TAX PLANNING THROUGH DEPRECIATION

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	Depreciation can be used as an effective tool for tax planning. According to section 32 (1), depreciation can be claimed in respect of building, machinery, plant or furniture and w.e.f. assessment year 1999-2000 depreciation on intangible assets such as know-how, patent rights, copyrights, trade marks, licenses, franchises, or any other business or commercial rights acquired on or after 1.4.98 can also be claimed, which are owned by the assessee and used for the purposes of business or profession.
	It may be noted that for the purpose of depreciation “Building” includes roads, bridges, culverts ,wells and tubewells. Likewise, plant and machinery includes Typewriters, Photocopiers, Telex & Fax Machines, Computers, Tools and Books (used by the professionals). Depreciation is allowed at prescribed percentage, which varies between 5% to 100% for various blocks of assets on the written down value. However, as per second proviso to section 32(1),depreciation shall be restricted to 50% of the prescribed percentage in respect of such asset which is acquired by the assessee during the previous year and put to use for the purpose of business or profession for a period of less than 180 days in that previous year. Another important point is that the first proviso to section 32(1) , which provided for full deduction of the actual cost of any machinery or plant costing upto Rs.5,000,has been omitted by the Finance Act , 1995 with effect from Assessment Year 1996 -97. However depreciation on professional books has been allowed at the rate of 100% with effect from Assessment Year 1996-97.
	CLAIMING 100% DEPRECIATION & REDUCING TAX LIABILITY :
	Wind mills and other special devices including electric generators and pumps running on wind energy, bio-gas plant, bio-gas engines, agricultural and municipal waste conversion devices producing energy and electrically operated vehicles including battery powered or fuel-cell powered vehicles, solar power generating systems etc., are some of the items included in machinery and plant which are eligible for 100% depreciation. An existing industry having considerable taxable profits may plan diversification in the industries and can claim 100% depreciation in respect of the new plant and machinery. In the recent past many companies have successfully done such tax planning, which is absolutely within the legal frame work and in accordance with the Govt. policy to promote investments in certain sectors.
	IS IT MANDATORY TO CLAIM DEPRECIATION OR IS TAX PLANNING POSSIBLE BY DEFERRING THE CLAIM ?
	In the case of - CIT v. Mahendra Mills and ors. [2000] 243 ITR 56 (SC). Supreme court has held that the provision for claim of depreciation is for the benefit of the assessee. If he does not wish to avail of that benefit for some reason, the benefit cannot be forced upon him. It is for the assessee to see if the claim of depreciation is to his advantage. Income under the head ' Profits and gains of business or profession' is chargeable to income-tax under section 28 and income under section 29 is to be computed in accordance with the provisions contained in sections 30 to 43A. The argument that since section 32 provides for depreciation it has to be allowed in computing the income of the assessee cannot in all circumstances be accepted in view of the bar contained in section 34. If section 34 is not satisfied and the particulars are not furnished by the assessee his claim for depreciation under section 32 cannot be allowed.Section 29 is thus to be read with reference to other provisions of Act. It is not in itself a complete code.
	If the revised return is a valid return and the assessee has withdrawn the claim of depreciation it cannot be granted relying on the original return when the assessment is based on the revised return. Allowance of depreciation is calculated on the written down value of the assets, which written down value would be the actual cost of acquisition less the aggregate of all deductions "actually allowed" to the assessee for the past years. "Actually allowed" does not mean "notionally allowed". If the assessee has not claimed deduction of depreciation in any past year it cannot be said that it was notionally allowed to him. A thing is "allowed" when it is claimed. A subtle distinction is there when we examine the language used in section 16 and sections 34 and 37 of the Act. It is rightly said a privilege cannot be a disadvantage and an option cannot become an obligation. The Assessing Officer cannot grant depreciation allowance when the same is not claimed by the assessee.
	NON-CLAIMING OF DEPRECIATION :
	Non-claiming of depreciation may at times be more beneficial rather than claiming it. Accordingly one may plan not to claim depreciation in a particular year and to claim the same in a subsequent year, in which depreciation can be claimed at a higher written down value due to non-claiming of depreciation in the earlier year. In this process the benefit of depreciation is not lost but it is deferred only.
