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Depreciation Rates

RISHI (cs) (227 Points)

11 September 2009

Can we provide income tax depreciation rates in Company's Profit and Loss account?Pls. also see attached file.

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Srikant (CA,CS,CMA,LLb,M.Com) (1289 Points)
Replied 11 September 2009

Originally posted by :RISHI
"	Can we provide income tax depreciation rates in Company's Profit and Loss account?Pls. also see attached file.	"

Dear RISHI,

having gone through your attachment of the Case Decision, it is clearly mention there that A Company can follow the the depreciation method and rates other than that mentioned under Sch -XIV.

However, it has to state the depreciation effect as per the Companies Act (i'e SCh XIV) in the notes on account under the headings "SIGNIFICANT ACCOUNTING POLICIES" together with the difference in a quantifiable manner and its impact on present financial staus had it not been followed as per the existing policy.

I am also highlighting the lines from the case decision which will benifit you.

It is stated that Schedule XIV clearly states that a company should disclose depreciation rates if they are different from the principal rates specified in the Schedule. On this basis, it is suggested that a company can charge depreciation at rates which are lower or higher than those specified in Schedule XIV. It may be clarified that the rates as contained in the Schedule XIV should be viewed as the minimum rates and, therefore, a company shall not be permitted to charge depreciation at rates lower than those specified in the Schedule in relation to assets purchased after the date of applicability of the Schedule."

Moreover, Note 5 of Schedule XIV contemplates that rate may be different from the rates specified in the said Schedule. This note reads as :

"5. The following information should also be disclosed in the accounts :

(i) depreciation methods used; and

(ii) depreciation rates or the useful lives of the assets, if they are different from the principal rates specified in the Schedule."

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RISHI (cs) (227 Points)
Replied 12 September 2009

Thanx Shrikant. But My actual query is

" If a company deliberately follows income tax depreciation rates to save 'MAT' Tax , will it be OK even then. Company has first financial year to end and it will follow IT depreciation rates in the future."

(Guest)

It will be OK if your company follows the Income tax depreciation rates.

But the Income tax is uncertain in its nature.

So, Every time Income tax change the rates for depreciation, Your company will also change the depreciation rates.

And as per the companies act, 1956, Whenevr you change the depreciation rates on company's assets, you shall have to insert notes on account as said by Mr. Srikant.

So, It is advisable to prepare balance sheet of two types.

(1) Master balance sheet for shareholder's approval and ROC Filling

(2) Balance sheet for the purpose of ascertaining the correct Income Tax payable.

If you need further clarification than contact me

Ankur Shah (Practicing Company Secretary)

“Guru Gautam” Bungalow, Inside Parshwa Tower,

Nr. Shyamal Cross Road, 132ft. Ring Road,

Satellite, Ahmedabad – 15

Contact: + 91-9427633901

E-mail: ankurjewel @ gmail.com

Blog: csankur.blogspot.com

RISHI (cs) (227 Points)
Replied 13 September 2009

My query is on MAT now. Pls. read my query first.

(Guest)

I know that your query is related to MAT.

But, the company law does not concerned with which type of Income tax Practice, you follow in your company.

The company law is concerned with that, whether you changed the depreciation rates or not.

If you have changed the depreciation rates than Notes of accounts is compulsory.

You can not escape from this provision by saying that You are following MAT or any other Income Tax structure.

I hope that, you can understand that Income Tax and Company Law both are different piece of Legislation and both of them have their unique procedures.

If you need further clarification than contact me.

Ankur Shah (Practicing Company Secretary)

“Guru Gautam” Bungalow, Inside Parshwa Tower,

Nr. Shyamal Cross Road, 132ft. Ring Road,

Satellite, Ahmedabad – 15

Contact: + 91-9427633901

E-mail: ankurjewel @ gmail.com

Blog: csankur.blogspot.com

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RISHI (cs) (227 Points)
Replied 13 September 2009

I think Mr. Ankur u are unable to understand my query. i am not talking abt escaping from provision but escaping from MAT.I request u to read my query once more. I want to ask if a company has to pay MAT if it follows CA depreciation rates and if it follows IT depreciation rates, it will not have to pay MAT.If we can do so simply by giving "notes' to accounts then there will be a lot of companies which will start following this practice to save MAT .Pl.s also note that in my case company's first financial is being ending.

Srikant (CA,CS,CMA,LLb,M.Com) (1289 Points)
Replied 14 September 2009

See, MAT is a part of Income Tax Act, 1961. and it walks at par with the normal income tax as per IT provisions.

In case of Companies MAT is equally applicable as that of Tax under normal provision. You have to compute MAT simultaneously with Normal Tax at the end of the year and then you have to compare the both computations.

