Depreciation under the Assam Agricultural Income Tax Act 1939

[CA DEV KUMAR KOTHARI]

Relevant provisions, links and references:

The Assam Agricultural Income Tax Act 1939 (AAITA)- particularly sections 2, 7,8,16 and 50.

THE ASSAM AGRICULTURAL INCOME-TAX RULES, 1939 (AAITR)- particularly Rule 6 and 7.

Sections 2(1A) , 32 and 50 of the Income- tax Act, 1961(ITA)

Rule 5(1A) and Appendix IA of the Income-tax Rules, 1962. (ITR) about depreciation.

Rules 7, 7A, 7B, and 8 of ITR about income which is partly agricultural income and partly business income .

Synopsis:

Generally under AAITA depreciation is to be allowed as per rates and manner as provided in ITA and ITR. Only in respect of assets for which depreciation rates are not prescribed in ITA and ITR rate prescribed in AAITR will apply. Therefore, depreciation on durable plants, trees, bushes, shrubs, etc. can be claimed under AAIT Act. Furthermore, unabsorbed depreciation is to be considered in manner as provided in ITA, therefore, limitation of three years for carry forward of agricultural loss is not applicable for unabsorbed depreciation pertaining to agricultural portion of loss.

Two classes of agricultural income in AIT Act:

There are two classes of agricultural income namely (1) rent or revenue of agricultural land in state of Assam as defined in section 2 (a)(1) and (ii) income from cultivation or agriculture to produce agricultural produce, processing of agricultural produce, raised from land in Assam and selling the same as defined section 2(a)(2) of AAITA.

The second class find further sub-classes of purely agricultural income and partly agricultural income in accordance with provisions of ITA and ITR – Rules 7,7A,7B, and 8.

Relevant provision about depreciation as found in AAITA:

Section 7 and 8 provide for determination of income and allowable deductions of two types of income respectively. Relevant provisions about deprecation allowance are reproduced below with highlights added by author:

Section 7. Determination of agricultural income:

The agricultural income mentioned in sub-clause (1) of clause (a) of section 2 shall be deemed to be the sum realised in the previous year on account of agricultural income mentioned in the said sub-clause (1) after making the following deductions:

(h) depreciation in respect of any capital asset purchased or constructed after First April, 1937 for the benefit of the land from which such agricultural income is derived, or for the purpose of deriving such agricultural income from such land at such rates as may be prescribed by the Central Government for computing profits or gains of any business for the purpose of assessment of income-tax thereon and in default of such prescription as prescribed by rules under Section 50;

(n) such other deductions on account of depreciation or any other cause as may be prescribed by rules under section 50.

Section 8.

Determination of agricultural income mentioned in sub-clause (2) of clause (a) of section 2.

(1) The agricultural income mentioned in sub-clause (2) of clause (a) of section 2 shall be assessed on the net amount of such income determined in the prescribed manner.

2) Rules prescribing the manner of determining the net amounts of agricultural income for the

purpose of this clause shall provide that the following deductions shall be made from the gross amounts of such income, namely:

From clause (f)

(iv) (a) depreciation of any asset required for the benefit of the land from which such agricultural income is derived or for the purpose of deriving such agricultural income from such land, subject the provisions of this Act in manner allowed and at the rates prescribed for the purposes of Indian Income-tax or in default of such prescription as prescribed by rules under section 50 of this Act;

(b) in respect of any such machinery or plant which in consequence of its having become obsolete has been sold or discarded, the difference between the written down value as defined the purposes of Indian Income-tax and amount for which the machinery or plant is actually sold or its scrap value; 

FROM THE ASSAM AGRICULTURAL INCOME-TAX RULES, 1939 

Rule 6. An allowance under clauses (h) and (m) of section 7 in respect of capital assets purchased or constructed after 1st April, 1937 and under sub-clause (iv) (a) of clause (f) of sub-section (2) of section 8 in respect of any asset whenever purchased or constructed shall be allowed at the rates prescribed by the Central Government and in respect of any of the assets for which no rates have been thus prescribed then depreciation shall be allowed in accordance with the following statement-

Statement of rates of depreciation for capital asset in respect of which rates have not been prescribed under the Indian Income-tax Act.

Class of machinery, implements, plants and other capital assets	Percentage on written down value or Prime cost	Remarks
1.Fencing of substantial material	5
2. Pucca Wells	2 ½
3.Tube Wells	6 ¼
4. Bullock-drawn wooden or leather implement and other small hand implements	25
5. Bullock-drawn iron implements	10
6. Tractors and oil engines and their implement	12 ½
7. Weighing Machines	5
8. Power pumping Machines	12 ½
9. Country cart	15
10. Factory made cart of iron material with rubber tyred wheels (Dunlop cart)	10
11. General (machines, implements, plants and other assets) not provided for above specifically )	5

Provided that in respect of assets which do not suffer wear and tear and also in respect of other petty items, renewals and replacements shall be allowed, in place of depreciation allowance.

