Unabsorbed Depreciation

What is Unabsorbed Depreciation?

Unabsorbed depreciation meaning refers to the part of depreciation that was not absorbed by the taxpayer while making the tax accounts. It occurs when there is so much depreciation compared to the profits. If there is a part of the depreciation that is left unabsorbed, then you can carry it forward to absorb against the future taxable profits.

The unabsorbed depreciation is not related to the books of accounts, which are prepared for the books of accounts. If the rate of unabsorbed depreciation changes, it will affect profits for tax purposes. So, deferred tax will arise. It should be dealt with according to the financial statements.

The conditions of unabsorbed depreciation arise when there is insufficient profit to set off the amount of depreciation of that year. For a financial year, if the capital expenditure is more than the profit of the company, then there is a chance of unabsorbed depreciation.

Assets' Actual Cost

The actual cost of the assets is defined under section 43 of the Income Tax Act, 1961. It is defined as the cost incurred on the assets presented by the assesse. This cost is reduced by a portion of the cost as provided by any person or authority. It can be direct or indirect, both ways.

As per the amendment of CBDT, if an assesse incurs any assets or any of its own, then such a payment should not be considered to calculate the actual cost of the assets. You need to meet certain conditions. For example, payment must be made using a method other than a bank draft, cheque, or electronic clearing system. And, the amount of such expense should be more than Rs 10,000.

Here is a table representation of the actual cost of assets in different scenarios:

Serial No.	Classification of Assets	Actual costs of assets
1	Assets that are used for scientific research purposes	The actual cost in this case would be the cost of the asset that is decreased by the tax deduction claimed under section 35
2	Assets came from the inheritance or gifts	The actual cost of these types of assets would be the cost of the asset after the depreciation claimed by the previous owner.
3	Assets that are re-acquired after being sold	The actual cost is the lower of the following: The actual cost of the asset when it is selected, after the depreciation is allowed on it. The price at which the asset is re-acquired.
4	The building/property that is already being used for personal uses	The actual cost of the asset would be the price reduced by the depreciation that has been allowed for the building used for business purposes.
5	Assets that came from the subsidiary business	The actual cost of the asset will be the net price of total depreciation, in case both companies are Indian.
6	Assets came from the amalgamation.	The actual cost of the assets will be the same as the cost of the net depreciation, if the amalgamating company is an Indian Company. It will have the same value as the amalgamating company that has continued.
7	Assets came from the de-merger	The actual cost of the asset will be the cost of the net depreciation if the resulting company is an Indian Company. The cost will be the same as the de-merged company.
8	Interests are being paid on acquiring the assets.	The implications of the Interest will be: If the interest is paid before the asset is put to use, then the amount of the interest will be added to the actual cost of the asset. If the interest is paid after the asset is put to use, then the interest amount will be charged to the P&L account.
9	Subsidy came on an asset or its parts.	Actual cost will exclude the part of the asset that the central or state government has subsidised.
10	An asset that is eligible for the deduction under section 35AD	The actual cost of the asset will be NIL

Unabsorbed Depreciation: Conditions of Set-off

The depreciation firstly has to be deducted from the income that comes under the taxable head "profit and loss of business and profession". If the amount of the depreciation has not been fully adjusted with the taxable income in the current period, then you can carry forward this unabsorbed depreciation and carry it forward to the next indefinite years. If there is a set-off, then you should follow the order below:

The adjustments that should be made towards the current family planning expenditure, scientific research expenditure, and current year depreciation.
The business loss should be adjusted and can be brought forward.
The adjustments should be made for the unabsorbed depreciation and unabsorbed capital expense on family planning or scientific research.

The unabsorbed depreciation is set off against any type of income other than salary. The carry-forward period for the unabsorbed depreciation is indefinite. Unabsorbed depreciation can still be carried forward, even if the related business has stopped.

Unabsorbed Depreciation Example:

Profit according to the P&L account before subtracting the depreciation	Depreciation of the year	Unabsorbed depreciation
5,00,000	6,00,000	1,00,000*

*When the income of the profession or business under the head of profits and gains is Rs 5,00,000, and the depreciation during the same year is Rs 6,00,000.

The excess depreciation of Rs 1,00,000, which is above the income that could not be set off against the current year's income. This cost is termed the unabsorbed depreciation in income tax.

If you are wondering how many years unabsorbed depreciation can be carried forward, then it will be indefinite years.

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