​ ​Under the Income Tax Act, depreciation is a deduction allowed for the wear and tear of tangible and intangible assets used in a business or profession. However, there are specific situations where claiming depreciation is either restricted or disallowed:​ Assets Not Owned by the Assessee: DepreciRead more
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​Under the Income Tax Act, depreciation is a deduction allowed for the wear and tear of tangible and intangible assets used in a business or profession. However, there are specific situations where claiming depreciation is either restricted or disallowed:​
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Assets Not Owned by the Assessee: Depreciation can only be claimed on assets that are owned, wholly or partly, by the taxpayer. If the taxpayer does not have ownership of the asset, depreciation is not permissible.
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Assets Not Used for Business or Professional Purposes: The asset must be employed in the taxpayer’s business or profession during the relevant financial year. Assets held for personal use or those not put to use during the year are ineligible for depreciation claims.
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Land and Goodwill: Depreciation is not allowable on land, as it does not suffer wear and tear. Similarly, following amendments effective from April 1, 2021, goodwill of a business or profession is specifically excluded from the definition of a depreciable asset, and depreciation on goodwill is disallowed.
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Assets Used for Charitable or Religious Purposes: For entities claiming exemption under sections 11 and 12, if the cost of acquiring an asset has been treated as an application of income (i.e., considered as expenditure towards charitable or religious purposes), depreciation cannot be claimed on such assets to prevent double deduction.
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Assets Acquired and Sold Within the Same Financial Year: If an asset is purchased and disposed of within the same financial year, it is not eligible for depreciation, as it has not been used for business purposes during the year.
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Personal or Non-Business Use: Assets used exclusively for personal purposes or not utilized for business or professional activities are not eligible for depreciation under the Income Tax Act.
When companies undergo a merger or acquisition, the treatment of depreciation on transferred assets is governed by specific provisions of the Income Tax Act. The key objective is to ensure that the tax benefit of depreciation already claimed by the transferor is preserved for the transferee, subjectRead more
When companies undergo a merger or acquisition, the treatment of depreciation on transferred assets is governed by specific provisions of the Income Tax Act. The key objective is to ensure that the tax benefit of depreciation already claimed by the transferor is preserved for the transferee, subject to certain conditions.
Key Points to Consider:
Carry Forward of Unabsorbed Depreciation:
Under the provisions applicable to amalgamations and demergers, any unabsorbed depreciation on assets of the transferor can be carried forward by the acquiring company. This means that if a company has already claimed depreciation in previous years, that benefit can continue in the new entity, provided the required conditions are met.
Continuity Conditions:
For the depreciation benefit to be transferred, the following conditions must generally be satisfied:
Continuity of Business: The acquiring company should continue the same business operations as the transferor.
Shareholding Continuity: There is often a requirement that a certain percentage (commonly 50% or more) of the transferor’s share capital or voting power is maintained by the acquiring company.
Basis of Depreciation for Transferred Assets:
The cost of the asset in the hands of the acquiring company is typically taken as the cost in the hands of the transferor, adjusted for any unabsorbed depreciation already claimed. This ensures that the depreciation deductions for future years are computed on the written-down value carried forward from the transferor’s books.
Practical Impact:
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See lessIf Conditions Are Met:
The acquiring company continues to claim depreciation on the transferred assets, and the benefit of unabsorbed depreciation is preserved. This helps in maintaining a lower taxable income post-merger or acquisition.
If Conditions Are Not Met:
If the continuity conditions fail, the depreciation claimed by the transferor may not be carried forward. In such cases, the acquiring company might have to start fresh without that tax benefit, potentially resulting in higher taxable profits.