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Depreciation

Kaushik Sekar (Article Assistant) (66 Points)

17 August 2016

Hi.

Why do we have a disparity between the rate of depreciation in Companies Act and that in Income Tax Act? Why don't MCA and Income Tax Department arrive at a consensus and issue a standardized rate?

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2 Replies

VINAY BHARGAV KUMAR G (Chartered Accountant) (221 Points)
Replied 17 August 2016

Depreciation under companies Act is for the accounting purpose only..while Income tax Act it is for the taxation...we cannot equalise them and moreover we take additional depreciation in income tax.

Kaushik Sekar (Article Assistant) (66 Points)
Replied 17 August 2016

Hi Vinay, thanks for your response. If you say that we are taking additional depreciation in Income Tax Act, let us take this example.

A company has a book profit of 100 cr. for three years and has an asset worth 60 cr. Now as you said, let us assume that the income tax depreciation is higher. Income Tax Dep - 30 cr per year (for two years) and Companies Act Dep - 20 cr per year (for three years). If we need not follow IT Act, we will directly pay tax on 300 cr. (100 cr each for 3 years).

If we apply IT Act, we will disallow book depreciation and take IT depreciation instead.
For the first year, 100 + 20 (book dep disallowed) - 30 (IT dep) = 90 cr.
Second year, 100 + 20 (book dep disallowed) - 30 (IT dep) = 90 cr.
Third year, 100 + 20 (book dep disallowed) - 0 (no more IT dep) = 120 cr.

If you see in this case also we are paying tax on 300 cr. (90+90+120) for three years.

So my question is, when the net impact is same, why do we have differential rates?