Analysis of charging section of Depreciation followed by landmark judgements-
1) Depreciation will be charged on both tangible and intangible assets.
2) Depreciation will be equally applicable whether the assets is held as stock in trade or as a capital assets.
It means that a real assets company can equally claim assets on their buildings which are held as a stock in trade.
3) the ownership is the must criteria for claiming of the depreciation whether partially or Fully.
It means that a tenant of the building can’t claim the depreciation on the building in which business is carried on by him. Hence applying the above, the lessor will always be treated as the owner of the assets and be entitled to claim the Depreciation as per the income tax act in his return regardless of the method of accounting followed.
4) However there Exists a Explanation 1 to charging section that if assessee incurred any expenditure on the building which is not owned by him, then such capital expenditures will be treated as deemed building on which Depreciation can be claimed. The above Explanation now make eligible to tenant for claiming of Depreciation.
However this provision does cover only building not any other assets and only capital expenditures is covered. Other expenditures can be claimed as revenue expenditures us 37(1).
Some important cases laws on ownership criterion:
a) Nidish Transportation Corporation (Kerala): it was held that the registration of vehicles in the name of the Assessee under Motor act will not be the sole determinative factors to consider the eligibility criteria of Claiming of Depreciation. What is to be seen that beneficial ownership and usage for business.
b) Mysore Minerals Ltd (Supreme Court)- on the very same line of Nidish Corporation it was held that beneficial ownership over the assets will be treated as eligibility criteria for claiming of Depreciation rather than actual ownership under Registration Act.
c) I.C.D.S. limited vs Commissioner of Income Tax – In the landmark judgement the assessee company was basically engaged in the business of Financing of heavy vehicles as the lessor. However as per the Requirement of Motor Vehicles Act, the vehicles must have to be Registered in the name of lessee And they will be treated as the original owner as per Motor Act.
It was held that the lessor company is still be treated as the owner for the purpose of Income Tax act, and the lessor will be the only person to whom the depreciation will be allowed. The reason behind such that lessor will be the actual beneficial ownership having exclusive control over the assets. If the lessee fails to make the payment they have the power to repossessed the vehicles which is extraordinary powers.
4) The other most important criteria is usage for the business or profession.
Analysis of above ::
1) it covers uses for profession… It means if a chartered accountant uses computers and software for his profession , then this criteria allow him to claim the depreciation on above.
2) the uses for the purpose of business is necessary. The section nowhere contemplate that assessee must be the actual users of the assets. Held by the hon’ble Madras High Court in the landmark judgement of Annamalai finance limited. Gist of the above cases law is as under –
The assessee is engaged in the business of leasing out of the vehicles and the finance income is treated as the business income of the assets and which is also accepted by the department. Now AO denies the depreciation based on the ground that assessee is not the actual user of the assets. Once the plea is accepted that the leasing out of the vehicles Is the main business of the assesse and hence it is clearly contradictory on the part of the department to disallowed the depreciation on the leased vehicles merely on the ground that it was not the actual users of the assets.
The IT rules specified that ” it is the end used of specified assets which is relevant for determination of percentage of Depreciation.” And once such finance income is accepted that it is business income and hence depreciation will surely be allow to the Assessee company whether he or not is the actual users of the assets. The only criteria to be seen that the specified assets must be put to use for the purpose of the business of the assesse.
Take another criteria…if the Assessee is engaged in the business of letting out of the properties which is its business and treated such income as business income (Chennai properties ).. since the assesse not himself uses the building for the purpose of business then whether it will be justified to denied the depreciation to the assesse ? The answer is clearly NO.. hence what is to be seen is that assets must be put to uses for the purpose of the assesse business.. who is Actual user will not the determinative factors.
5) it shall be allowed on the “Written down values” of the ” block of the assets” at the prescribed percentage.
1) Rate of the depreciation shall be prescribed as per the finance act or as per IT Rules..
2) block of the assets concept is defined us 2(11) of the “Act”.
Earlier the concept of single assets is applicable but now we were have the used the block concept under income tax act.. block simply means if the Assessee have say 10 assets then assets which have the same rate of Depreciation is prescribed will fall under one blocks. Majorly two blocks is made.. one for Tangible assets and other for intangible Assets. Further under tangible assets , assets which have same rate of Depreciation prescribed will fall under one blocks and so on.. similarly for the intangible assets.
To become the part of the “block of the assets ” assets must be put to use for the purpose of business or profession. It’s means first assets have to own the assets . Then he have to uses the assets for the purpose of business or profession and then it will be included in the block of the Assets, then only depreciation be allowed .
To more clarification let’s take an example assessee purchases a building for Rs 2,00,000 which is never used for the purpose of business . And hence is not eligible to take it to the block of the assets. If this building is sold for say Rs 10,00,000 after 4 years. Then section 50 will not be attracted since it will be attracted only when assets is falling under any block of the assets. Hence its a normal transfer as per section 48 and will be chargeable under capital gains .
3) written down values is described us 43(6) of the income tax act , 1961 .
Up to 1987-88 the concept of individual assets is relevant and after that Block of the assets is relevant.
Now, it is mandatory to follow the WDV method for the Assessee once he is eligible to claim the depreciation. SLM method in income tax is only applicable to the electricity companies under section 32(1)(ii) and not for other assessee.
There are basically two technical terms used in section 43(6) ..
One is “actual cost” and other is money’s payable”..
Actual cost is defined us 43(1) of the Act . It is followed by 13 Explanation to section 43(1) which covers the different criteria to calculate the actual costs of the assets in Various situations.
And other is ” money’s payable in respect of the assets sold, discarded , demolished or destroyed and the amount of scraps”
1) Money’s payable actually means the sales price of the assets which is fall under the block of the assets.
2) say, a building which is fall under the block is sold below its FMV, and the blocks is still exist then only the actual sales price is taken for the purpose of calculation of money’s payable and not the fair market values.
3) if the assets is stolen /damaged and no insurance compensation is recieved , then there is no transfer in terms of section 45(1A). Hence if such assets falls within block of the assets , then there is no separate treatment required.. the losses is incorporated in the WDV and the depreciation is allowed over the number of the years if other assets exists
4) if assets is damaged and no insurance claim is received & assets is the only assets in the block of the assets .. then block ceased . However section 50 is not attracted since there is no transfer.. since as per 45(1A) transfer in cases of damaged or destruction will be considered only when the insurance compensation is Received either in cash or kind.
5) if the assets is damaged and no insurance compensation is Received, however such assets is sold as scrap , then scrap values shall be reduced from the block of the assets and depreciation shall be allowed on the remaining WDV and if block ceased because the assets is the only assets or the scrap values exceeds the sum of opening values as enhanced by additions then section 50 will attracted. And the short term capital gains/losses shall be calculated and dealt accordingly as per the chapter of capital gains.
6) To sum up the things first determined the actual cost of the assets as per Section 43(1) of the assets which are intended to used for the purposes of business or profession.
Then assets must have to put to used for the purpose of Assessee business and then allocate the assets to the proper blocks.
And then claim the depreciation as per rates prescribed by finance act.
Disclaimer :- this article is for the purposes of information and shall not be treated as solicitation in any manner or of for any other purposes whatsoever. For the benefits of reader a short glimpse of provisions is presented in my personal language as per my capabilities. It shall not to be used for any legal advice /opinion and shall not to be used to rendering any professional opinion. Readers are advised to kindly go through to original government publications and published case laws and judicial pronouncements. Errors may creep in and hence it will be highly appreciable to highlight such errors or providing suggestions for effective improvements.