Rates of depreciation on 'actual cost' on SLM basis and on 'intangible assets' seems, without authority of CBDT, to prescribe such rates.

Rates of depreciation on 'actual cost' on SLM basis and on 'intangible assets' seems, without authority of CBDT, to prescribe such rates.

Retrospective amendment in S.295 and then amendment in Rules is desirable to avoid controversies and litigation.

Section 295 of the Income-tax Act, 1961 confers powers in favour of Central Board of Direct Taxes ( in short CBDT / Board). Relevant portion is reproduced below with highlights added:

Power to make rules.

'295. (1) The Board may, subject to the control of the Central Government, by notification in the Gazette of India, make rules for the whole or any part of India for carrying out the purposes of this Act.

(2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters :-

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(d) the percentage on the written down value which may be allowed as depreciation in respect of buildings, machinery, plant or furniture;'

Unquote- There is a specific clause conferring power to prescribe rates for allowing depreciation.

However, this clause prescribes limited manner (WDV) and limited type of assets on which depreciation rates can be prescribed by the Board. These have been highlighted by underlining in the reproduced portion of section for analysis, hence not repeated.

Provisions for depreciation:

We find provision relating to depreciation in section 32. Part relevant to manner and types of assets is reproduced below with highlights added for analysis about manner and assets which are not covered in S.295 (2) (d):

Depreciation.

32. (1) 1[In respect of depreciation of-

(i) buildings, machinery, plant or furniture, being tangible assets;

(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, 34[not being goodwill of a business or profession,]

owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed-]

2[(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed;]

(ii) 3[in the case of any block of assets, such percentage on the written down value thereof as may be prescribed:]

Analysis:

We find that S. 295.2.d is only about buildings, machinery, plant or furniture .

Various intangible are not covered in S. 295.2.d.

And only method mentioned is written down value (WDV).

Whereas in Section 32 we find that depreciation rates on 'actual cost' that is 'straight line method is also prescribed for 'undertaking engaged in generation or generation and distribution of power'.

Therefore, author feels that the rates on SLM method basis and rates for intangible assets are beyond the power to make rules.

Though S.32 itself authorises depreciation on actual cost. However, rates are to be prescribed.

Similarly S.32 itself authorises depreciation on intangible assets, but rates are to be prescribed.

Power for making Retrospective Rules :

In section 295.(4) we find that the Board has been conferred power to give retrospective effect, to Rules. However, before such retrospective effect is given the Board must have power to make particular type of Rule. The provision reads as follows:

(4) The power to make rules conferred by this section shall include the power to give retrospective effect, from a date not earlier than the date of commencement of this Act, to the rules or any of them and, unless the contrary is permitted (whether expressly or by necessary implication), no retrospective effect shall be given to any rule so as to prejudicially affect the interests of assessees.

Remedial measures:

It is clear that corresponding amendment in S.295 is desirable, and it can be given effect retrospectively to avoid likely disputes about intangible assets and Straight line method of depreciation on actual cost.

Once S.295 is amended with retrospective effect, then the Board can make suitable amendment in Rules about rates of depreciation on intangible assets and on SLM method basis. Amendments already made in Rule 5 and New Appendix I and Appendix IA to income tax rules can be given retrospective effect.

Author request learned readers and other authors to send their feedback and also to point out if something in the Act and Rules have remained unnoticed by the author.