Unabsorbed Depreciation – FAQ’s

What Is Unabsorbed Depreciation?

A company depreciates long-term assets to recover expenses it incurs in operating activities and maintenance processes. Fiscal laws allow a firm to recover unabsorbed depreciation over a number of years.

Depreciation Definition

Depreciation methods help a company spread the cost of fixed assets over several years. Fixed assets are also known as long-term or capital assets. Examples include property, plants, equipment and machinery. Depreciation expense is a noncash item, meaning a company does not pay for it.

Deduction Limits

To record an asset’s depreciation, an accountant debits the depreciation expense account and credits the accumulated depreciation account. Unabsorbed depreciation is accumulated depreciation that a company is unable to deduct in tax reports because of fiscal limits that the Internal Revenue Service sets every year

Future Years

The IRS allows businesses and individuals to carry forward unabsorbed depreciation. In other words, a company can deduct unabsorbed depreciation in future years’ financial statements until the depreciation account has a zero balance. An accountant reports depreciation expense in the statement of profit and loss.

How to set-off unabsorbed depreciation?

The claim of depreciation by taxpayers and its denial by the tax authorities has been the subject matter of constant litigation. Frequent changes in the provisions related to depreciation in the Income Tax Act have contributed to multiple interpretations and different decisions, distinguishing one from the other.

This article seeks to analyse the recent decision of the Mumbai Tribunal Special Bench in the case of Times Guaranty Ltd (‘assessee’). Before we analyse this decision, it is imperative to know the background of various amendments carried out in the provisions related to set off of unabsorbed depreciation.

Up to assessment year 1996-97, unabsorbed depreciation was considered as the depreciation allowance of the succeeding year(s) and, thus, had an indefinite life for set-off against any head of income.

From assessment year 1997-98 to 2001-02 (‘intervening period’), the law was amended and unabsorbed depreciation of a particular year was permitted to be carried forward for a period of eight years only, for a set-off against profits and gains of business or profession...

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