FBT PAID DEPRECIATION IS NOT ACTUALLY ALLOWED UNDER THE INCOME TAX ACT IT CAN BE ADDED BACK IN WDV a point of view.

[C.A. DEV KUMAR KOTHARI]

Disallowance of depreciation:

Many times depreciation allowable in normal way is not actually allowed for the reason of use of assets for non business purposes, personal use, or due to specific provision. For example, we can recall specific provisions for disallowance of deprecation on certain type of cars, buildings (e.g. guest house), and other assets used in particular circumstances. In those cases deprecation was not actually allowed, so it was not deductible from actual cost to determine WDV of asset. Even today some old motor cars manufactured out of India and acquired after 28.02.1975 but before 01.04.2001 are not eligible for depreciation allowance in certain circumstances-vide proviso to Section 32.

In some circumstances the A.O. may disallow a part of depreciation on some assets, such disallowed portion is not actually allowed.

FBT payable on depreciation:

We find that FBT is payable on certain portion of depreciation allowable on some assets, for example:

Vide Section 115WB (H) read with Section 115WC 20% of depreciation allowable on motor cars is considered as value of fringe benefit taxable as FBT.

Vide Section 115WB (I) read with Section 115WC(c) 20% of depreciation allowable on aircrafts is considered as value of fringe benefit taxable as FBT.

At present there is no FBT on depreciation of guest house assets but who know when FBT will be levied on assets like guest house buildings and furniture in guest house or house of employees or other houses. 

Concept of FBT:

Practically we can say that for easy collection of tax FBT is imposed as additional income tax on income employer on income of employees. It is well known that FBT was introduced to levy tax on employers for taxing benefits and perquisites provided to employees in collective manner where it is not possible to tax such benefit in hands of employees. The scheme of FBT was considered as a better and convenient manner instead of disallowing expenses in hands of employers. There was lot of litigation on disallowance of depreciation and the revenue usually faced defeat because a benefit provided to employee is for the purpose of business therefore, disallowance of deprecation was not a proper way.

FBT and income tax:

Fringe Benefit Tax (FBT) is also income tax. It is considered as an additional tax. Even if tax is not payable on income of employer, FBT is payable in specified circumstances. The rate of income tax and FBT are also the same in most of cases/ years. FBT was introduced w.e.f. 01.04.2006 and since then rate of tax on fringe benefits is also 30%.

Therefore, FBT is a part and parcel of income tax and provisions of Income tax Act, 1961.

FBT takes away deprecation actually allowed:

Depreciation may be allowed in computation of income. The assessee may have a loss and the depreciation may be carried forward and deemed as allowed. If tax is payable, the amount of income tax is reduced on one hand. However, on the amount of deprecation which is subjected to FBT, the assessee has to pay tax which is nothing but additional income tax levied under the same enactment the is the Income-tax Act, 1961.

Therefore, what is allowed in computation of income is taken away in computation of Fringe Benefit and additional income tax payable as FBT under section 115WA.

Example:

Suppose a company has fleet of cars and air crafts on which deprecation allowable is Rs.500 lakh. The company does not have taxable income and a major portion of deprecation allowance is carried forward as unabsorbed deprecation. Or suppose the company has taxable income and pay income-tax after claiming deprecation of Rs.500 lakh on fleet of car and aircrafts. In both cases depreciation of Rs.500 lakh is just taken into computation of income or loss as the case may be.

The company is required to pay FBT on 20% of Rs.500 lakh that is Rs.100 lakh. The company pay FBT accordingly. By this way the deprecation taken into computation of business income while computing business income is actually taken back by way of inclusion in fringe benefit and imposing income tax on the same.

Suppose (as prior to insertion of FBT) there was no FBT company would have saved income tax @30% on the entire depreciation of Rs.500 lakh that is say Rs.150 lakh. After insertion of FBT though deduction of Rs.500 lakh is allowed and  Income tax is reduced. However, by considering Rs.100 lakh of deprecation as value of fringe Rs. 30 lakh is imposed as additional tax. Therefore, now because there is FBT, company has to pay FBT of Rs.30 Lakh on depreciation of Rs. 100 lakh. Accordingly to the extent of Rs.100 lakh the company has not been able to actually avail tax benefit of deprecation allowance or its benefit by reduction of its liability to total  income tax under the Act. (IT + FBT).

