Depreciation When Asset is Eligible for Two or More Rates

RATE OF DEPRECIATION WHEN ANY ASSET IS ELIGIBLE FOR TWO OR MORE DIFFERENT RATES BASED ON USE DURING THE PREVIOUS YEAR.

Deprecation allowance:
Depreciation allowance is allowed at specified rates, subject to fulfillment of other conditions. The scope of this write-up is only about applicable rate when an assets is put to use in different manners for which different rates of depreciation are allowable. Depreciation is allowed with a view that over a period of time (which may be one or more years) the income is computed in a real manner. In case of few assets rate of deprecation is allowable at different rates when assets is put to use in different manner.
Entitled for depreciation allowance only for a part of the year
Another situation can be that for some time the asset was put to use in a manner that it was not entitled to depreciation allowance, and on some days asset was put to use in a manner that it is entitled to deprecation allowance. For example, suppose a medical student while pursuing his course of MD purchased a car and could use it for personal purposes, while studying and appearing for MD examination during April to August. From September he started his medical practice and used car for his professional purposes. Thus during April to August the use was such that the car was not eligible for deprecation allowance, however, from September the car became eligible for depreciation allowance. In such a case based on use from September, the car will be eligible for deprecation allowance.
Rates of depreciation:
1. In case of eligible asset owned and used for the purpose of business or profession of the assessee normal depreciation is allowed under section 32 of the Income Tax Act, 1961 (The Act) read with Rule 5 of the Income Tax Rules, 1962 (The Rules) at the rates prescribed in Appendix I or Appendix IA to the Rules, as may be applicable. Some time additional depreciation / initial depreciation or weighted depreciation is also allowed on eligible assets as provide in section 32 and Rule 5.
Scope of this write-up is to undertake a study about certain assets, which may be eligible for two or more rates depending on two or more type of actual use of the asset during the previous year by the assessee.
Example of assets, which may be eligible for different rates:
2. Generally single rate is applicable to a particular type of asset irrespective of the use to which it has been put. However, from time to time some classification of assets is such which may be used differently attracting depreciation at different rates. Few examples are given below:
I. Buildings:
1. Buildings, which are used mainly for residential purposes except hotels and boarding houses - 5%
2. Buildings other than those used mainly for residential purposes and not covered by sub-item (1) above and special category provides in sub-item (3) in the appendix 10%.
Machinery and plant:
Motorcars, other than those used in a business of running them on hire, acquired or put to use on or after the 1st day of April 1990 - 15%
Motorbuses, motor lorries and motor taxis used in a business of running them on hire- 30%
Other motor buses*, motor lorries* and motor taxis (that is those not used in a business of running them on hire) will be eligible for depreciation at general rate applicable to plant and machinery - at present the rate is 15%
(* Not being some commercial vehicles falling in to special category eligible for 40,50,or 60% rate).
Books owned by assessees carrying on a profession -
(a) Books, being annual publications 100%
(b) Books, other than annual publications 60%
Books owned by assessees carrying on business in running lending libraries - 100%
Rates when asset is put to single use:
3. There will be no dispute when the asset is put to a single use. For example, a flat used for residential purpose for staff accommodation will be eligible for 5% depreciation. Another flat used as office will be eligible for 10% depreciation.
A Truck used in own business will be eligible for depreciation @ 15%. If the same truck is used in business of running it oh hire, it will be eligible for depreciation @ 30%.
Circumstances when asset is put to different uses:
4. Some times assets may be put to more than one type of use. The multi pal functional use may be also be different ways, for example:
(A) Same asset is used for two different purpose daily or simultaneously for example a flat may be used as office in the office hours and as residential accommodation at other times.
(B) A flat might have been used as residential flat during a part of the year and as office in other part of the year.
(C) A truck may be used within and for the purpose of assessee's own factory as well as for running it on hire for some hours for other parties.
(D) A truck might have been used in own business for some days and on other days to earn freight it may be hired out to other parties.
(E) A professional may use his library for own professional requirement and he may also allow it to other persons for reading and lending books in consideration of some hire.
In the above-mentioned circumstances it is found that the same asset is used in such way that two rates are applicable.
'Main use' in case of buildings:
5. A. In case of buildings we find that the words used are 'mainly used', whereas for other assets there is no such wording. Thus, in case of buildings if the building is mainly used as residence lower rate will be admissible. If it is not mainly used as residence but as an office higher rate will be admissible but this will be applicable when there is simultaneous use as residence and office.
Therefore, if the same flat is used simultaneously for the residential purposes as well as office use, one will have to find out the main use. The main use can be ascertained based on number of days or hours for which different use is made.
However, if the same flat is exclusively used as office at any time during the year, the assessee may claim higher depreciation by classifying the flat in to the category of block of asset eligible for 10% depreciation.