	In the following situations it is advisable not to claim the depreciation-
	i)	In case where certain deductions and allowances like brought forward investment allowance may lapse for insufficiency of profits, in a particular year, if the depreciation is claimed.
	ii)	In case of non-corporate assessees expecting higher profit in the subsequent year or years, if their present income is falling in lower tax bracket, as claim of depreciation in the subsequent years will help them reducing the taxable profits and thereby saving tax, which would have been payable at a higher rate considering the slab rates.
		Non-claiming of depreciation may be used for avoiding the provisions of section 50. It may be noted that profit on sale of depreciable asset is treated as Short Term Capital Gain under section 50. Therefore, if any person desires to hold an asset for the purpose of re-sale at a future date, particularly in cases where such asset is retained for such period which may entitle him to claim it as a long term asset, then it is advisable not to claim depreciation on the same. In such a process, the profit on sale of the asset will be beyond the mischief of sec. 50 and shall be treated as Long Term Capital Gain (LTCG). As a result such assessee will be entitled to the benefit of cost inflation index as well as the concessional rate of tax on LTCG.
		Further w.e.f. assessment year 1997-98 depreciation can be carried forward for 8 assessment years only, as such it has become more important to claim it only in the year in which taxable profit arises.
	CLAIM OF DEPRECIATION ONLY WHEN AN ASSET IS USED FOR BUSINESS :
	One of the stipulation for claiming depreciation under section 32(1) is that the assessee had used the asset for the purpose of business or profession. When an asset will be considered to have been used, has been a matter of controversy. Some important Judicial views are as under :-
	Punjab National Bank Ltd. v. CIT 141 ITR 886 (Del.)- That depreciation had to be allowed in full on the lifts and the air-conditioning plant since they were being used by the assessee for the purpose of its business, the fact that they might also be utilised by the tenant of one of the floors or customers or visitors did not make any difference. Plant or machinery could be said to be used by somebody else if such other person has control over the same. It is the control which determines who is using it. "User" means not only getting benefit, but also controlling, running, stopping, repairing, replacing, etc.
	Whittle Anderson Ltd. v. CIT 79 ITR 613 (Bom.)- The word "used" should be understood in a wide sense so as to embrace passive as well as active user ; when machinery is kept ready for use at any moment in a particular factory under an express agreement from which taxable profits are earned, the machinery can be said to be "used" for the purposes of the business which earned the profits although it was not actually worked. Western India Vegetable Products Ltd. v. CIT 26 ITR 151 (Bom.)- When a business is established and is ready to commence then it can be said of that business that it is set up; but before it is ready to commence business it is not set up. There may however be an interval between the setting up of the business and the commencement of the business and all expenses incurred during that interval would be permissible deductions.
	CWT v. Ramaraju Surgical Cotton Mills Ltd. 63 ITR 478 (SC)- A unit cannot be said to have been set up unless it is ready to discharge the function for which it is being set up. It is only when the unit has been put into such a shape that it can start functioning as a business or a manufacturing organisation that it can be said that the unit has been set up.
	CIT v. Industrial Solvents and Chemicals (P) Ltd. 119 ITR 608 (Bom.)- Even if the finished product obtained by the assessee could be termed as sub-standard, it cannot be contended that because the end product then obtained was not of proper standard, the business of the assessee cannot be said to have been set up though the plant was being worked.
	Grasim Industries Ltd. v. CIT 32 TTJ 329 (Bom-Trib.)- A company need not have actually commenced production to claim depreciation. It was enough if it was merely ready to produce. The bench ruled that the plant was "ready for" business in fiscal 1992-93, and hence eligible for claiming depreciation.
	TREATMENT OF REPAIRS- WHETHER ON REVENUE OR CAPITAL ACCOUNT :
	It is more or less an age old tradition to treat only small repairs to an asset as revenue expenditure. However, there are occasions when heavy repairs are undertaken and/or one whole item of Plant & Machinery may require replacement. The taxing authority tends to immediately jump to the conclusion that the same is on capital account. The assessee also succumbs to the assertion of the authorities under ignorance of law. The result, no appeal thereby inviting heavy taxation.
