The Gains Of March

Purchase a car by March 31 and claim depreciation. That is the pitch dealers and finance companies belts out every year. Indeed, come March and there is a flurry of buying activity. If you are a small business operator or a fresh-faced professional who is clueless about the why of it, its time you got an accountant and preceded that by learning some agreeable ways to plan tax savers.

What is Depreciation? The term is largely irrelevant to the salaried employee but others pay heed. Your business will require some working assets that will duly wear out and decrease in value. Alternately, technology may render them obsolete. So a value is assigned to these assets on which you can claim deduction to allow for their replacement when needed, from taxable income.

 

Who can claim it? Subhash Lakhotia, tax consultant, says that If you own the asset, utilise it for work and specifically use it in the relevant accounting year, you can claim depreciation on it. Seems quite straightforward but take certain factors into account.

Such as ownership. If you buy immovable property like a factory but the sale deed is not executed, can you claim depreciation on it? Section 53A of the Transfer of Property Act holds that for property worth over Rs 100, if you have a written agreement signed by the transferor and have taken possession of the property completely or partly, then you will be considered the owner even if the transfer is not registered. So go right ahead and claim depreciation.

Hire purchaser or leased property: In the latter, to claim depreciation you have to invest capital on renovation, extension or improvement. It is this expenditure that can be claimed for depreciation.

Mr X signs a hire-purchase agreement for a property. He can get depreciation only if the agreement gives the date when ownership will be transferred in his name. Assume he loaned the money and had to mortgage the property or offer it as a security. Once he becomes the owner, he can nevertheless claim depreciation

Use of assets for partial business: A doctor uses his car for professional calls and personal use. Section 38(2) says an asset not used solely for work will be assigned a proportionate depreciation sum (set by the assessing officer).

Use in the accounting year: The degree of use of an asset is immaterial. Since 1992-93, if you use the asset for less than 180 days you are entitled to 50 per cent of depreciation allowed on the figure prescribed for it. This explains the hype before March-end because even if you buy an asset by March 29 and use it for just two days you get the 50 per cent benefit. An item bought upto September 29 qualifies for a full years depreciation but reduces to half that amount if bought on October 1.

Assets qualified for depreciation: You can claim depreciation for assets, new or used, under the heads buildings, machinery, plant or furniture. Depreciation is calculated by a reducing method on the written down value of the asset (See below). So a day will come when no more depreciation can be availed off on that asset.

But be careful. Buildings in no ways includes land. X bought a floor of office space for Rs one crore while Y bought land worth Rs 50 lakh and then built the office for 50 lakh. Based on a Supreme Court decision 30 years ago, X will get depreciation on Rs 1 crore but Y will get it only on the Rs 50 lakh spent on building the superstructure. If that is unfair what of loss in quakes and floods? The land value decreases but deductions do not.

Or a builder in order to save taxes may suggest two agreements - part of payment as a co-owner of the land and part as purchaser of built-up area. Steer clear of this trap if you want full depreciation on the amount you spend.

Disallowance of depreciation: If a car is used officially but not as a business of running it on hire and is bought between April 1, 1967 and February 28, 1975, you cannot claim depreciation on the actual cost over Rs 25,000. After this date, the claim can go upto 20 per cent deduction on the total cost (including insurance and other costs) if it is of Indian make.

Foreign cars bought after February 28, 75 are not eligible for depreciation but from assessment year 1992-93, one can make a claim on foreign cars owned and used abroad for purposes of work.

How to compute depreciation allowance for the

assessment year 1997-98

A. Determine the Written Down Value (WDV):

(1) Find depreciated value of block of assets (building, furniture, plant, machinery) on April 1, 96 (2) Add actual cost of asset acquired in previous year ending March 31, 97 (3) Deduct money from sale of asset in same previous year provided it does not exceed value of block asset calculated till (2). The final value is the WDV. When you begin your profession, only (2) and (3) will apply.

B. Determine the rate of depreciation for the block

C. Amount of depreciation = WDV x Rate of Depreciation. This amount can be deducted from your taxable income

D. Depreciated value of the block on April 197 will be = WDV- Amount of depreciation. This will determine the WDV for next assessment year.

Note: If asset is acquired and used for less than 180 days you will get depreciation of 50 per cent of the

amount calculated at the prescribed rate of that block of asset.

Some assets on which 100 per cent depreciation is available under section 32 of the Income Tax Act for a professional or self-employed individual

Air pollution control equipments like dust collectors if required (50 per cent for AYs 1988-89 to 91-92 and 40 per cent for the AYs 1992-93 and 93-94)

Cinematographic films and bulbs of studio lights

Energy saving devices like automatic voltage controller, automatic power cut-off devices (relays) mounted on individual motors

Gas cylinders with valves and regulators

Books owned by assessee carrying on a profession or running the business of lending libraries

(This list is not exhaustive)

Let us have a look at the broad block of assets and their ranges of rate of depreciation

Block of Asset Range of depreciation rates

(% of written down value)

A.(1) Buildings mainly used for residential 5%

purposes and not covered under sub-item(3)

(2)Buildings not used mainly for residential 10%

purpose but not covered under sub-item(3)

(3)Buildings used as hotels or dwellings units 20%

each having plinth area not more than 80 sq m

(4) Purely temporary structures like wooden ones 100%

B. Furniture and fittings 10-15%

C. Plant and machinery not covered 25 or 100%

(specific limitations) under other blocks

D. Plant and machinery including motor 20%(10% for ships on inland

cars acquired/used on and after waters other than speed boats)

April 1, 1990, except those used for hiring

out, ocean going ships, fishing vessels, etc

E. Plant and machinery including buses 40%

lorries and taxis that are hired out, aeroplanes,

laboratory or research assets or used in

semi-conductor industry

F. Glass or plastic containers used as refills 50%

(applicable from assessment year 1997-98)