Budget 2009 - DEPRECIATION - Suggestions: Accelerated depreciation with few type of assets can be introduced with option to claim depreciation at any time - Books should include e-books.

[C.A. DEV KUMAR KOTHARI]

Budget 2009:

After the ensuing general elections nee government will be formed. Then annual exercise of presenting budget for 2009-10 shall take place during budget session of the parliament.  Depreciation is an important aspect of fiscal policies of the GOI.

Broad suggestions:

The provisions relating to depreciation should be modified to provide more impetus to the economy besides they should be made more clear and unambiguous.

Accelerated depreciation of 33.33 % should be reintroduced. In fact in view of globalization of economy and more frequent changes in technology depreciation @ 50% is desirable because there is higher obsolescence.

At present under companies Act items costing up to Rs.5000 are to be depreciated in first year. However, in the I.T. Act, such provision was omitted and need reintroduction with higher limit of Rs.10000/-

The policy can be so devised that the assessee may be given an option to claim depreciation equal to 'actual cost' of any asset at any time.

All depreciable assets including buildings and furniture may be considered as 'plant' and number of blocks and rates may be reduced. There is no purpose in indulging in lot of litigation about claim for depreciation. Because higher depreciation only defer tax payment on account of income tax. Higher deprecation allowance can bring into more revenue by way of indirect taxes and more employments.

Book is 'plant':

Books used in any business or profession are considered depreciable plant. The definition of the word plant as given in Section 43 (3) specifically includes books within its ambit. The relevant part of the definition reads as follows:-

"Section 43(3) : 'plant' includes ships, vehicles, books,…. used for the purpose of the business or profession but does not include …………."

Thus, we find that books are specifically included in the definition of 'plant'. Even in absence of such specific inclusion book would be plant as it is used for the purpose of business and profession for getting information, reproducing information, in producing books before authorities as reference material,.. etc. The books which are durable are only plant. But books which are not durable may not be plant as because they may not be kept to be used in future but are once read and discarded. Therefore, magazines may not be plant, unless they are kept on some permanent basis for reference in future. The books which are not kept on permanent basis may not be considered as depreciable plant and there cost may be charged to revenue account. Because  some degree of durability exceeding more than one accounting period is considered as essential character for an asset to be depreciable asset as per accounting standards and general accounting policies.

Conventional definition of book:

A set of written sheets of skin or paper or tablets of wood or ivory b : a set of written, printed, or blank sheets bound together into a volume c : a long written or printed literary composition d : a major division of a treatise or literary work e : a record of a business's financial transactions or financial condition — often used in pl. ‹the ~s show a profit.

Definition of e-book:

e-book \'ē-"bụk\ n (1988) : a book composed in or converted to digital format for display on a computer screen or handheld device.

From the above definition it can be observed that e-book is also a book which is composed in or converted to digital format.  In era of advanced technology we cannot ignore technical developments and with advancement we have to adopt new meanings. Therefore, e-book can be considered a book and within the meaning of and in the context of 'plant' as defined in inclusive manner in section 43(3).

From the conventional definition of book we find that books of account are also included in the definition of book. Now-a- days, books of account in soft form are considered as books of account and are also considered as good evidence. Therefore, there is no reason fro not treating an e-book as book. E-book also contains information as any physical book contain. E-book and book on the same subject and containing the same text can be used for the same purposes. In fact an e-book can be more useful and convenient tool to the people who have learnt use of technology.       

In days of advanced technology we also find new forms of books in e-from. These are popularly known as e-book. Though these e-books do not have number of paper sheets printed and bound in form of a physical book yet the functional role is the same. In case of e-book also we find several pages, the pages are serialized and numbered. Just as in case of physical book we can have access to pages one by one or by way of random access. E-books have many special features like different type of search facilities, copy and paste etc. therefore, e-books are a tool of trade.

