Even if Income is exempt Assessee need to adjust written down value of fixed Assets with depreciation as per Income tax Act, 1961
14 Clarification regarding definition of written down value under subsection(6) of section 43.
14.1 Clause (ii) of sub-section (1) of section 32 provides that depreciation shall be allowed at the prescribed percentage on the written down value (WDV) of any block of assets. Sub-clause (b) of clause (6) of section 43 provides that written down value in the case of assets acquired before the previous year means the actual cost to the assessee less all depreciation actually allowed to him under the Income-tax Act.
14.2 Some persons were exempt from tax and, therefore, not required to compute their income under the head “profits and gains of business or profession”. Upon withdrawal of exemption, such persons became liable to income-tax and hence were required to compute their income for income-tax purposes. In this context, dispute has arisen regarding the basis for allowing depreciation under the Income tax Act in respect of assets acquired during the years when such persons enjoyed tax exemption. The Income Tax Appellate Tribunal in the case of Kandla Port Trust v. Assistant Commissioner Of Income-Tax, 104 ITD 01 (Rajkot) has held that in the case of sucha previously exempt entity, since there was no liability to tax, there was no occasion to compute the income of such person under the provisions of the Income-tax Act. Hence, the depreciation provided in the books in the years when the income was exempt cannot be treated as the depreciation “actually allowed”. Accordingly, it was held that as the assessee was not required to compute profits and gains of business or profession under the Income-tax Act, mere passing of accounting entry made for depreciation in the books of account was not the depreciation “actually allowed” as there was no liability to tax and hence no income-tax assessment for this period. It has further held that the written down value (WDV) for the purpose of assessment would be the original cost less nil i.e the original cost. This interpretation is not in conformity with the intent and purpose of the provisions of depreciation. Accordingly, Explanation 6 has been inserted in sub-section (6) of section 43 to clarify that in such a case -
(a) the actual cost of the asset shall be adjusted by the amount attributable to the revaluation of such asset, if any, in the books of accounts of the assessee;
(b) the total amount of depreciation on such asset provided in the books of account of the assessee in respect of such previous year or years preceding the previous year relevant to the assessment year under consideration shall be deemed to be the depreciation actually allowed under the Income-tax Act for the purposes of subsection (6) of section 43;
(c) the depreciation actually allowed as above shall be adjusted by the amount of depreciation attributable to such revaluation.
14.3 Applicability: This amendment has been made applicable with retrospective effect from 1st April, 2003 and shall accordingly apply for assessment years 2003-04 and subsequent assessment years.
Extract taken from Explanatory Notes to The Provisions of the Finance Act, 2008 vide circular no. 1/ 2009, dated 27th Mar, 2009.