What is unabsorbed depreciation ? how is its treatment different in taxation vis-a-accounting?
18 Replies
CA Dhiraj Ramchandani
(CA, M. com)
(10823 Points)
Replied 24 February 2010
Unabsorbed depreciation - Its the amount of depreciation which the assessee couldnt claim as expenditure in his profit and loss account due to lack of sufficient credit in the credit side of p&l account or other expenses..
Such loss in p&l account due to the excess depreciation is called unabsorbed depreciation.
such depreciation can be set off against any head of income in the current year and the balance not setoff can be carried forward for any number of years.
Treatment of current year depreciation:
a. claim deduction of current year depreciation from the business to which it relates.
b. Deficiency in a. can be setoff against profits and gains of any other business of the assessee.
c. Deficiency in b. can be set off against any other head of income of current previous year
d. Deficiency in c. is "unabsorbed depreciation" for the current previous year. the unabsorbed depreciation has same treatment as business loss which is carried forward - for accounting purpose.
Desperado
(Cost And Management Accountant)
(129 Points)
Replied 24 February 2010
Dear,
Unabsorbed Depreciation is that portion of depreciation, which has not been recognised in accounts (made for tax purpose) so far due to the higher amount of depreciation against lower taxable profits. In such a case that portion of depreciation, which is unabsorbed, will be carried forward to be absorbed against future taxable profits.
Also note that it has no concern with accounts made for financial reporting purpose provided that rate of depreciation in both accounts (Tax and accounts) is consistent. However, if both of the profits are changed due to the different rate of depreciation in arriving at Taxable profit and Accounting profit then deferred tax implications would arise, which has to be accounted for as per rules provided by the relevant standards.
Let me know if confusion still exists.
Best Regards,
Desperado.
chota_accountant
(wanna b CA)
(54 Points)
Replied 24 February 2010
how does unabsorbed depreciation arise?
Is it due to different rates of depreciation applied for accounting and taxation purposes?
How does it affect the P& L a/c?
please explain with numerical figures.
MOHIT MAHAJAN
(LCS, ACA)
(2050 Points)
Replied 24 February 2010
Take a simple example -
In P/L a/c you have G.P./ Income etc. on credit side as Rs. 50,000. Depreciation during the year is say 10,000. Now you will simply debit the depreciation and your net profit will become 40,000 chargeable to tax.
However if the credit side remains same as Rs. 50,000 but the depreciation is 60,000 then what will happen?
In accounting terms it will simply show a loss of 10,000 to the firm. However in taxation terms this 10,000 will be known as unabsorbed depreciation.
Now the assessee can carry forward this 10,000 to next years and can setoff it against future profits. For details you should read SET-OFF & CARRY FORWARD chapters along with topic of depreciation in b&p
Ankit Himatsingka
(Exec)
(52 Points)
Replied 25 February 2010
To add to what Mohit mentioned:
It is important under Income tax that net loss for any year be segregated into two parts in the Return of Income - 1) Business Loss 2) Unabsorbed depreciation.
While business loss can be carried forward & set off against business income only to a maximum of 8 year (subject to certain conditions), unabsorbed depreciation can be carried foward & set off against business income during unlimited number of years.
Therefore, in the subsequent years, whenever the entity has a profit, it should first set off its past losses. Once all the past losses have been set-off, the unabsorbed depreciation can be set off against income.
Ankit Himatsingka
(Exec)
(52 Points)
Replied 25 February 2010
To add to what Mohit mentioned:
It is important under Income tax that net loss for any year be segregated into two parts in the Return of Income - 1) Business Loss 2) Unabsorbed depreciation.
While business loss can be carried forward & set off against business income only to a maximum of 8 year (subject to certain conditions), unabsorbed depreciation can be carried foward & set off against business income during unlimited number of years.
Therefore, in the subsequent years, whenever the entity has a profit, it should first set off its past losses. Once all the past losses have been set-off, the unabsorbed depreciation can be set off against income.
chota_accountant
(wanna b CA)
(54 Points)
Replied 25 February 2010
Thank You
Mr. Mohit & Moonwalker for explaining the concept in such a simple manner.
Siddharth Nasa
(Desh raj & co.)
(28 Points)
Replied 25 February 2010
a type of business loss only...........
Om Prakash Singh
(Account Executive)
(30 Points)
Replied 05 April 2011
dear sir
i want to what is the depriceation and what is the treatment of the deprication please sare a doc. about the complete depriciation knowldge
Om Prakash Singh
(Account Executive)
(30 Points)
Replied 05 April 2011
dear sir
i want to what is the depriceation and what is the treatment of the deprication please sare a doc. about the complete depriciation knowldge, what, how we define , how many kind method of depreciation
Raj
(Assistant)
(56 Points)
Replied 22 April 2011
| Originally posted by : MOHIT MAHAJAN | ||
 |
Take a simple example - In P/L a/c you have G.P./ Income etc. on credit side as Rs. 50,000. Depreciation during the year is say 10,000. Now you will simply debit the depreciation and your net profit will become 40,000 chargeable to tax. However if the credit side remains same as Rs. 50,000 but the depreciation is 60,000 then what will happen? In accounting terms it will simply show a loss of 10,000 to the firm. However in taxation terms this 10,000 will be known as unabsorbed depreciation. Now the assessee can carry forward this 10,000 to next years and can setoff it against future profits. For details you should read SET-OFF & CARRY FORWARD chapters along with topic of depreciation in b&p |
 |
Any indirect expneses other than depreciation coming under this rule?
Vikash Shah
(Real Estate Developer)
(47 Points)
Replied 11 August 2011
can someone please help me in this little problem
Profit & loss account
purchase 1000 sale 1200
expenses 300
capital loss 200
speculative business loss 400
Book Depreciation 600
Net Loss 1300
Additional Info:
Dep as per IT 800
this is my solution:-
1. PGBP
profit from p/l (1300)
+book dep 600
+sp. business loss 400
+capital loss 200
-dep as per IT (800)
Non sp Business loss 900......to be c/f
Speculative business loss 400....to be c/f
2.C.G (200)......to be c/f
i am confused about unabsorbed depreciation. where it is?? how much to be c/f??
thanx
CA.Sampath Rao
(In Practice)
(78 Points)
Replied 20 August 2011
Depreciation which is not absorbed due to shortage of income
HARI PRASAD
(ARTICLE)
(21 Points)
Replied 11 March 2015
Mr.Vikash Shah
First we have to understand why there is a difference between Income Tax Depreciation and Companies Act depreciation. The reason is due to the rates as per IT act and rates as per companies act.
Unabsorbed depreciation is the amount of depreciation not been absorbed by Profit.
According to Sett off / carry forward provisions of Income Tax Act, unabsorbed depreciation means depreciation as per Income Tax Act
So you just have to consider Rs.800 as unabsorbed depreciation for your computation.
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