30 January 2010
hi, Where an asset has reached its residual value of 5% under SLM and the company is still using that asset and keeping this asset at residual value of 5% in their FA register but it claims depreciation under WDV for tax purpose. Whether the difference in taxable income and accounting income on account of depreciation charged in IT Act and no depreciatoin charged in Co Act will be timing difference or permanent difference??
30 January 2010
This is a very good conceptual question.
As per AS-22, tax shall be accounted on accrual basis; not on liability to pay basis.
Deferred Tax (Asset or Liability) is measured on the basis of timing difference.
In the present circumstances given in the querry -
1. Difference of residual value (which is 5% of asset cost ) is never to be written off in the books.
2. Depreciation is allowable on residual value also in Income Tax Act.
Since the depreciation will never be charged in the books now onwards ; hence the difference is of permanent nature.
Since it does not come into timing difference hence it is out of purview of Deferred Tax provisions. Hence no effect is to be given in the books of account for deferred tax.
31 January 2010
Thank u sir, but if u can elaborate further, is it practical for a company to differntiate in their IT depreciation calculation on those assets which have reched 5% WDV under SLM since we follow Block concept in IT. How do we solve these practical problems?? Furher from ur own experience whether companies do actually leave out the such type of assets in deferred tax calculation.
31 January 2010
Thank you sir once again but suppose a company has 1000 items in their FA register under the Head Plant & Machinery maintained under Companies Act and out of which 200 items have reached their residual value of 5%. Hence on these 200 items depreciation calculation under IT Act should also be stopped. But since there is block concept under IT ACT we dont have actual WDV of individual assets as per IT ACT. Then on what amount of WDV as per IT Act we should stop taking depreciation for deferred tax purpose.
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