rules.
1. Depreciation is allowed on all tangible and intangible assets except land, animals and goodwill.
2. Assets must be owned by the assessee. No depreciation on any hired assets but if any capital expenditure is incurred on a hired building then depreciation can be claimed on such capital expenditure.
3. Depreciation is calculated on the last day of accounting year and only on those assets which are in use on that day.
4. It is calculated at prescribed rates.
5. Depreciation is calculated on diminishing value method i.e., ( WDV basis) but in case of assets used in an undertaking engaged in generation or generation and distribution of power, the assesssee may opt to choose the actual cost basis ( straight line method).
6. Total depreciation in the life of an asset cannot exceed it's actual cost.
7. Assets must be used in assessee's business or profession.
8. In case of stand-by asset like generator, depreciation will be allowed even if it is not used during the year.
9. In case of newly acquired asset during the relevant previous year, full year's depreciation is allowed if asset is installed and used for 180 or more than 180 days and half year's depreciation is allowed if installed and used for less than 180 days. If asset was acquired in any earlier previous year but is put to use during the relevant previous year, the condition of 180 days shall not be applicable.
10. No depreciation is allowed in the year in which the asset is sold, demolished, discarded or destroyed.
11. No depreciation is allowed on cars manufactured outside India and acquired after 1-3-1975 but before 1-4-2001. But now depreciation is allowed in same manner as for Indian cars.
12. The word plant includes in itself Plant and Machinery, Air Conditioners, office equipment, surgical equipment, electrical fittings and utensils of a hotel etc.,. The term plant shall not include tae bushes, livestock, or building, or furniture and fittings.
13. The term ' Commercial vehicle ' includes ' heavy passenger motor vehicle ' , light motor vehicle, medium goods vehicle, medium passenger motor vehicle but does not include maxicab, motor cab, tractor and road roller. These vehicle shall have same meaning as is assigned to them in section 2 of Motor Vehicle Act 1988.
.Method of Depreciation.
Depreciation is calculated on block of assets basis.
Block of assets means aggregate of WDV of all those assets which have a common rate but within same group.
.Formation of Block.
Take WDV as on 1-4-2015 of all those assets, which have a common rate within same group ( Add it)
Add actual cost of any new asset acquired and put into use during the previous year.
Add any capital expenditure incurred during the year on assets of same block.
Deduct money realised ( sale-price, insurance claim plus scrap value, if any) on account of sale, demolition, destruction, compulsory acquisition or discarding of any asset during the year.
Balance is WDV on 31-3-2016.
.Computation of Depreciation.
Compute half year's depreciation on any new asset installed and used for less than 180 days during the current previous year.
Out of total WDV deduct the cost of new asset used for less than 180 days and on balance amount calculate depreciation for full year. Deduct total depreciation out of WDV and balance is opening WDV as on 1-4-2016.
.Actual Cost of Asset.
1. Cost at which asset was originally acquired. Any subsidy or grant on account of such asset is to be deducted out of actual cost. In case subsidy is not related to the asset it is not to be deducted out of actual cost. In case any subsidy does not relate to any particular asset but to many assets, the amount of subsidy shall be apportioned in the ratio of cost of asset to cost of all assets.
2. Following expenses are added in the actual cost as these are capital expenses :
Cost of loading, unloading, insurance, freight and customs.
Legal expenses, stamp duty, registration charges, brokerage and commission paid to acquire the asset.
Cost of travelling incurred to acquire the asset.
Cost of replacement incurred before asset is put into use.
Interest on loan taken, to acquire the asset from the date of taking loan till asset is put into use.
Cost of installation or expenses on installation.
In case any duty of excise or additional duty leviable under section 3 of the Customs Tariff Act 1975 for which a claim of credit has been allowed under Central Excise Rules 1944, such amount of duty or additional duty shall be deducted out of actual cost.
3. Motor car imported into India after 25-2-1975 but before 1-4-2001 [ Section 32(1)(2) ]
No depreciation is allowed on any motor car manufactured outside India and used for assessee's business unless it is used in business of running it on hire for tourists. During the period 1-4-67 to 28-2-1975 depreciation was allowed on imported cars but in case actual cost exceeded Rs. 25000, excess was ignored and depreciation was calculated on Rs 25000 as actual cost. After 28-2-1975 no depreciation is allowed on imported cars and restriction of price has been removed. With effect from 1-4-2001 depreciation shall be allowed on imported cars.
