Depreciation and Capital gains on Asset

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Gaurav Garg (Querist)
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29 June 2009 ABC LTD. IS A MANUFACTURING CO. AND HAS PLANT & MACHINERY OF WHICH WDV (INCOME TAX)AS ON 1.04.2008 IS RS. 25 CRORES. DURING THE F.Y. 2008-09 A FIRE BROKE OUT IN ONE OF ITS MANUFACTURING UNIT RESULTING IN LOSS OF PLANT & MACHINERY WORTH RS. 50 LACS AND CURRENT REPLACEMENT COST OF THE DAMAGED P & M IS RS. 90 LACS. THE COMPANY HAS INSURANCE COVER OF RS. 5 CRORE FOR SUCH LOSSES. THE COMPANY CLAIMS RS. 90 LACS FROM INSURER TOWARDS THE LOSS. TILL 31.03.2009 THE CLAIM HAS NOT BEEN SETTLED AND FINAL SETTLEMENT AMOUNT IS UNCERTAIN.

NOW MY QUERY IS THAT FOR COMPUTATION OF DEPRECIATION AS PER I.T. ACT WHAT AMOUNT SHOULD BE REDUCED FROM THE BLOCK:

RS. 50 LACS OR RS. 90 LACS.

PLEASE ANSWER ELABORATELY.

CA.BHARAT BHUSHAN

CA.BHARAT BHUSHAN (Expert)
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29 June 2009 Dear Sir,

If we read section 32(1)(iii) it is given that if any asset is sold, discarded, demolished or destroyed in the P.Y. no depreciation shall be allowed on amount by which "MONEYS PAYABLE" in respect of the said asset falls short of the WDV.Provided that such deficiency is actually written off in the books of the assessee.

Hence, it is clear that the term "MONEYS PAYABLE" is very important. Explanation of the said section states that "Moneys payable" includes;ANY INSURANCE, SALVAGE OR COMPENSATION MONEYS PAYABLE IN RESPECT THEREOF.

So, we can draw the conclusion that it is the insurance payable which will be deducted from WDV.Moreover, we can also assume that we sold the destroyed assets to insurance company. If we read the section 45(1A) we see there that it is the actual amount received which is taxable as capital gain. Hence, in my opinion, amount recoverable from insurance company is it be deducted.

However, you have to be very careful in deciding the amount which will u recover from insurance company.

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