Book must be durable:

For allowability of depreciation they must be used for the purpose of business or profession as a tool or apparatus. Books kept and used only for the purpose of hobby or entertainment or just for enrichment of knowledge (without any need for business or profession) will not be eligible for depreciation allowance. However, if the activity of entertainment or enrichment of knowledge is also in the course of business or profession they may be plant. For example library in a factory's recreation club for employees may be considered as plant.

BOOKS USED IN RUNNING LENDING LIBRARIES:

In running lending libraries, books are used for the purpose of lending on hire to others and therefore, they are used for the purpose of business of the library- lending and earning hire. It will not be necessary that the borrower of the book also use the same for business or profession. The borrower may use it simply for entertaining or enrichment of knowledge. For example library may lend books to students who use the books for the purpose of pursuing academic course. The borrower is not using it for the purpose of business but so far the lending library is concerned the books are used in the business of lending them on hire or reward by whatever name called.

RELEVANT ENTRIES IN APPENDIX:

In the Appendix to the Income Tax Rule 1962, relevant entries relating to books have also changed from time to time as follows:

1. For the first time the entry was inserted by the Income Tax (6th Amendment) Rules 1995 with effect from 01.4.1996 as follows:

"4. Books for professional purpose - 100%"

2. The above entry was substituted by the Income Tax (1st Amendment) Rules 1996 with effect from 1.4.96 as follows:

"4. (i) Books owned by assessee carrying on a profession - 100%

     (ii) Books owned by assessee carrying on business in running lending libraries - 100%

 3. In the revised Appendix with effect from AY 2003-04, the following entry appears

9. (i) Books owned by assessees carrying on a profession-

   (a)  Books, being annual publications                                                  100%

  (b) Books other than those covered by entry (a) above                      60%

 (ii) Books owned by assessees carrying on business in running

                 lending libraries                                                                    100%

In the latest appendix effective from assessment year 2006-07 also the entry no. 9 is exactly the same as given above for assessment years 2003-04 to 2005-06.

Though the appendix has been revised several times but new technical aspect about e-book have not been incorporated.

AN ANALYSIS:

On analysis of above specific entries, it is clear that for the professional persons specific entry was introduced only with effect from 1.4.96 and also for the libraries the entry was with effect from 1.4.96, though both were inserted by different amending rules. Prior to that there was no specific entry. Therefore prior to these specific entries, depreciation on books used for business and profession was allowable at the general rate applicable to plants and machineries from time to time. However, when the cost of each book was below the prescribed limit (Rs. 750/- or Rs. 5000/-) full cost was allowed in one year.

Presently also the depreciation allowance is covered by a specific entry only for professional and lending libraries.

OTHER ASSESSEES:

In case of other assessees, there is no specific entry for books used by them for business. Therefore the other assessees can claim depreciation only at the normal rate applicable to the plant and machinery category which is at present 25%.

USED IN PROFESSION

The books may be used in various profession. The term profession has been defined in Section 2(36) in inclusive manner as follows:-

"Profession" includes vocation.

Thus, any vocation is also included within the definition of profession. If someone uses books in a vocation which may or may not be  a recognized profession under the Income Tax Rules (Rule 6F), still he may be entitled to depreciation allowance as per entry applicable to professional persons if the books are used in carrying out vocation. Therefore the following persons though not carrying a recognized profession will be entitled to depreciation on books as used in a profession -

1. Teachers who also teaches in personal capacity and not as salaried employee,

2. Stenographers and Typists on books used by them. For example, dictionary, books of standard forms and drafting.

3. A person engaged in religious and spiritual teaching.

4. Politicians using books in libraries maintained for keeping mass contacts,

5. Schools, colleges, universities providing books to teachers and students as a facility,

Therefore these persons carrying on a profession or vocation will also be eligible for depreciation at specified rates. In other case, the assessee using books for business or profession in its trade, commerce, industry will also be entitled to depreciation. However, they will be eligible for normal rate, which is at present 25%..