Suppose a flat is used exclusively for office purposes at the beginning of the previous year, thereafter it is kept ready for office use but no actual use was made. In that case depreciation for the full year shall be eligible at the rates applicable for office building. If the same flat is used as residence for some part of the year, the assessee can still claim depreciation at higher rate because on some days he used it exclusively for office. Here the beneficial provision can be applied.
In case the flat is used both as residence and as office equally, the assessee may choose to apply higher rate based on rule of application of beneficial rate / classification.
Use in case of other assets:
6. In case of assets other than buildings there is no use of phrase "mainly used". Therefore, if at any time of the previous year the asset is put to such use, which entitles the assessee higher depreciation, the assessee may claim higher depreciation.
For example:
First situation one: suppose a truck is used in the business of running on hire every day for three- four hours or say for some days only and it could not be used for rest of the period / other days. The truck will be eligible for higher depreciation of 40%.
Second situation: Now suppose if the same truck is also used for own production business of the assessee (not for running on hire) for some hours daily or some days during the year.
In this case also the assessee can rightly claim depreciation at higher rate because he also used the truck in the business of running it on hire.
It would be incorrect to say that he will be entitled to lower depreciation when truck was used more - in business of hiring and in other business merely because he used it not exclusively for hiring.
Used even on a single day entitles for depreciation:
If an asset is used at any time (theoretically say on a single day), it will be eligible for depreciation allowance at applicable rate. Therefore, when an asset is used for some days in a use which entitles for higher depreciation and suppose if the asset is not used in another purpose, still it will be entitled to higher depreciation, therefore, there would be no justification to allow depreciation at lower rate merely because the asset was used on some days in a manner that entitles for lower depreciation allowance.
Two rates can be claimed, but it will not be reasonable:
One may also argue that the truck was used as a 'vehicle on hire', so it falls in to 30% category and as it was also used in own business so it is also covered in other category so 15% depreciation can be allowed. However, it will means that the truck can appear in two block of assets simultaneously, apparently there is no prohibition for such claim in view of the definition of block of asset in section 2 (11) of the Act. Which reads as follows:
2(11) " block of assets" means a group of assets falling within a class of assets comprising—
(a) Tangible assets, being buildings, machinery, plant or furniture;
(b) intangible assets, being know-how, patents, copyrights, trade marks, licenses, franchises or any other business or commercial rights of similar nature,
in respect of which the same rate percentage of depreciation is prescribed.
Thus, it can be said that when the truck was used in the business of running it on hire it was falling in to the block of assets of 30% and when it was used in own business it was falling in the general category eligible for 15% depreciation. Therefore, depreciation can be claimed separately of two businesses to compute income of two business carried by the assessee.
However, it may not appear to be logical and justified for the reason that if the truck was fully used for hiring it would be eligible for only 30% depreciation. The truck was not fully used so it could be used for other business. Therefore, taking a reasonable, rational and realistic view and also liberal and beneficial classification 30% depreciation can be claimed on such truck for the full period.
Cases before Rajasthan High Court:
In case of CIT V Bansiwala Iron & Steel RE-Rolling Mills (2004) 134 Taxman 124 (Raj.) The assessee used a truck trailer in its own business as well as in business of running on hire. As per claim of the assessee the Tribunal allowed higher depreciation taking in to note of the fact that the assessee had substantial earnings from hire. The reference applications under section 256 (1) and 256 (2) preferred by the CIT were rejected by the ITAT and the Rajasthan High court for the reason that truck trailor was used for the business of running on hire and hire income was also substantial.
In CIT V Manjeet Stone Co. (1991) 55 Taxman /190 ITR 183 (Raj.) it was held that the vehicles were used mainly in assessees own business and not in business of running on hire. Though the vehicle was registered, as a public transport vehicle the earning of hire charges was nominal, therefore, assessee was not in the business of hiring of vehicles thus not entitled to higher depreciation allowance.
In the above cases it appears that the Court has taken view on the basis of main use of vehicle by way of earnings made and also the business of the assessee.
The logical view:
In view of the above discussion on a logical view it can be said that higher depreciation may be allowable if the asset is used in a business or put to such use for which higher rate is eligible even if the asset is used in other business for which lower rate is applicable. Provided that first type of business should also be a business carried on by the assessee.
Thus, where a flat is used as office and residence of employees, it will be eligible for depreciation @ 10%. Because if it is not used as residence still depreciation @ 10% will be allowable.
When the library is used for own profession as well as for lending books to others the books will be eligible for depreciation @ 100%.
Where a motorcar is also used in business of running for hire as a motor taxi, besides use for transportation of own staff for some time of the day, the motorcar will be eligible for higher depreciation.
Where a building is used as residential accommodation for staff in a seasonal factory and as a hotel or boarding house in off-season, the building will be eligible for higher depreciation.

