When can a Property be called as “Put to Use” ?
What are the Effects ?
What is the Logic behind this ? What are the Do’s and Dont’s ?
Helpful tips are at the end ( bottom ) of this writeup
In the Income Tax Act there is no clear definition about the word”put to use” and is therefore to be considered in a wider sense.Steps taken to set building into gear are ‘putting it to use’ – After arranging for the building, any steps taken by the entrepreneur to set the building into gear for running the unit, would be nothing but putting it to ‘use’ – CIT v. O.P. Khanna & Sons [1983] 140 ITR 558 (Punj. & Har.).
In the case of leases also it is seen that the lessor generally leases out the newly purchased buildings to the lesses without taking any certificates and can easily claim depreciation.For them giving out the assets on lease is itself pertaing to put to use.Thye definition “put to use is to be used with reference to the context of the situation.Also in the above mentioned case reliance is placed on the decision of Sarabhai Management Corporation Ltd. v. CIT [1976] 102 ITR 25 (Guj) with respect to leases.
As per ICAI, Accounting Standard, AS-10, Para 6
6.l Fixed asset is an asset held with the intention of being used for
the purpose of producing or providing goods or services and is not held for sale in the normal course of business.
Section 32 of the Income tax Act
Depreciation is an allowance on capital assets acquired and put to use and not an expenditure unlike repairs to machinery, plant or furniture. It need not be incurred by the assessee during the previous year. The depreciation allowance has to be calculated on the assets of the assesee as per the methods and rates prescribed under the income tax law.
Depreciation allowance is one of the deductions allowed from business or professional income chargeable under section 28 or other income chargeable under section 56(2)(ii) or 56(2)(iii) of the Income Tax Act, 1961.
As per section 32 of the Income Tax Act, 1961, depreciation is allowed on tangible assets and intangible assets owned, wholly or partly, by the assesse and used for the purposes of business or profession.
As per section 57(ii) depreciation deduction is available from the income from hire of machinery, plant or furniture [Section 56(ii)] or income from buildings (in case of the building is inseparable from the letting of the said machinery, plant or furniture) [Section 56(iii)].
On new plant or machinery, apart from depreciation allowance under section 32(1) and Section 32(2), investment allowance is also available additionally as per the provisions of sections 32AC and 32AD.
Depreciation under the Income Tax Act is allowed as a deduction, as a percentage on the written down value (WDV) of the block of assets as per the rates prescribed in New Appendix I to the Income Tax Rules, 1962.
In case of assets of an undertaking engaged in generation or generation and distribution if power, the depreciation is allowed as deduction on the actual cost i.e. straight-line method (SLM) individually on each asset at depreciation rates prescribed in Appendix IA to the Income Tax Rules, 1962 or on WDV of the block of assets. These categories of undertakings shall opt for charging depreciation either on SLM or WDV method. As per Rule 5(1A) of the Income Tax Rules, 1962 the option shall be exercised before the due date for furnishing the return of income under section 139(1) of the Income Tax Act, 1961. As per the proviso to Rule 5(1A), the option once exercised shall be final and shall apply to all the subsequent assessment years.
Block of asset: Section 2(11)
As per section 2(11) of the Income Tax Act, 1961, “block of asset” 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, trademarks, licenses, franchises, or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed.
For the purpose of classification of assets into blocks, the percentage of depreciation within the class of assets needs to be considered. Each such class of asset with the same percentage of depreciation will be identified as a block of the asset.
An asset put to use for a period less than 180 days
In case of an asset acquired during the previous year and is put to use for the purpose of business or profession for a period less than 180 days in that previous year, the deduction as depreciation allowance shall be restricted to 50% of the amount of such depreciation in case of:
i. SLM depreciation on assets of an undertaking engaged in generation or generation and distribution of power;
ii. WDV method of depreciation on block of assets method on both tangible and intangible assets;
iii. Additional depreciation.
Notes:
1. In case of additional depreciation allowance, the balance 50% (out of 20% or 35% as the case may on actual cost) shall be allowed in the immediately succeeding previous year;
2. The restriction of 50% of normal depreciation is not applicable to the assets acquired prior to the previous year and put to use in the previous year for a period of less than 180 days;
E. Income Computation and Disclosure Standard V relating to tangible fixed assets
Preamble
This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” and not for the purpose of maintenance of books of account.
In the case of conflict between the provisions of the Income-tax Act, 1961 (‘the Act’) and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent.
Scope
1. This Income Computation and Disclosure Standard deals with the treatment of tangible fixed assets.
Definitions
2(1) The following terms are used in this Income Computation and Disclosure Standard with the meanings specified:
| (a) | “Tangible fixed asset” is an asset being land, building, machinery, plant or furniture held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business. | |
| (b) | “Fair value” of an asset is the amount for which that asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction. |
(2) Words and expressions used and not defined in this Income Computation and Disclosure Standard but defined in the Act shall have the meanings assigned to them in that Act.
Identification of Tangible Fixed Assets
3. The definition in clause (a) of sub-paragraph (1) of paragraph 2 provides criteria for determining whether an item is to be classified as a tangible fixed asset.