PRIOR TO SPECIFIC ENTRY:

Prior to specific entries, depreciation was allowed at normal rate or as per proviso full cost was allowed to all assessee when cost was below specified limit. A large part of books were covered by the proviso. The matter was quite simple. However, by making specific entries un-necessary complications have been created. It is likely to involve litigation.

UNNECESSARY COMPLICATIONS FOR PROFESSIONALS

As noted above in the latest entry No.9(1), two categories have been made now only books being annual publications are eligible for 100% depreciation and other books are eligible for 60% depreciation. It appears that this classification is likely to create litigation because the term 'annual publication', has not been defined. However, in our practice, 'annual publication' can mean only those books which are published once in a year due to certain changes which takes place generally once in a year. For example, Income Tax Act and Rules may be considered as annual publication but this is also not beyond dispute because in these enactments also certain changes may be made within a year .Though, Earlier there was no practice of bringing new editions in the midst of a year. However, considering several amendments made therein some publishers have published new edition bringing into latest amendments in mid of a year. For example, Income Tax Act September 2003 by Taxman. Therefore in this case the Income Tax Act 2003 and Income Act September 2003 taken together may not be considered as annual publication.

Other possible view on 'annual publication' can be such publications which have utility of only one year. This is again a matter of controversy. A Tax Practioner may purchase Income Tax act every year, still old editions are used or may be required while dealing with cases of earlier years. In fact even while dealing for a matter of relating to several years past behind old and new both books may be required - old book to find out what was the law then prevailing at relevant time and new book to find out whether there is any amendment with retrospective effect which may have bearing in earlier year. Thus, if the meaning of annual publication is taken according to utility many view are possible on this issue.   

JOURNALS

Professional journals are published at certain intervals and they can be bound and are generally bound in certain volumes and kept as books for reference in future. These publications cannot be brought within the category of annual publication, although a particular item published once will not be published again. Therefore considering publication once in a year it can be argued that these are annual publications. The amount involved in annual publication for any profession may not be substantial and a publication may or may not be brought within that category. Therefore it was not at all desirable to keep two categories which will hardly have material effect on the revenue collection. It would have been better if 100% depreciation was provided for all books used by professions lending libraries and other industries.

DEPRECIATION VIS-À-VIS CLAIM AS REVENUE EXPENDITURE

As a matter of practice many businessmen and professionals claim expenses incurred for the purpose of books and journals as revenue expenditure. This is because the useful life of books and journals in many cases may not be long lasting and the useful life may came to an end within the year. Expenses incurred on weekly or fortnightly or monthly journals may reasonably be considered as revenue expenses because they are just to keep abreast of latest developments. However, once they are kept as a future reference whether bound in book or not they assume character of durable  capital asset. Therefore it can be said that when the expenditure is incurred in subscribing or purchasing a journal, it is a revenue expenditure and therefore it can be claimed as such. Subsequent decision to keep the journal in bound volume may not be relevant. However, the claim as revenue expenditure has one disadvantage that it may have to be debited in the P&L A/c. and therefore the library created over a period of time may not be reflected in the balance sheet.

 NEW BOOKS:

In respect of new books purchased during the previous year one will have to keep record of the number of days for which it was used during the previous year. In case it was used for less than 180 days only half of normal depreciation will be allowable. This is again a case of un-necessary complication which may require enquiry by the A.O.

SUGGESTION FOR AVOIDING LITIGATION AND SIMPLIFICATION ABOUT BOOKS:

To make the provision simple it is desirable that for low value items of any plant or machinery including books the proviso to section 32 may be re-inserted to allow full cost in the year of acquisition without any condition. Considering the inflation the limit may be kept at Rs.10000/- per piece. Any item of plant or machinery including books exceeding in cost of Rs.10000/- may be made eligible for depreciation at normal rates.

To avoid disputes, e-books may be included in definition of plant or 'book' may be defined to include e-book. Before such amendment is amendment the board may issue a circular.