Provision of WDV:

We find provision of WDV in Section 43 (6) by way of meaning of WDV. The section with relevant highlights is reproduced below:

Definitions of certain terms relevant to income from profits and gains of business or profession.

43. In sections 28 to 41 and in this section, unless the context otherwise requires—

XXX

(6) "written down value" means—

(a) in the case of assets acquired in the previous year, the actual cost to the assessee;

(b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act, or under the Indian Income-tax Act, 1922 (11 of 1922), or any Act repealed by that Act, or under any executive orders issued when the Indian Income-tax Act, 1886 (2 of 1886), was in force:

[Provided that in determining the written down value in respect of buildings, machinery or plant for the purposes of clause (ii) of sub-section (1) of section 32, "depreciation actually allowed" shall not include depreciation allowed under sub-clauses (a), (b) and (c) of clause (vi) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922 (11 of 1922), where such depreciation was not deductible in determining the written down value for the purposes of the said clause (vi);]

[(c) in the case of any block of assets,—

(i) in respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year and adjusted,—

(A) by the increase by the actual cost of any asset falling within that block, acquired during the previous year;

(B) by the reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased; and

44[(C) in the case of a slump sale, decrease by the actual cost of the asset falling within that block as reduced—

(a) by the amount of depreciation actually allowed to him under this Act or under the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922) in respect of any previous year relevant to the assessment year commencing before the 1st day of April, 1988; and

(b) by the amount of depreciation that would have been allowable to the assessee for any assessment year commencing on or after the 1st day of April, 1988 as if the asset was the only asset in the relevant block of assets, so, however, that the amount of such decrease does not exceed the written down value;]

 (ii) in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1989, the written down value of that block of assets in the immediately preceding previous year as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous year and as further adjusted by the increase or the reduction referred to in item (i).]

Explanation 1.— When in a case of succession in business or profession, an assessment is made on the successor under sub-section (2) of section 170 the written down value of [any asset or any block of assets] shall be the amount which would have been taken as its written down value if the assessment had been made directly on the person succeeded to.

Explanation 2.— Where in any previous year, any block of assets is transferred,—

 (a) by a holding company to its subsidiary company or by a subsidiary company to its holding company and the conditions of clause (iv) or, as the case may be, of clause (v) of section 47 are satisfied; or

(b) by the amalgamating company to the amalgamated company in a scheme of amalgamation, and the amalgamated company is an Indian company, then, notwithstanding anything contained in clause (1), the actual cost of the block of assets in the case of the transferee-company or the amalgamated company, as the case may be, shall be the written down value of the block of assets as in the case of the transferor-company or the amalgamating company for the immediately preceding previous year as reduced by the amount of depreciation actually allowed in relation to the said preceding previous year.]

Explanation 2A.— Where in any previous year, any asset forming part of a block of assets is transferred by a demerged company to the resulting company, then, notwithstanding anything contained in clause (1), the written down value of the block of assets of the demerged company for the immediately preceding previous year shall be reduced by the 4written down value of the assets] transferred to the resulting company pursuant to the demerger.

Explanation 2B.— Where in a previous year, any asset forming part of a block of assets is transferred by a demerged company to the resulting company, then, notwithstanding anything contained in clause (1), the written down value of the block of assets in the case of the resulting company shall be the 49[written down value of the transferred assets of the demerged company immediately before the demerger.

Explanation 3.— Any allowance in respect of any depreciation carried forward under sub-section (2) of section 32 shall be deemed to be depreciation "actually allowed".

Explanation 4.— For the purposes of this clause, the expressions "moneys payable" and "sold" shall have the same meanings as in the Explanation below sub-section (4) of section 41.

Explanation 5.— Where in a previous year, any asset forming part of a block of assets is transferred by a recognised stock exchange in India to a company under a scheme for corporatisation approved by the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), the written down value of the block of assets in the case of such company shall be the written down value of the transferred assets immediately before such transfer.]