Rule 7.

This Rule prescribed form for furnishing details of depreciation allowable WDV etc. which is not much relevant because these will be governed by ITR. Therefore the same is not reproduced.

Discussion on true nature and effect of above provisions:

A bare reading of the above provisions shows that deprecation under AAITA read with AAITR shall be allowed at the rates and in the manner as provided in the ITA. Therefore, provisions found in ITA for allowability of depreciation, rate of depreciation, determination of written down value, carry forward of unabsorbed depreciation etc. shall govern the same for the purposes of AAITA and AAITR.

Only in case for any asset rate of depreciation is not prescribed in the ITA, then only we need to find out if any rate is prescribed in the AAITR.

From the rate of depreciation provided in AAITR we find that items nos. 1-10 in the table are covered by various entries in the Appendix 1A (old appendix 1) to ITR and definition of ‘plant’ in section 43(3) of the ITA. Most of these items fall into the category of general plant and machinery which includes vehicles. Some items may however also fall in category of building depending on nature of items like fencing and wells used in connection with agricultural land.

Therefore, for these items and also other items covered by the Appendix to ITR, the provisions of ITA and ITR will apply and not the provisions of AAITA and AAITR.

General item in AAITR:

In entry no. 11 of the table, we find a general or residuary items which are not prescribed in items 1-10 of the table. In this residuary category items of following nature can be covered:

(a)  machines,

(b)  implements,

(c)  plants and

(d)  other assets

Any item of capital asset which is durable and a depreciable asset, having span of life of more than one year can be considered. Machines and implements are generally covered by rate of depreciation provided in ITA and ITR.

The items like plants and other assets are such items which can be eligible for deprecation allowance under AAITA and AAITR.

The words plants and other assets are not defined in the AAITA and AAITR. Therefore, we need to consider their popular meaning and definitions. If any plant or group of plants and any asset is an asset of capital nature , having longer but limited useful life then such assets are considered as ‘depreciable assets’ in terminology of accountancy and taxation both.

Word ‘plant’ is very wide and it includes any asset fixed or movable, live or dead, which is used as any tool, equipment, apparatus, instrument or machine with which business is carried on.

Therefore, items of assets for which depreciation is not allowed under the AAITA and AAITR can be considered as plant or other asset for claiming depreciation under AAITA in addition to depreciation allowable as per ITA and ITR.

Tea bush, rubber trees, coconut trees, Beatle nut trees and other perennial trees having longer life for growing any agricultural produce like fruits, flowers, grains, etc. are all items of capital asset and fixed assets. They have useful life of more than one year but have limited useful life. These plants are used as basic tool or apparatus for producing specific item. Therefore, all such assets are eligible for depreciation allowance if they are owned and used by assessee for the purpose of benefit of agricultural land or for the purpose of agriculture.

Tea bush was held plant:

In case of The General Fibre Dealers P. Ltd [1993 (1) TMI 254 - ITAT KOLKATA], prior to amendment of section 43(3) of ITA , Tribunal has held that tea bush as used in tea plantation satisfy all tests of being tool of trade, being basic apparatus used to grow tea, being a durable yet having limited useful life, being an asset which requires up-keep, repair and maintenance and also replacement of worn out parts ( by way of infilling of dead bushes)is a plant, tool, implement or apparatus and is eligible for depreciation allowance. However, after amendment of S. 43(3) tea bushes were excluded from the meaning of plant for the purposes of ITA.

After amendment of S. 43(3) of ITA there is no rate prescribed for depreciation of tea bushes. There is no rate prescribed for rubber trees, fruit trees, shade trees also. Therefore, the provisions of AAITA and AAITR are attracted.

Rubber trees, and other trees of durable nature are also plants or any other asset used for the benefit of agricultural land and for cultivation of land to produce. Shade trees planted in plantations to provide shade to plants and workers are also in nature of plants and any other assets.

Therefore depreciation on such assets can be claimed under AAITA, over and above depreciation allowable under ITA.

Carry forward of unabsorbed depreciation:

As noted above in case of agricultural income of the nature of income from agriculture and processing of cultivate produce the depreciation is to be allowed in the manner and at the rates as provided in the ITA. Therefore, following the provisions of the ITA and ITR unabsorbed depreciation of an agriculturist in state of Assam will be governed by the provisions of section 32(2) of ITA. Accordingly unabsorbed depreciation under AAITA will also be carried forward and set off as per the provisions of section 32 (2) of ITA. Therefore limitation of three years as laid down in section 16(2) of AAIT Act is applicable to loss of profit from agriculture and this will not include unabsorbed depreciation.