Depreciation

hi Ritu. 

When we fianalize the balance sheet of a company we consider the depreciation as per companies act. Now at the time of computing the taxable income as per IT act.  we add back this depreciation and deduct the depreciation as per IT Act.

We have to calculate both the rates as per the acts. Since companies are governed by the companies act so it is mandatory for the companies to charge depreciation accordingly.But Since the IT act provides its own rate & method  same has to be followed while computing income & paying taxes.

agree with shailly.....................

for calculating profit as per companies act we calculate deprecitaion as per companies act......but same is not allowed in incometax...for income tax act we calculate depreciation as per that act....and difference in both ..amount is further calculated and provision for tax on that difference amount is calculated that is called deffered tax (may be asset or liability)

for calculating profit as per companies act we calculate deprecitaion as per companies act......but same is not allowed in incometax...for income tax act we calculate depreciation as per that act....and difference in both ..amount is further calculated and provision for tax on that difference amount is calculated that is called deffered tax (may be asset or liability)

agree with shailly

By income tax you all mean income tax on the profit earned by company?

 

Kindly explain .....

while finalizing  the balance sheet, depreciation to be charged should be based on the guidelines given by the companies act in schedule XIV, i.e. the minimum rate of depreciation.

the depreciation charged while finalizing the balance sheet will not be allowed as deduction for the purpose of income tax and thus has to be added back to the profit as per books while preparing the computaion of income. what is allowed as deduction is depreciation as specified u/s 32 of the IT act. so wht u need to do is deduct the depreciation as per it act from the computation.

thus for the purpose of finalization of balance sheet, follow companies act depreciation while for computation of income follow income tax as per income tax act.

For finalisation of Companies – provide depn as per companies act(minimum depn rate).

 

Where management’s estimate of useful life of asset is shorter than that envisaged under relevant statute, depn can be calculated by applying higher rate.

 

If management’s estimate of useful life of asset is longer than that envisaged under the statute, depn rate lower than that envisaged by the statute can be applied only in accordance with requirements of the statute.

 

Depreciation as per  income tax law –Why ?

 

the very basic purpose is that by giving higher benefit in income tax the Govt want you to invest more in capital infrastructure to save tax and by this way they want to build a chain of capital investment. there in nothing other moto in this.

 

 

That’s why we are following 2 depn rate.

Regards

K.Ilayaraja

very technically and well said...

Agree with K. Ilayaraja completely. V.good indepth conceputual explanation