4. Asset earlier used for scientific research. When an asset is used in business after it ceases to be used for scientific research related to that business, the actual cost of the asset shall be the actual cost to the assessee as reduced by the amount of any deduction allowed in respect of such asset. [ Section 43 (1) ]
The asset will be added to the block with cost as NIL but when any money is realised in respect of this asset, it shall be deducted out of such block..
5. In case an asset was being used in business and is sold during the year and is reacquired later at a much higher price with the intention to charge higher depreciation, the Assessing Officer may disallow such transfer and allow calculation of depreciation as if no sale had taken place.
.ADDITIONAL DEPRECIATION [ Section 32(1)(2A) ]
With effect from assessment year 2006-2007 an additional depreciation @20% of actual cost of P&M is allowed if following conditions are fulfilled :
(a) The assessee is engaged in the business of manufacture or production of any article or thing or good
(b) In case any new plant and machinery is acquired on or after 1-4-2005 ,it shall qualify for additional / initial depreciation. In case new plant and machinery is acquired before 1-4-2005. but installed on or after 1-4-2005, then additional depreciation is not allowed.
(c) It is allowed in addition to normal depreciation and shall be taken into consideration for calculating written down value. Additional depreciation is allowed only once i.e., in the year in which new asset is acquired and installed.
(d) To claim additional depreciation @20% of actual cost, the condition of use for 180 days during the relevant previous year shall be applicable for this depreciation also. If used for less than 180 days, initial / additional depreciation shall also be allowed @10% (i.e., for half year).
(e) The plant and machinery is new and it has not been used earlier either in India or outside India.
(f) The plant and machinery is not eligible to be written off @100% of its actual cost in the very first year.
(g) The plant and machinery is not in the nature of office appliances or road transport vehicles.
(h) The return of income must be accompanied by the details of plant and machinery and expansion of installed capacity.
The return if income must be accompanied by a report by the chartered accountant that the deduction has been correctly claimed.
Additional depreciation is not allowed in case of the following assets.
(1) Ships and aircrafts.
(2) Old plant and machinery used either in India or outside India by any other person.
(3) Any plant and machinery installed in office premises, residential accommodation and guest house.
(4) Office appliances or road transport vehicles.
(5) Any other plant and machinery the whole of cost of which is going to be debited to the profit and loss account by way of depreciation or otherwise in any one previous year.
(6) In case of power generating units, additional is not available.
.Grant of additional depreciation to power sector undertakings [ Section 32(2a) ]
With effect from assessment year 2013-2014 an additional depreciation shall be allowed in case new Plant and Machinery is acquired and installed after 31-3-2012 by an assessee engaged in the business of generation or generation and distribution of power. But a power generating unit claiming depreciation on straight line basis will not be allowed any additional depreciation. New P&M does not include ship and aircraft .
.Higher / Additional depreciation to undertakings located in notified backward area of Andhra Pradesh, Telangana, Bihar and West Bengal [ Provision to Sec. 32(1)(2a) ]
Additional depreciation has been allowed to incentivize manufacturing activity in specified backward areas. Rate of additional depreciation @35%( i.e., 20% + additional @15% ) shall be allowed if the asset is used for 180 days or more during that previous year and 17.5% if used for less than 180 days. Higher depreciation shall be allowed where an assessee sets up an undertaking or enterprise for manufacture or production of an article or thing and fulfills following conditions :
(1) New plant or machinery is acquired and installed in a notified backward area of Andhra Pradesh, Telangana, Bihar and West Bengal.
(2) New plant or machinery is acquired and installed between 1-4-2015 to 31-3-2020.
(3) New plant or machinery does not include ships, aircrafts and machinery or plant which are currently not eligible for additional depreciation as per the existing provision to Section 32(1)(2a).
.Grant of additional depreciation in succeeding previous year. In case new plant and machinery is put to use for less than 180 days in the previous year of its acquisition and installation, then additional depreciation shall also be allowed only upto 50% of 35% in that year and balance 50% will be allowed in the immediate succeeding previous year.