Explanation 6.— Where an assessee was not required to compute his total income for the purposes of this Act for any previous year or years preceding the previous year relevant to the assessment year under consideration,—

(a) the actual cost of an asset shall be adjusted by the amount attributable to the revaluation of such asset, if any, in the books of account;

(b) the total amount of depreciation on such asset, provided in the books of account of the assessee in respect of such previous year or years preceding the previous year relevant to the assessment year under consideration shall be deemed to be the depreciation actually allowed under this Act for the purposes of this clause; and

(c) the depreciation actually allowed under clause (b) shall be adjusted by the amount of depreciation attributable to such revaluation of the asset.]

From reading of the above provision with relevant highlights it is seen that:

As per beginning of the section 43 there is a definition which is subject to contextual requirement. However, sub-section (6) which is about WDV, actually gives a meaning of the term. Therefore, the meaning of WDV as given in Section 43(6) is to be strictly interpreted and it can be said that it is not subject to contextual requirements. The portions which are highlighted and which are self explanatory are not discussed in details and crux of the subject matter is discussed in this paragraph.

From the actual cost only depreciation 'actually allowed' under the entire Income tax Act  is to be deducted in all cases where a computation is made under the Income-tax Act. Even in case of succession, merger, demerger etc. the WDV in hands of previous owner / transferor is considered as WDV in hands of new owner/ transferee. The concept of 'actually allowed' is similarly applicable in case of any asset prior to 01.04.1988 and in case of block of assets from 01.04.1988.The explanations are in respect of change in ownerships as specified  legal consequences and specified circumstances. In other cases these are not applicable. In case of sale of assets by previous owner to new owner (purchaser) the actual cost of the asset to the new owner shall be the WDV in first year and not the WDV in hands of transferor who sold the asset. In this regard it is also worth to mention that actual sale price shall be deducted from the WDV of asset/ block of asset in hands of the previous owner and on that basis, short-term capital gains will be taxable in his hands. Therefore, in case of sale of assets by one person to other, the revenue will have no justification to blame that the price charged is excessive and therefore the A.O. should not exercise his discretion to re determine actual cost of assets in hands of buyer.    

The Explanation 6 provides an exception and states that in some cases depreciation not actually allowed will also be deducted from actual cost to determine WDV. This Explanation was inserted vide the Finance Act, 2008 w.r.e.f. 01.04.2003 that is assessment year 2003-04. However, this is applicable only in cases where the assessee was not required to compute his income for the purposes of the Income-tax Act,1961. And not in other cases. Where an assessee has filed return of loss or return of income not taxable or below tax free limit or where a return is filed to claim refund or in cases where a return is required to be filed, this explanation will not be applicable because in such cases the assessee is required to compute his income for the purposes of the Act. Even when income is exempt, assessee who are required to file return are required to compute income, and therefore this explanation will not be applicable. Therefore, in practical manner this explanation will be applicable only in case of low income earner individuals , HUF, BOI, AOP who are not required to file return where income is below threshold limit. In such cases also if depreciation is not provided in books of account then any depreciation shall not be deductible to determine WDV. Even if deprecation was provided in accounts in earlier years, one has option to write it back and state the assets at actual cost to avoid deduction of notional depreciation. For example suppose a professional person has started practice, his earnings are below threshold basic exemption. He is not required to file return of income for first three years. Therefore, he is not required to compute his income for the purpose of the Act.  He does not provide depreciation in books of account and state the fixed assets like furniture, office space, office equipments, books etc. at actual cost. Therefore, in fourth year when he is required to file return of income and compute income, he can claim depreciation on actual cost of assets. Suppose he provided depreciation in books of account in some year, then he can write back such depreciation to state the assets at actual cost.  

