AMITY INTERNATIONAL BUSINESS SCHOOL, AMITY UNIVERSITY

CORPORATE TAX PLANNING

Submitted To: Dr. Ajit Mittal

Submitted By: Mukul Kumar MBA- IB SEC-G

Ques) What is the practical implication of Depreciation on Tax chargeable to the corporate houses? Elaborate by taking up an example. Ans) Depreciation is defined as a portion of the cost that reflects the use of a fixed asset during an accounting period. A fixed asset is an item that has a useful life of over one year. In other words, Depreciation is a financial convention that lowers the value of tangible assets, or fixed assets, that you own and operate in business activities. Accumulated depreciation is the total depreciation that you have deducted from a fixed asset value. For example, you bought a car three years ago. The automobile value was Rs 10,00,000, and you opted for a five-year depreciation term. Accordingly, the annual depreciation is Rs 2,00,000 (Rs 10,00,000 divided by 5). After three years, the accumulated depreciation is Rs 6,00,000 (Rs 2,00,000 times 3). Accumulated depreciation has a positive fiscal implication. Unlike rent, interest and groceries, you do not pay for depreciation. Yet depreciation expense lowers ones tax debt. For instance, the Rs 6,00,000 accumulated depreciation recorded above, on the car was fiscally advantageous. It lowered the taxable income over three years.

As per Section 32 of Income Tax Act, 1961, an assessee is entitled to claim depreciation on fixed assets only if the following conditions are satisfied: 1. Assessee must be owner of the asset registered owner need not be necessary. 2. The asset must be used for the purposes of business or profession. 3. The asset must be used during the previous year. The use of the asset during the previous year may be active use or passive.

Talking about the implication of depreciation on Tax for corporate houses, the depreciation is taken as a non operating expense which reduces the net profit of the company, directly reducing the total tax to be paid by the company on its Net Profit. It is a tax benefit for the company. Depreciation can be used as an effective tool for tax planning. According to section 32 (1), depreciation can be claimed in respect of building, machinery, plant or furniture and w.e.f. assessment year 1999-2000 depreciation on intangible assets such as know-how, patent rights, copyrights, trade marks, licenses,

franchises, or any other business or commercial rights acquired on or after 1.4.98 can also be claimed, which are owned by the assessee and used for the purposes of business or profession.

EXAMPLECLAIM OF DEPRECIATION ONLY WHEN AN ASSET IS USED FOR BUSINESS: One of the stipulation for claiming depreciation under section 32(1) is that the assessee had used the asset for the purpose of business or profession. When an asset will be considered to have been used, has been a matter of controversy. Some important Judicial views are as under :Punjab National Bank Ltd. v. CIT 141 ITR 886 (Del.)- That depreciation had to be allowed in full on the lifts and the air-conditioning plant since they were being used by the assessee for the purpose of its business, the fact that they might also be utilised by the tenant of one of the floors or customers or visitors did not make any difference. Plant or machinery could be said to be used by somebody else if such other person has control over the same. It is the control which determines who is using it. User means not only getting benefit, but also controlling, running, stopping, repairing, replacing, etc.

In another case of CIT v. Yamaha Motor India Private Limited (2009) 226 CTR (Del) 304, the assessee claimed depreciation on discarded assets which were written off during the previous year. The AO disallowed the claim on the ground that the assets were not used for the purposes of business during the previous year. It was held that that the term used appearing in section 32(1) comprise of both active use and passive use. Further, the expression used for the purposes of business used in section 32(1) has to be read harmoniously with the term discarded meaning thereby that the assessee is entitled to claim depreciation as far as discarded asset is concerned if the asset has been used for the purposes of business in earlier years. Adopting a realistic approach and harmonious construction, the expression used for the purposes of business appearing in section

32 when used in respect of discarded asset would mean that the use in the business need not necessarily be in the relevant previous year but in earlier previous years. Any other interpretation would lead to an incongruous situation because on the one hand the depreciation is allowed on discarded asset after allowing inter alia adjustment for scrap value, yet, on the other hand use would be required of the discarded machinery which use is not possible. The decision of the Delhi high court is logical considering the existing provisions of the Act as regards allow ability of depreciation on discarded asset. Either the Act must permit the residual value of the discarded asset to be written off completely in the year in which the asset is discarded or the interpretation adopted in the aforesaid judgment has to be accepted.