.Investment allowance to Big manufacturing company [ Section 32AC ] [ w. e. f. A. Y. 2014-2015 ]
(1) Eligible assessee. A company engaged in the business of manufacture of an article or thing.
(2) Conditions :
(a) The investment must be made in new assets ( plant and machinery) as defined in this section. The new asset excludes computers, vehicles, ships, aircraft ,office appliances and other specified assets.
(b) The amount of investment must be more than Rs 100 crores.
(c) The above investment must be made during the period beginning from 1-4-2013 and ending on 31-3-2015. In other words new eligible asset ( Plant and Machinery) must be acquired or installed during the period 1-4-2014 to 31-3-2015.
(d) The newly acquired asset must not be transferred within a period of 5 years ( Except in the case of amalgamation or demerger).
(e) Such plant and machinery must be ready to use by 31-3-2015.
(3) Amount of deduction.
(a) For A. Y. 2014-2015. 15% of aggregate amount of actual cost of new assets acquired and installed during the financial year 2013-2014.
(b) For A. Y. 2015-2016. 15% of aggregate amount of actual cost of new assets acquired and installed during the period beginning on 1-4-2013 and ending on 31-3-2015, as reduced by the deduction allowed, if any, for A. Y. 2014-2015.
.Investment allowance to Medium and a big Sized Manufacturing Company [ Section 32AC(1) ] [w. e. f. A. Y. 2015-2016]
(1) Eligible assessee. A company engaged in the business of manufacture of an article or thing.
(2) Conditions :
(a) The investment must be made in new assets ( plant and machinery ) as defined in section 32AC(1). The new asset excludes computers, vehicles, ships, aircrafts office appliances and other specified assets.
(b) The amount of investment during any previous year must be more than Rs. 25 crores.
(c) The above investment must be made during the period beginning from 1-4-2014 and ending on 31-3-2017. In other words, new eligible assets ( Plant and Machinery) must be acquired and installed during the period 1-4-2014 to 31-3-2017.
(d) The newly acquired asset must not be transferred within a period of 5 years from the date of its installation.
(3) Amount of deduction. 15% of actual cost of new assets acquired and installed during any of specified financial years.
(4) Period of deduction. The deduction is available for 3 Assessment Year i.e., Assessment Years 2015-16 to 2017-18 . Hence no deduction shall be available with effect from assessment year 2018-19.
(5) No double deduction for A. Y. 2015-16. No deduction u/s 32AC (1A) shall be allowed for the A. Y. beginning on 1-4-2015 ( i.e., A. Y. 2015-16 ) to the assessee who is eligible to claim deduction u/s 32AC (1).
(6) Forfeiture of deduction. It any asset acquired and Installed by the assessee is sold or otherwise transferred, except in connection with the amalgamation or demerger, within a period of 5 years from the date of its installation, the deduction allowed under this section shall be deemed to be the income of the assessee chargeable under the head ' profits and gains of Business or profession of the previous year in which such new asset is sold or otherwise transferred. It is important to note that any capital gain arising on transfer of such new asset shall also be taxable.
.Additional investment allowance in case new undertaking is set up in notified backward areas of Andhra Pradesh, Telangana, Bihar and West Bengal [ Section 32AD. ]
Finance Act, 2015 has inserted new section 32AD to provide for an additional investment allowance of an amount equal to 15% of the cost of new plant and machinery acquired and installed by an assessee :
Conditions
(1) Assessee sets up an undertaking or enterprise for manufacture or production of any article or thing on or after 1st April, 2015 in any notified backward areas in the State of Andhra Pradesh, Telangana, Bihar and West Bengal.
(2) The new assets are acquired and installed during the period beginning from 1-4-2015 to 31-3-2020.
New assets does not include second hand machinery, machinery installed in an office or residential accommodation or guest house, vehicles, ship or aircraft and any plant and machinery the whole of which is allowed as deduction while computing business income.
(3) Deduction u/s 32AD shall be allowed over and above the existing deduction already allowable u/s 32AC.
(4) The new plant and machinery on which deduction u/s 32AD has been claimed cannot be transferred for a period of 5 years. But this restriction shall not apply in case of amalgamation or demergee or on business reorganisation.