Damned if you file, damned if you don’t

Publication:Economic Times Delhi;
Date:Jul 10, 2008;
Section:EFM;
Page Number:7
M Padmakshan MUMBAI FILING income-tax returns has never been so saral, as is made out to be. The latest controversy is about filing TDS (tax deducted at source) certificates. Last year, the department had issued an advise to taxpayers not to file any attachment with the returns. However, when taxpayers complied, the department changed its stand. It said the TDS certificates would have to be filed along with the returns, else the returns will not be accepted. Now, taxpayers are in a fix: to file the attachment or not. Chartered accountant Nilesh Kapadia explains the dilemma. He says the income-tax commissioners are refusing to accept the returns if TDS certificates are not filed with the returns. Even when you produce copies of TDS certificates along with the returns, the commissioners continue to reject the returns. The department insists that TDS certificates should be original. The I-T department says the advise by the tax authorities not to file any attachment with the returns was part of its ongoing exercise to automate the whole administration. Office of the chief commissioner, Mumbai, said the instruction for not filing any attachment with the return was made in the financial year 2006-07. The CBDT has already issued instructions that if the TDS claim by the employer is less than Rs 5 lakh or if the refund is less than Rs 25,000, the taxpayer need not produce the TDS certificate. In all other cases, the returns should carry the TDS certificate. The office also explained the reason for the changed stance. Quite often, employers who are supposed to file quarterly returns do not follow the rule. And when they file it, they do not fill in crucial details like the PAN of the employee from whose salary the TDS has been deducted. This prevents the officers from verifying the TDS payment mentioned in the return. Therefore, despite a decision to ask the employees not to file any attachment with the returns, the department had to reconsider the decision. According to tax lawyer Jignesh R Shah, “Till the tax administration becomes completely automated, the taxpayers should be given an option to file returns electronically or manually.”

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KPMG gets notice for tax evasion

KPMG gets notice for tax evasion
Publication:Economic Times Delhi;
Date:Apr 25, 2008;
Section:Economy;
Page Number:10
Deepshikha Sikarwar NEW DELHI Consultancy firms have drawn the ire of the service tax department for alleged evasion. The department has issued show-cause notice to leading consultancy firm KPMG. It is understood that notices have been issued to some other firms of the same league in other cities. The show-cause notice to KPMG group of entities — KPMG (partnership firm), KPMG Advisory Services (P) Ltd, KPMG(I) Pvt Ltd, KPMG Resource Centre (P) Ltd, BSR & Co and BSR & Associates is for service tax totalling Rs 29 crore. The notice has been issued to them on foreign remittances made to entities abroad in respect of professional services received by them on out-of-pocket expenses billed by them on services wrongly claimed as export, on regulatory services and on membership fee during the course of investigation. KPMG group of entities have already deposited service tax amounting to Rs 4.38 crore and interest of Rs 42 lakh. This amount has been paid for period from June, 2005 to March 2007, when an explanation was added to the section 65(105) of the Finance Act, 1994, making such services specifically taxable. But, the department has alleged that the services provided in India by foreign service providers were always taxable and liability to pay tax was on service receiver since August 2002 when the service tax rules were amended. When contacted, a KPMG spokesperson said: “This is an accounting industry issue and not limited to KPMG alone. We believe we have paid taxes wherever applicable. We are examining the issue and will contest it based on merit and as per the law.” Earlier, the Delhi service tax Commissionerate is understood to have issued show cause notices to Ernst & Young group of companies for Rs 8.15 crore on reverse charge issue and out of pocket expenses. Some other consultancy firms have also been issued show cause notices in Mumbai and Kolkata on similar grounds.