4. Stand-by equipment and servicing equipment are to be capitalised. Machinery spares shall be charged to the revenue as and when consumed. When such spares can be used only in connection with an item of tangible fixed asset and their use is expected to be irregular, they shall be capitalised.
Components of Actual Cost
5. The actual cost of an acquired tangible fixed asset shall comprise its purchase price, import duties and other taxes, excluding those subsequently recoverable, and any directly attributable expenditure on making the asset ready for its intended use. Any trade discounts and rebates shall be deducted in arriving at the actual cost.
6. The cost of a tangible fixed asset may undergo changes subsequent to its acquisition or construction on account of
| (i) | price adjustment, changes in duties or similar factors; or | |
| (ii) | exchange fluctuation as specified in Income Computation and Disclosure Standard on the effects of changes in foreign exchange rates. |
7. Administration and other general overhead expenses are to be excluded from the cost of tangible fixed assets if they do not relate to a specific tangible fixed asset.
Expenses which are specifically attributable to construction of a project or to the acquisition of a tangible fixed asset or bringing it to its working condition, shall be included as a part of the cost of the project or as a part of the cost of the tangible fixed asset.
8. The expenditure incurred on start-up and commissioning of the project, including the expenditure incurred on test runs and experimental production, shall be capitalised.
The expenditure incurred after the plant has begun commercial production, that is, production intended for sale or captive consumption, shall be treated as revenue expenditure.
Self- constructed Tangible Fixed Assets
9. In arriving at the actual cost of self-constructed tangible fixed assets, the same principles shall apply as those described in paragraphs 5 to 8. Cost of construction that relate directly to the specific tangible fixed asset and costs that are attributable to the construction activity in general and can be allocated to the specific tangible fixed asset shall be included in actual cost. Any internal profits shall be eliminated in arriving at such costs.
Non- monetary Consideration
10. When a tangible fixed asset is acquired in exchange for another asset, the fair value of the tangible fixed asset so acquired shall be its actual cost.
11. When a tangible fixed asset is acquired in exchange for shares or other securities, the fair value of the tangible fixed asset so acquired shall be its actual cost.
Improvements and Repairs
12. An Expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance is added to the actual cost.
13. The cost of an addition or extension to an existing tangible fixed asset which is of a capital nature and which becomes an integral part of the existing tangible fixed asset is to be added to its actual cost. Any addition or extension, which has a separate identity and is capable of being used after the existing tangible fixed asset is disposed of, shall be treated as separate asset.
Valuation of Tangible Fixed Assets in Special Cases
14. Where a person owns tangible fixed assets jointly with others, the proportion in the actual cost, accumulated depreciation and written down value is grouped together with similar fully owned tangible fixed assets.
15. Where several assets are purchased for a consolidated price, the consideration shall be apportioned to the various assets on a fair basis.
Transitional Provisions
16. The actual cost of tangible fixed assets, acquisition or construction of which commenced on or before the 31st day of March, 2016 but not completed by the said date, shall be recognised in accordance with the provisions of this standard. The amount of actual cost, if any, recognised for the said assets for any previous year commencing on or before the 1st day of April, 2015 shall be taken into account for recognising actual cost of the said assets for the previous year commencing on the 1st day of April, 2016 and subsequent previous years.
Depreciation
17. Depreciation on a tangible fixed asset shall be computed in accordance with the provisions of the Act.
Transfers ( Example “Sale” )
18. Income arising on transfer of a tangible fixed asset shall be computed in accordance with the provisions of the Act.
Disclosures
19. Following disclosure shall be made in respect of tangible fixed assets, namely:—
| (a) | description of asset or block of assets; | |
| (b) | rate of depreciation; | |
| (c) | actual cost or written down value, as the case may be; | |
| (d) | additions or deductions during the year with dates; in the case of any addition of an asset, date put to use; including adjustments on account of— |
| (i) | Central Value Added Tax credit claimed and allowed under the CENVAT Credit Rules, 2004; | |
| (ii) | change in rate of exchange of currency; | |
| (iii) | subsidy or grant or reimbursement, by whatever name called; |
| (e) | depreciation Allowable; and | |
| (f) | written down value at the end of year. |
in Simple words
Accounting Standards have their own Basis
ICDS have a slightly different Basis
to be on Safer side, as far as income tax is concerned
the Non Corporate/ Corporate entity must understand that appropriate evidence should be there so that there is no risk of Interest or Depreciation being disputed by the Government bodies
Some of the Evidences usually seen by the Income Tax bodies are
Following List of Evidences is suggestive in Nature,
Sales have started ( The Biggest Evidence ) ( with proper invoices, E way bill, E invoice, Truck GR copy, Weighment slip, etc )
Purchases have started ( with proper invoices, E way bill, E invoice, Truck GR copy, Weighment slip, etc )
Machines have arrived ( with proper invoices, E way bill, E invoice, Truck GR copy, Weighment slip, etc )
Electricity expense is happening ( with proper Meter reading etc)
Workers have been appointed ( with Proper ESI, EPF, Welfare Fund / Professional tax records etc)
Other consumables that are required to manufactur, apart from the Raw Material, ( as per the Bill of Material, of the product being produced )
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