21 July 2024
Under both the Income Tax Act and the Companies Act, the treatment of small-value items like cans used for milk receiving can be different. Here’s how each regulation typically addresses such items:
### Income Tax Act:
1. **Small Value Items (S. 32(1)(i)):** - Under Section 32(1)(i) of the Income Tax Act, small-value items costing less than Rs. 5,000 are eligible for full deduction in the year of purchase. - This means you can directly charge the cost of these cans to the Profit and Loss Account (P&L A/c) in the year of purchase rather than capitalizing them and claiming depreciation over subsequent years. - This provision is useful for items like cans which have a low individual cost but are purchased in bulk and used in operations.
### Companies Act:
1. **Accounting Treatment (Schedule II):** - Schedule II of the Companies Act, which deals with depreciation, requires companies to capitalize assets and then depreciate them over their useful lives. - However, there is no specific threshold mentioned for small-value items like cans. Companies generally follow a materiality threshold based on their internal policies and materiality assessments. - For items below the materiality threshold (which could be around Rs. 5,000 or less), companies may expense them directly in the P&L A/c rather than capitalizing them.
### Clarification:
- **Income Tax Act:** You can choose to directly expense the cost of cans costing less than Rs. 5,000 in the year of purchase under Section 32(1)(i). This reduces taxable income for that year.
- **Companies Act:** While there’s no specific provision similar to the Income Tax Act regarding small-value items, companies often follow a policy aligned with income tax rules for practical reasons. If your company has consistently capitalized these items, it's important to maintain consistency unless there’s a change in policy or materiality threshold.
### Practical Approach:
- **Consistency:** Since you have been capitalizing and depreciating these cans since 1969, it’s advisable to continue this practice for consistency in financial reporting and compliance.
- **Tax Efficiency:** For income tax purposes, you can take advantage of Section 32(1)(i) to directly expense small-value items, thereby reducing taxable income in the year of purchase.
In conclusion, while the Income Tax Act provides a clear provision for expensing small-value items like cans costing less than Rs. 5,000 in the year of purchase, the Companies Act relies on internal policies and materiality thresholds. Given your long-standing practice, continue capitalizing and depreciating these cans under the Companies Act unless there’s a change in policy or materiality threshold assessment.
CAclubindia