Goods transport agents get tax exemption

Goods transport agents get tax exemption

Publication:Economic Times Delhi;
Date:Jun 27, 2008;
Section:Economy;
Page Number:18
Agents Won’t Have To Pay Service Tax On Renting Of Goods Carriage
Our Bureau NEW DELHI TRANSPORTERS hit by the hike in diesel prices have a reason to cheer. The government has exempted goods transport agents from paying a service tax on renting of goods carriage. The Centre on Thursday issued a notification fully exempting from levy of service tax the supply of transport vehicles (goods carriage) to a goods transport agency (GTA) which is used for transport of goods by road. This follows representations from the All India Confederation of Goods Vehicle Owners’ Associations and the All India Motor Transport Congress requesting the government to provide relief on levy of service tax on supply of goods carriage to GTA for use in transport of goods. GTAs often provide services for transportation of goods by road using the goods carriage obtained on rent or hire basis. They had sought relief on the ground that the service tax paid on renting or hiring of goods carriage could not be claimed as input credit for payment of service tax towards GTA service. Services provided by a GTA in relation to transportation of goods is leviable to service tax under GTA service. However, service tax for the GTA service provided is payable only on 25% of the amount charged for providing the GTA service and the balance amount is exempt from levy of service tax. In the view of this provision, GTAs were not entitled to take input credit under Cenvat credit scheme on goods and services used for GTA service. Moreover, the service tax for GTA services provided in seven specified cases is not required to be paid by the GTA service provider but by the person making payment towards the freight. In this year’s Budget, services provided in relation to supply of tangible goods for use, without transfer of possession and effective control, has been made as separate taxable service and this service has come into force with effect from May 16, 2008. Consequently, supply of goods carriage to the GTA, without transfer of possession and effective control, for using the said goods carriage for transport of goods by road becomes leviable to service tax. “Notification No.29/2008-Service Tax, dated 26.06.2008 exempts fully the levy of service tax on supply of goods carriage to GTA for use in transportation of goods by road,” an official statement said here.

E-PAYMENT OF TAXES- CONCEPT AND

E-PAYMENT OF TAXES- CONCEPT AND
PROCEDURE
E-payment of tax is a facility provided to the tax payers to make tax
payments through internet using net-banking facility.

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Recent Clarification - Service Tax

Recent Clarification - Service Tax

The Ministry of Finance, Department of Revenue, Tax Research Unit has issued a Circular on January 4, 2008. This circular is an amendment to the master circular no.96/7/2007-ST issued on August 23, 2007. The circular clarifies the departments stand on cenvat credit that can be availed by service providers who either provide or utilize services that come under the category of works contract, construction and rental of immovable property.
The following issues have been addressed: Read More......

19 steel companies under scanner on excise evasion

19 steel companies under scanner on excise evasion

NEW DELHI: The Directorate General of Central Excise Intelligence has issued showcause notices to 19 steel firms for alleged duty evasion of about Rs 108 crore. Parmarth Industries, Kamakhya Steel and Jain Steel are among the defaulters. Taxmen had raided the premises of Parmarth, an Uttar Pradeshbased saria maker about a year ago and recovered Rs 1.78 crore, sources said.

Building flats for sale not liable to service tax

Building flats for sale not liable to service tax

THE Gauhati High Court has held that the activity of construction of flats by a builder for subsequent sale is not chargeable to service tax under construction of complex services. In the relevant case, the petitioners, in the business of development and sale of immovable property (residential flats), entered into agreements for sale of such flats with the prospective purchasers during the course of development/construction and also after completion of construction of such flats. Under these agreements, they accepted installments from the purchasers as advance against the sales price of such flats. At the time of sale, stamp duty was to be paid on the entire consideration for the sale of the flats, including the installment amounts. The petitioners argued that the sale of flats in such circumstances was a transaction of sale of immovable property and not a transaction of provision of residential complex construction services. The high court accepted the argument of the petitioners and held that the construction activities undertaken by the petitioners were in respect of the petitioners’ own behalf and it was only the completed constructed flats which were sold by the petitioners to their buyers. Further, the advances received from prospective buyers were as consideration for the sale of the flats to such prospective buyers and were not for the purpose of obtaining services from the petitioners. It thus held that service tax was not chargeable on such transactions.