Actual allowance under the Act is relevant:

Deprecation may be allowed while computing income under the head 'income from business or profession' under section 32 and also under the head 'income from other sources" under section 57(ii) read with Section 32. Both heads are part of the Act. Similarly the provisions of FBT are also part of the Act and FBT is considered as also a tax on income recognized as 'additional income tax' under section 115WA of the Act. Therefore, one has to consider depreciation actually allowed under the Act. That means depreciation for which the assessee has actually got reduction of tax liability under the Act. An amount of deprecation allowed in one computation and taxed by way of additional income tax cannot be considered as deprecation actually allowed to the assessee under the Act. It is worth to mention that deprecation actually allowed under the Act is relevant and not deprecation allowed under different heads of income. The Act has to be considered in entirety and not in a piecemeal manner. It is worth to mention that in computation a larger portion of depreciation may originally be taken into account but later on a part may be disallowed or tax may be imposed on a part of such larger depreciation taken in computation. In such cases in actuality only a portion of the larger amount is allowed, then only deprecation actually allowed in to be deducted from cost to determine WDV. For example when world income is computed or composite income is computed and only a part of such income is taxable. In those case depreciation actually allowed in only the amount for which the ITO has actually given benefit of tax reduction under the Act.

WDV a well settled concept:

The legal position is well settled long ago by several judgments of the Supreme Court, including larger benches the concept of term 'written down value', as defined in section 43(6). Practically WDV means the actual cost of a depreciable asset minus depreciation actually allowed by the assessing officer under the provisions of the Income-tax Act, 1961 and earlier enactments for computation of income for the purpose of income tax levied by the Central Government on income chargeable to the Central income-tax. The key words 'actual cost' and 'actually allowed' is the pivot of the meaning of 'written down value'. Any notional allowance or any allowance merely allowable will not be deducted from the actual cost or WDV unless benefit of depreciation has been actually given effectively in the assessment of taxable income by the Assessing Officer it will not be deducted. About WDV the Supreme Court on these lines has rendered several judgments. For example:

Madeva Upendra Senai V UOI [2008 -TMI - 6436 - SUPREME Court]

Depreciation allowed or merely allowable during tax holiday period by State Government under state tax Act was also held to be not depreciation actually allowed under Income-tax act, and therefore such depreciation was not to be deducted from written down value and actual cost of assets was taken as actual cost and WDV when the provisions of the income-tax were extended. CIT V. Dharampur Leather Co. Ltd 1965 -TMI - 49238 - (SUPREME Court).

When only a portion of gross income, or global income is taxable, then depreciation actually allowed will be only to the extent and in proportion of taxable income comprised in the gross income or global income and not the full amount of depreciation considered while computing gross income or global income CIT V. Nandlal Bhandari Mills Ltd 1965 -TMI - 49240 - (SUPREME Court), Hukumchand Mills Ltd V. CIT 1966 -TMI - 39897 - (SUPREME Court). 

Recent judgment of the Supreme Court on WDV:

The decision is on the fundamental issue of what is WDV and it has been decided following the long ago settled legal position in several judgments of the Supreme Court as discussed earlier. The Supreme Court in present case besides relying on those judgments also provided two illustrations and methods for computation of income from sale of tea cultivated and manufactured by assessee. The Court found that in both way what is noticed is that deprecation 'actually allowed', will be to the extent of 40% because the proportion of taxable income is only 40% of composite income of the assessee when only 40% of composite income is taxable. The Supreme Court also found that the earlier judgments of the Supreme Court, and in particular judgment in case of nand lal Bhandari Mills, which was concerned with computation of taxable income taking into account 'world income', was similar to the computation of taxable income from 'composite income'. Therefore, the Supreme Court dismissed appeal of the revenue against the judgment of Guwahati High Court.

Payment of FBT means no actual allowance under the Act:

As discussed earlier, the portion of depreciation on which FBT is levied, is 'not actually allowed', under the Income-tax Act, 1961 because income tax has been paid on the same. Therefore a possible view is that such amount of deprecation can be added back in WDV to correctly work out WDV to be carried forward for subsequent year. In case, till assessment year 2008-09 such depreciation has wrongly been deducted from WDV, the same can be added back in the WDV so that the assessee actually get tax benefit on entire cost of the asset  during its life and / or on its discard. 

Readers are requested to send their feedback for betterment of the arguments on this point.