CA Umesh Sharma
Arjuna (Fictional Character): Krishna, it is said that there is drastic change in the provision of calculation of depreciation according to New Companies Act 2013. So many Company Taxpayers are facing issues in calculating Depreciation. Please explain about the change and how it will affect and other information regarding depreciation?
Krishna (Fictional Character): Arjuna, every taxpayer gets deduction of depreciation on Fixed Assets. There are various methods for calculating depreciation on Fixed Assets. Depreciation is calculated according to law like Companies Act, Income Tax Act etc. According to the provision of New Companies Act there is change in the method of calculation of Depreciation on Fixed Assets. For this taxpayers may have to go beyond 60 years and date of incorporation of company whichever is earlier. So, company taxpayers are depressed in removing records of fixed assets of previous years and calculating depreciation. Therefore taxpayers are saying audit of companies is on halt one side and calculation of depreciation is going on and more time is consumed in working for depreciation rather than audit. Further taxpayers have to work out depreciation as per Income Tax Act.
Arjuna: Krishna, What is Depreciation?
Krishna: Arjuna, Fixed Assets depreciates day by day and as per law this diminution in the value of asset is shown as expenditure. In reality this is not expenditure but taxpayer gets deduction of it. For e.g. if Computer is purchased and its useful life is three years then depreciation is provided in three year and at the end of three years its value become negligible in books. The Rates of Depreciation are different in Companies Act and in Income Tax Act so Taxpayer has to face many Difficulties.
Arjuna: Krishna, What are the changes in Depreciation Provision in Companies Act?
Krishna: Arjuna, According to Companies Act Depreciation is calculated from the date of booking of Asset till the end of relevant Financial Year according to the rates of depreciation prescribed. Previously, while calculating depreciation more emphasis was not given on useful life of the asset. However according to new Companies Act more importance is given to Useful life of Assets. Importantly effect of depreciation on fixed assets purchased in earlier years will have to be given in the year 2014-15. Further while calculating depreciation 5% Scrap value is required to be considered for every Fixed Asset. For taking different scrape value there are other provisions. Earlier depreciation is not provided according to useful life of Asset, so written down value (WDV) is remained in the books but according to new provisions after useful life WDV does not remain. In this situation the company will have to transfer remaining value under the head of Retained Earnings. Due to this change in this provision of depreciation profit or loss of the company for the year 2014-15 will be affected as if depreciation increased profit will decrease and vice versa. Generally if useful life of any Asset came to end then depreciation on it will be more. New Companies Act provides Rate of depreciation, Useful Life etc. on the basis of type of Asset. Also provisions were given according to type of Business.
Arjuna: Krishna, How Depreciation can be availed in Income Tax Act?
Krishna: Arjuna, every taxpayer has to calculate depreciation according to the rates provided in Income Tax Act while filling income tax returns or at the time calculating income tax. Income Tax Act is having concept of Block of Assets. Taxpayer gets the deduction of depreciation on the basis of rates of depreciation provided in Income Tax Act. So Useful Life is not relevant for Income Tax purpose. In Income Tax Depreciation is calculated after the date of Put to Use of Fixed Asset. Also depreciation is allowed if it is put to use for more than 180 days in a year otherwise 50% depreciation is allowed.
Arjuna: Krishna, what amendment was made in budget relating to Depreciation?
Krishna: Arjuna, Manufacturer can avail additional depreciation on Plant and Machinery in the year of Purchase. Earlier if the Asset is put to use for more than 180 days then Additional depreciation @ 20% is available but if it is put to use for less than 180 days in the year of purchase then depreciation @ 10% is available, in next year remaining 10% was not allowed. But now if the Asset is put to use for less than 180 days then depreciation @10% is available in 1st year and 10% in next year.
Arjuna: Krishna, What taxpayer should learn from this provision of depreciation?
Krishna: Arjuna, Many company taxpayers were facing difficulty due to finding previous years records and calculating depreciation according to New Companies Act. Companies Act requires maintenance of Fixed Assets register but many Companies failed to do or update the same. If taxpayers had kept proper records for previous years then taxpayers might not have faced problems. So, taxpayer should follow the provision of depreciation and other provision properly to stay away from complications and difficulties at later date.