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Unabsorbed Depreciation

Updated on:  

08 min read

Unabsorbed depreciation is that amount of unutilised depreciation which the assessee will not be able to claim as an expense in his income tax returns due to lack of sufficient profit in the profit & loss 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 assessment years.

Meaning of unabsorbed depreciation

It is that portion of the depreciation which could not be absorbed by such assessee in his books of accounts made for tax purposes. It could be the result of a huge amount of depreciation against the profits. In such a scenario, the portion of depreciation that 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. 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 with accordingly.

The actual cost of assets

As per Section 43 of the Income Tax Act, 1961, the actual cost can be defined as the “cost incurred on the assets to the assessee, reduced by that portion of the cost thereof, if any, as met directly or indirectly by any person or authority”.

However as per the amendments by CBDT, with effect from 1st April 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 ClassificationActual Cost of Assets
1Asset used for scientific researchThe actual cost of assets would be the cost of assets reduced by the deduction already claimed under Section 35.
2Asset acquired by gift or inheritanceThe actual cost of such assets would be the cost of assets to the previous owner reduced by any depreciation claimed by the previous owner.
3The asset sold and re-acquiredThe actual cost will be lower of following:The actual cost of the asset when first acquired reduced by the depreciation allowed on the assetThe cost at which the asset is re-acquired
4The building is already used for personal purposesThe 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 business purposes.
5Asset acquired from holding/subsidiary businessIf both the companies are Indian companies, then the actual cost of assets would be the cost net of depreciation.
6Assets acquired on an amalgamationIf the amalgamated company is an Indian company, then the actual cost of assets would be the cost net of depreciation. It will be the same value as the amalgamating company would have continued.
7Assets acquired by de-mergerIf the resulting company is an Indian company, then the actual cost of assets would be the cost net of depreciation. It will be the same value as the de-merged company would have continued.
8Interest paid on acquisition of assetsThe implication of interest will be:The interest would be added to the actual cost of assets if the interest paid is before the asset is put to useThe interest would be charged to the P&L account if the interest paid is after the asset is put to use.
9Subsidy received on an asset or part thereofActual cost will not include the part of the asset on which the subsidy is being given by the Central or state government or any authority.
10The asset is eligible for deduction u/s 35ADActual 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 part of depreciation for that year. In the case of set-off, the following order should always be followed:

  • At first, adjustments must be made towards the current scientific research expenditure, family planning expenditure and current year depreciation.
  • Secondly, the brought forward business loss should be adjusted.
  • Lastly, the unabsorbed depreciation, unabsorbed capital expenditure on scientific research or family planning have to be adjusted.

Unabsorbed depreciation can be carried forward for an 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 has been discontinued. 

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