.Computation of Gain / loss.
If depreciation is claimed on WDV basis :
(1) If the Block of Asset ceases to Exist. If block consists of only one asset and that very asset is put out of use or it consists of more than one asset and all of them are put out of use, the difference between WDV and money realised is short term capital gain/loss .
(2) When Block of Assets is Deemed to Cease to Exist. If block of assets consists of more than one asset and one or more of them but not all are put out of use or are transferred any money realised is more than WDV of whole block, the block is deemed to cease to exist. The difference between money realised and WDV is always short term capital gain. No further depreciation is allowed on remaining assets. In case any of the remaining assets is sold in some later year the whole of money realised shall be short-term capital gain.
.In case depreciation is claimed on actual cost basis.
(1) Terminal Depreciation. The Finance Act (2) 1998 has introduced these two concepts for those assets only on which depreciation is claimed on actual cost basis. In case any asset ( plant and machinery and building) is sold demolished, destroyed or discarded during the year and money realised is less than the WDV of the asset, the difference between the WDV and money realised can be fully debited to P&L account of the same year as terminal depreciation or balancing terminal depreciation.
(2) Balancing Charge. In case money realised is more than the WDV, the excess amount shall be deemed as business profit of the year in which asset is sold, demolished, destroyed or discarded. In no case the profit shall exceed the amount of depreciation charged so far. If money realised is more than the cost, capital gain shall be computed as per provisions u/s 48.
.Unabsorbed Depreciation. When total depreciation is more than available profits, the excess is called unabsorbed depreciation. it can be adjusted from any other income of the year. With effect from 2002-03 depreciation which remains unadjusted as either there is no income or less income in the relevant previous year, it can be carried forward till it is fully adjusted from any income during the succeeding previous years. It shall be treated as depreciation of the succeeding previous year.
.TEA, COFFEE AND RUBBER DEVELOPMENT ACCOUNT [ Section 33AB ]
In case the assessee is engaged in the business of growing and manufacturing tea, coffee or rubber and it deposits a certain amount in a special account shall be allowed as deduction.
This benefit shall also be available if such amount is deposited in an account to be opened in accordance with and for the purpose specified in a scheme framed by the Tea, Coffee or Rubber Board.
Rate of Deduction [ 33AB(1) ]
(a) Amount deposited in a special account with National Bank, Or
(b) 40% of profits from such business ( computed under the head " Profits & Gains of Business or Profession " before allowing this deduction)
Whichever is less is allowed as deduction out of the profits of the year before adjusting the brought forward losses. In case assessee has claimed a deduction in respect of a deposit in one previous year it will not be allowed in any subsequent previous year. In case deduction is claimed by the firm, it shall not be allowed to its partners again.
Special Account defined. It is an account to be opened with National Bank for Agricultural and Rural Development ( NABARD). The Finance Act 1994 has extended this benefit for any deposit made in an Account called TEA DEPOSIT ACCOUNT opened by the assessee in accordance with and for the purposes specified in a scheme framed by the Tea Board with the prior approval of Central Government. This benefit is to be made available only in relation to assessment year 1995-96 and afterwards.
When to deposit. Amount has to be deposited : before the expiry of six months from close of previous year : or before the date of furnishing of return : whichever is earlier.
Withdrawal of Amount [ Section 33AB (3) ]
Withdrawal from this account will not be allowed except on Closure of Business : Death of an assessee : Partition of H. U. F. Dissolution of firm : or liqiluidation of company.
In case any amount is withdrawn due to closure of business or dissolution of firm, before 8 succeeding previous years the whole of such amount shall be deemed as income taxable under the head Profits & Gains of business or profession of the previous year in which amount is withdrawn 133 AB (5) ].
In case any amount is withdrawn and utilised for the business during any previous year such expenditure shall not be debited to Profit & Loss Account of that previous year [33AB (6) ].
In case any amount is released by the Bank in connection with a scheme approved by Bank ( NABARD ) such amount must be utilised within same previous year. Any amount remaining unutilised is deemed as income taxable under Profits & Gains of business or profession [ 33 AB(7) ].
