Depreciation related

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

25 July 2012 hi

in year one i started my proprietary business. n filed the return with IT dept on ITR-4.

in year two i stopped business and start doing job there was on PGBP income in year two so i filed my return on ITR-1 n got my refund.

now in year three i again started same business while doing the job with private co.

now my question is that can i claim carry forward depreciation of year two(in which i didn't have any business income n i filed my return on ITR-1)in year three.

or i simply take opening balance of assests in year three which were on the end of year one(closing balances of year one).

please guide.

thanks in advance.

Amol S Joglekar

Amol S Joglekar (Expert)
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26 July 2012 Assuming that other sonditions of ASSETs are satisfied... used for business, put to use etc.... you can take the opening balance as if depreciation has been allowed in year2.

Querist : Anonymous

Querist : Anonymous (Querist)

26 July 2012 need more clarification

Querist : Anonymous

Querist : Anonymous (Querist)

26 July 2012 Can I set off the carry forward deption of year two in third year...or I m not eligible toset off second year unabsorve deption bcz I filed year two return on itr-1 instead of itr-4 bcz I stopped the business temporarily for year two

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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21 July 2024 If you have temporarily stopped your proprietary business in year two and did not file your return using ITR-4, which is meant for businesses reporting under the head "Profits and Gains of Business or Profession" (PGBP), you might face limitations regarding the carry forward of depreciation from year two to year three. Here’s how it typically works:

1. **Nature of Return (ITR-1 vs ITR-4):**
- ITR-1 is used for individuals having income from salaries, one house property, other sources (like interest income), and agricultural income up to Rs. 5,000.
- ITR-4 is used for individuals and HUFs (Hindu Undivided Families) having income from a business or profession.

2. **Depreciation and Business Continuity:**
- Depreciation can only be claimed against income from business or profession. If you did not report income under the head PGBP in year two (because you were employed and did not operate your business), you likely did not claim depreciation on your assets.
- Since depreciation is a business expense, it cannot be claimed against salary income reported in ITR-1.

3. **Carry Forward of Business Losses including Depreciation:**
- Under the Income Tax Act, if you have business losses, including unabsorbed depreciation, you can carry forward these losses to set off against future profits from the same business.
- For depreciation specifically, unabsorbed depreciation can be carried forward indefinitely until it is fully absorbed.

4. **Impact of Filing ITR-1 in Year Two:**
- Since you filed ITR-1 and did not report business income or claim depreciation in year two, it may be treated as a break in the continuity of the business for income tax purposes.
- Typically, to carry forward depreciation, you need to demonstrate continuity of the business and consistency in filing returns under the appropriate ITR form (ITR-4 for business income).

5. **Options in Year Three:**
- **Starting Fresh:** You can start fresh in year three, considering the opening balance of assets (closing balances of year one) for depreciation purposes. Any unclaimed depreciation from year one can be carried forward.
- **Depreciation from Year Two:** If you want to claim depreciation from year two, you might need to justify the continuity of your business and possibly rectify by filing a revised return for year two under ITR-4 (if permissible under tax laws in your country).

6. **Consultation with Tax Advisor:**
- Given the complexities involved, it’s advisable to consult with a tax advisor or chartered accountant. They can provide specific advice based on your financial situation, tax laws applicable to your jurisdiction, and any options available for rectification or carry forward of unabsorbed depreciation.

In conclusion, while depreciation can be carried forward indefinitely, the key consideration is the correct reporting of business income under the appropriate ITR form. If you did not report business income in year two, claiming depreciation carry forward in year three may require additional steps or explanations to the tax authorities.

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