19 August 2013
Dear Expert , I have received demand of Rs. 7290.00. On receiving of this demand I compared it with Computation then I found that depreciation deduction under section 32 1 (ii) was disallowed .
I could not get why the IT department has disallowed the same.
Some points are as follows.
1) our company is getting losses for last two year excepting this year in which demand raised. 2)this losses are being carried forward and set off with profit as and when profit arises 3)same f.y. we had also paid mat
however IT has raised demand , I could not understand what the reason behind for such demand. Please let me know with example
19 August 2013
Go through the return and check whether you have mentioned details of depreciation in the Depreciation Schedule. Also check if the details have been correctly mentioned.
In case of any discrepancy in above rectify the same and file a rectification application.
21 July 2024
It seems like the Income Tax Department has disallowed the depreciation deduction under section 32(1)(ii) in your case, leading to the demand notice. Let me explain the possible reasons and implications with an example:
### Understanding Depreciation and MAT
Depreciation under section 32 of the Income Tax Act allows businesses to claim depreciation on assets used for business purposes. It reduces the taxable income of the company, thereby reducing its tax liability.
Minimum Alternate Tax (MAT) is applicable when a company, despite having book profits, does not pay income tax due to various exemptions, deductions, or incentives under the Income Tax Act.
### Example Scenario
Let's assume a hypothetical scenario to illustrate:
- **Financial Year (FY) 2021-22:** - Profit before Depreciation and Tax (PBDT): Rs. 10,00,000 - Depreciation as per Books (Section 32): Rs. 3,00,000 - Profit before Tax (PBT) after Depreciation: Rs. 7,00,000 - Taxable Profit after adjustments: Rs. 7,00,000
- **MAT Calculation:** - Book Profit (PBT as per Books): Rs. 7,00,000 - Adjusted Total Income for MAT: Rs. 7,00,000 - MAT rate: 18.5% (including surcharge and cess)
- **Computation of MAT:** - MAT liability: 18.5% of Adjusted Total Income - MAT liability = 18.5% of Rs. 7,00,000 = Rs. 1,29,500
- **Scenario Analysis:** - If the company had sufficient regular tax liability (computed tax) exceeding MAT liability, it would pay regular tax. If not, MAT would apply. - In your case, if the regular tax liability was lower due to deductions such as depreciation, MAT might have been applied.
### Possible Reasons for Demand Notice
1. **MAT Credit Entitlement**: If MAT was paid in the past years and you now have regular taxable income, you might be entitled to a MAT credit. However, this needs careful computation and verification.
2. **Adjustment of Depreciation**: The IT Department might have disallowed certain depreciation claimed under section 32(1)(ii) due to scrutiny or mismatch in filing. This could lead to higher taxable income and hence the demand notice.
### Course of Action
Since you've received a demand notice, here’s what you can do:
- **Review the Demand Notice**: Check the computation details provided in the demand notice. - **Compare with Computation**: Cross-verify the computation details with your records and see why depreciation under section 32(1)(ii) was disallowed. - **Rectification or Appeal**: If you find discrepancies or have valid reasons, you can file for rectification under Section 154 or appeal against the demand notice to the Income Tax Appellate Tribunal (ITAT).
### Example of MAT and Depreciation
Let's assume the company had MAT applicable due to insufficient regular tax liability despite having book profits. If depreciation claimed under section 32(1)(ii) was disallowed by the IT Department, it might have led to a higher MAT liability, hence the demand notice.
### Conclusion
Understanding the reasons behind the disallowed depreciation deduction is crucial. It's advisable to consult with a tax professional or chartered accountant who can assist in reviewing the notice, preparing a response or appeal, and ensuring compliance with the Income Tax laws.
CAclubindia