	Some situations when repairs/replacement may be treated as Revenue expenditure and Capital expenditure are given below -
	1)	A factory has got 2 or 3 electric motors. If one of them is worn out and replaced by a new motor of similar capacity involving a heavy cost, in such case, the expenses would be treated as revenue expenditure. The entirety of Plant & Machinery in a factory is to be treated as one unit capable of carrying on the business. If any one part of that unit, say an electric motor in this instance, is replaced by another motor of similar capacity, it is a repair to the whole gamut of Plant & Machinery and therefore allowable as revenue expenditure.
	2.	If the same factory is reconstructed by replacing the old Plant & Machinery by new ones of bigger capacity then it will be a clear case of reconstruction and the cost of new Plant & Machinery will be treated as capital expenditure.
	3.	If a wall is constructed as covered by the obligation of a tenant as per conditions of a leasehold property, such cost incurred for reconstruction of the wall will be treated as revenue expenditure. It is a case similar to the replacement of a few units of worn out railway track by a company out of its entire long track, which was held as revenue expenditure by the courts.
	4.	Cost of replacement of petrol engine of a bus by a diesel engine to continue to run it will also be treated as revenue expenditure.
	5.	A fleet owner purchases a second hand car with a view to use its parts to repair his own other cars. It is a simple case of revenue expenditure as the car was purchased for using its parts to repair the other cars and not to run it as a car.
	6.	A company undertook extensive repairs to its own building by repairing/replacing some columns and beams and plastering with cement with the process of guniting which involves heavy expenses. As in such case no structural alteration was made to the building and the assessee carried out only those repairs which were absolutely necessary to preserve and maintain the building, the expenditure was not capital expenditure. The magnitude of the repair was in consonance with the magnitude of the wear and tear the building had suffered.
	7.	A Company doing business in automobile parts takes lease of an old building, the owner of which is incapable of repairing/reconstructing the same. The lessee company wants to reconstruct the building at its own cost to run its business.
		In such a case, it may be stated that expenditure was incurred to relieve the assessee from a series of future revenue outgoings and therefore the expenditure would be on revenue account and therefore allowable as such.
	8.	Expenses incurred on arrear repairs to restore the property to usable state are treated as revenue expenditure.
	9.	In case heavy expenses are incurred for extensive repairs to a lease property without bringing into existence a new asset, the cost incurred had to be allowed as general revenue expenditure, even if not as current repairs.
	10.	In case of a cinema hall premises taken on monthly rent with no long term lease if expenses are incurred to remove defects in cinema building pursuant to direction of an order of the District Magistrate in order to get a renewal of the cinema hall license, the entirety of such expenses partakes the nature of repairs under a statutory direction. The same are therefore allowable as general revenue expenditure.
	11.	Magnitude of an expenditure on repairs is immaterial consideration in deciding whether it is on a revenue account or capital account. It is the nature of alteration, renovation, repairs etc. which is relevant.
	12.	Due to fire in factory and office premises, as also residential quarters of the Managing Director, if expenses are incurred for repairs and reconstruction, such expenditure incurred for putting the original building in proper working shape does not bring into existence a new building. As such the same is considered as revenue expenditure
	13.	An assessee manufacturing cars contributed an amount necessary to improve nearby approach roads belonging to the Government. The money spent was not to bring about any asset or advantage of enduring benefit to the assessee, but to run the business effectively and conveniently and hence, in such case the amount is deductible as revenue expenditure, though it was spent voluntarily by the assessee in view of business interest.
	14.	If expenses are incurred by a cotton mill towards remodelling of furniture in its own retail depots, such expenditure is deductible on revenue account.
	15.	If an assessee has taken three buildings on a short term lease and effected improvement to those by construction of partition walls, wall panelling, show windows etc. the expenses so incurred will be treated on revenue account in view of the facts that the assessee was not the owner of the premises and there was no longer term lease in favour of the assessee.
	FACTORS RELEVANT TO DETERMINE THE NATURE OF EXPENSES ON REPAIRS :
	1.	If the repair is not resulting into a new asset or any additional asset, it will be revenue expenses otherwise it will be capital expenditure.
	2.	If the expenses are incurred on ground of commercial expediency, the same may be considered as revenue expenditure.
	3.	If any expenses are essentially incurred for reconstruction or modification as per direction of any statutory authority, it may be treated as revenue expenditure.
	4.	In determining the nature of expenditure, the nature of assessee's business and overall circumstances have to be considered. No uniform test can be applied to all situations.