The method which have the effect of higher tax will be taken as Tax payable by the Company under Income Tax Act, may be under MAT or under normal provisions. A company need not to pay Tax under both MAT & normal provisions. Rather A company can take the benefit of excess Tax paid as credit which can be utilised in future years, which is named as MAT CREDIT.MAT is not compulsory at all. It is applicable when the Tax amount computed is higher than normal income Tax. otherwise tax under normal income Tax would be applicable.

Now you want to have a tax planning. Then Compute Tax payable under Income Tax Act, and also under 115JB through BOOK PROFIT (i.e MAT). Then comapre it and then see which one is more and pay the higher amount.

Also please go through Section115JB of IncomeTax Act,1961 to see the items considered only for computing MAT.

Also note that in MAT there is nothing contained as regards Depriciation under Companies ACT. Only thing you have to do is to compare the Depreciation as per Income TAx Act and Depriciation actually followed ( under whatever provision) and take the lowest one.

Please also note that a Company is not bound to follow Depriciation rates either under Companies Act or under Income Tax Act. Ii can follow depriciation under its own policies.

All the thing it is need to do is that consider It ACT and RULES while complying with the Formalities under Income Tax Act, and consider Companies ACT and Rules while complying with the formalities of Companies Act.

Hope you are clear now.

Thanks and Regards

CS SRIKANTA KUMAR PATTANAYAK

(Guest)

I Fully agreewith Mr. Srikant.

RISHI (cs) (227 Points)
Replied 14 September 2009

Reg. Shrikant saying

" Also note that in MAT there is nothing contained as regards Depriciation under Companies ACT. "

While calculating Book Profits under MAT, it is given that Profit & Loss A/c should be drawn in conformity with Schedule VI. You mean to say that profit calcuated shall be OK even if we provide IT depreciation rates instead of CA depreciation .

Dear Shrikant, it seems u r dealing with such types of companies.Can u give me names of 1 or 2 comapnies which are following these rules.

What shrikant said,

"Only thing you have to do is to compare the Depreciation as per Income TAx Act and Depreciation actually followed ( under whatever provision) and take the lowest one."

Where and in which section it is written or in which judgment it is decided?

Srikant (CA,CS,CMA,LLb,M.Com) (1289 Points)
Replied 15 September 2009

Please find the attachment. I think this will help you and let me know if ther is any further query.

Attached File : 52 mat.doc downloaded: 227 times

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santosh kabbur (proprietor) (21 Points)
Replied 16 April 2010

Dear Mr.Srikant, Mr.Rishi. I hope the following text would clarify the dobuts!!!

Dynamic Orthopedics vs. CIT

(Supreme Court)

The assessee, a private limited company, provided for depreciation in its Profit & loss account by adopting the rates specified in the Income-tax Rules and computed its “book profits” u/s 115J on that basis. The AO recomputed the book profits by adopting the depreciation rates as per Schedule XIV to the Companies Act as those were lower than the income-tax rates. The CIT (A) & Tribunal upheld the stand of the assessee on the ground that Schedule XIV was not applicable to a private limited company though the High Court took the view that s. 205 of the Companies Act stood incorporated into s. 115J and consequently depreciation had to be provided at the rates specified in Schedule XIV and not in terms of the Income-tax Rules. On appeal by the assessee, HELD doubting its own judgement in Malayala Manorama 300 ITR 251:

(i) The law laid down in Malayala Manorama 300 ITR 251 {that (i) Schedule VI does not create any obligation to provide for any depreciation much less for depreciation at Schedule XIV rates, (ii) As per the Company Law Board Circular the rates in Schedule XIV are the minimum rates and a company can provide for higher rates and (iii) Schedule XIV itself contemplates that depreciation can be provided at rates different from the Schedule rates} needs re-consideration because s. 115J by a deeming fiction legislatively only incorporates provisions of Parts II and III of Schedule VI of the Companies Act and not sections 205, 350 or 355. Once a company, whether private or public, falls within the ambit of it being a MAT company, s. 115J applies and is required to prepare its Profit & loss account only in terms of Parts II and III of Schedule VI. By the Companies (Amendment) Act, 1988, the linkage between depreciation as per Rule 5 and the Companies Act have been expressly de-linked and the rates are also different.

(ii) If the judgement in Malayala Manorama is to be accepted, the very purpose of enacting s. 115J would stand defeated particularly when the said section does not make any distinction between public and private limited companies.

(iii) Accordingly, the matter needs re-consideration by a larger Bench of the Court.

Note: In Malayala Manorama, all that was said was that a company was entitled to provide for depreciation at the income-tax rates because the rates specified in Schedule XIV were the minimum rates. It was emphasized that Schedule XIV itself permitted different & higher rates to be provided. Further, the Bench followed Apollo Tyres 255 ITR 273 (3 Judges) where it was laid that the AO could not recompute “book profits” by excluding provisions made for arrears of depreciation.