Compulsory Audit. In case of an assessee who is not subject to audit under any provision of income-tax Act, and such assessee wants to claim this deduction, it must get its accounts audited and the report of such audit must accompany the return [ 33AB (2) ].
No deduction. No deduction shall be allowed in respect of any amount utilised for the purchase of any plant & machinery installed in office premises, residential houses and guest houses : any office appliances ( except computers) any plant & machinery whose full actual cost has been allowed as deduction : any plant & machinery installed for production of an article specified in 11th schedule [ 33AB (4) ].
Deemed Profit. In case an asset acquired under this scheme is sold / transferred before expiry of 8 succeeding previous years, the amount of cost which was met out, amount released from special account shall be deemed to be profit & gain from business [ 33 AB (8) ].
SITE RESTORATION FUND [ Section 33ABA ]
Eligibility. Assessee is carrying business of prospecting for or extraction or production of petroleum or natural gas or both in India. There is an agreement between such assessee and the Central Govt. [ Section 33ABA (1) ].
Rate of deduction. Amount deposited in a Special Account to be opened with State Bank of India or deposited in an account named Site Restoration Account : or 20% of the profits of such business ( computed under, the head " Profits & Gains " before this deduction) whichever is less shall be allowed as deduction. This deduction shall be allowed before any loss brought forward from earlier years is adjusted .[ Section 33ABA (1) ]
Conditions
(a) In case this deduction is claimed by firm, A. O. P. or B. O. I., the partners or members cannot claim this deduction from their individual income. [ Provision to 33ABA (1) ]
(b) In case a deduction for amount deposited in Special Account or Site Restoration Account is claimed.
(c) No deduction can be claimed for such amount under any other section. [ Provision to 33 ABA (1) ]
(d) In case any interest is credited to such account, the amount so credited shall be deemed to be deposit. [ Provision to 33ABA (1) ]
(e) To claim this deduction it is compulsory to get the accounts audited and such audit report must accompany the return. [ Provision to 33 ABA (2) ]
(f) In case accounts are audited under any other law or other section of this Act, separate audit shall not be required under this section. [ Section 33ABA (3) ]
.Withdrawal of amount.
(a) Any amount standing to the credit of the assessee in Special Account or Site Restoration Account cannot be withdrawn except for the purposes mentioned under this section.
(b) No deduction can be claimed in respect of any amount utilised for the purpose of :
(1) any machinery or plant installed in the residential houses or a guest house,
(2) any office appliances except computers,
(3) any plant and machinery whose full cost is allowed to be debited to Profit and Loss account.
(4) any new plant and machinery to be installed for setting up of a new unit to produce an article included in Eleventh schedule. [ Section 33ABA (4) ]
.Closure of account. In case any amount is withdrawn from this account by closing it, the amount so withdrawn, as reduced by any amount paid or payable to Govt. as share of profit under agreement, shall be deemed as income under the head profits and gains of the previous year in which such amount is withdrawn. In case business is not in existence in the year of withdrawal even then it shall be deemed as income under the head Profits and Gains of Business or Profession. [ Section 33ABA (5) ]
In case any amount standing to the credit of such account is utilised for the purpose of any expenditure incurred in such business in accordance of this scheme, it shall not be allowed to be debited to Profit and Loss account of the year in which such expenditure is incurred. [ Section 33ABA (6) ]
In case any amount is withdrawn from such account to utilise it for the purposes in accordance with this scheme, but remains unutilised at the end of the previous year in which it is withdrawn, the unutilised amount shall be deemed as income of the previous year in which it is withdrawn. Section 33ABA (7).
The above provision shall not be applicable in case amount is withdrawn due to death of assessee, partition of HUF or on liquidation of company. [ Section 33ABA (6) Provision ] . This provision has been deleted by the Finance Act 1999.
In case any asset acquired out of funds withdrawn from such account is sold or transferred [ Not to Govt. Local authority, a statutory corporation or a Govt. Company and when a firm is succeeded by a company ] , before the expiry of 8 succeeding previous years, the amount invested out of such account shall be deemed as income under the head Profits and Gains of the year in which asset is sold or transferred. [ Section 33ABA (8) and Provision. ]
The Central Govt. has the power to withdraw this benefit at any time by notifying it in Gazette. [ Section 33ABA (9) ]