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Unabsorbed Depreciation is that amount of unutilized depreciation which the assessee will not be able to claim as an expense due to lack of sufficient profit in P&L Account. Such unabsorbed depreciation can be set off against any heads of income and the remaining balance can be carried off till for any number of periods.

Unabsorbed Depreciation- Meaning

It is that portion of the depreciation which has not been taken into consideration in the books of accounts, which is made for tax purposes. The main reason for such treatment can be a huge amount of depreciation against the profits. In such scenario, the portion of depreciation which is unabsorbed can be carried forward to be absorbed against the future taxable profits. It must be noted that the unabsorbed depreciation has nothing to do with the books of accounts prepared for the financial statements. However, if the profits in the books of accounts for financial statements and tax purposes are different due to the change of rates of depreciation, then the concept of deferred tax would arise, and it must be dealt accordingly.

Actual Cost of Assets

As per section 43 of the Income Tax Act, 1961, actual cost can be defined as “actual cost means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any person or authority” However as per the recent amendments by CBDT, w.e.f 01/04/2018, if any assessee incurs any expenses for acquiring the assets or any part thereof, and the payment for such expense has been made other than by cheque or bank draft or electronic clearing system and the amount of such expense is more than Rs. 10,000/- then such expense should not be taken for calculation of the actual cost of assets. The actual cost of assets in various scenarios are:
Sl. No. Asset Classification Actual Cost of Assets
1 Asset used for scientific Research Actual cost of assets would be the cost of assets reduced by the deduction already claimed under section 35
2 Asset acquired by Gift or Inheritance Actual cost of such assets would be the cost of assets to the previous owner reduced by any depreciation claimed by the previous owner
3 The asset sold and re-acquired The actual cost will be lower of following:
  1. The actual cost of the asset when first acquired reduced by the depreciation allowed on the asset
  2. The cost at which the asset is re-acquired
4 Building already used for personal purposes Actual cost of assets would be actual cost of the assets reduced by the depreciation that would have been allowed had the building been used for the business purposes
5 Asset acquired from holding/subsidiary business If both the companies are Indian Company, then the actual cost of assets would be the cost net of depreciation
6 Assets acquired on amalgamation If the amalgamated company is an Indian Company, then the actual cost of assets would be cost net of depreciation. It will be the same value as the amalgamating company would have continued
7 Assets acquired by de-merger If the resulting company is an Indian Company, then the actual cost of assets would be cost net of depreciation. It will be same value as the de-merged company would have continued
8 Interest paid on acquisition of assets The implication of interest will be:
  1. The interest would be added to the actual cost of assets if the interest paid is before the asset is put to use
  2. The interest would be charged to P&L account if the interest paid is after the asset is put to use.
9 Subsidy received on asset or part thereof Actual cost will not include the part of asset on which the subsidy is being given by Central or state government or any authority
10 Asset eligible for deduction u/s 35AD Actual cost will be NIL

Conditions of set-off of Unabsorbed Depreciation

Depreciation has to be first deducted from the income chargeable to tax under the head “Profit and loss of business and profession”. If the depreciation is not fully adjusted with such income chargeable to tax in the current period, then the remaining unabsorbed portion will be carried off to the next year and would be deemed as the part of depreciation for that year. In the case of set off, the following order should always be followed:
  1. The first adjustments are to be made towards the current scientific research expenditure, family planning expenditure and current year depreciation
  2. Secondly, the brought forward business loss should be adjusted
  3. Lastly, the unabsorbed depreciation, unabsorbed capital expenditure on scientific research or family planning have to be adjusted.
Unabsorbed depreciation can be carried forward for indefinite period and can be set off against any other income (other than salary). The unabsorbed depreciation can be carried forward even if the business related to such depreciation have been dis-continued.  
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