RATE OF DEPRECIAITON -THE WHOLESOME APPROACH IS REQUIRED

[C.A. DEV KUMAR KOTHARI]

Rate of depreciation:

Some general and special rates of depreciation are prescribed in the Income Tax Rules vide Appendix to the Rules. There have been changes from time to time. Earlier there was thinking of allowing higher rate of depreciation and even fro general plant and machinery rate was 33.33%. Then without any reason or logic rate was reduced to 15% although the need of time in view of globalization of business due to opening economy was to provide for higher depreciation to compete internationally where higher obsolescence takes place. Lowering of rate to 15% for general plant and machinery can thus be described just a political or bureaucratic decision based on just mood or withdrawing incentives to industry. Similarly we find many cases of higher or lower rate of depreciation which is more dependent on the mood of persons in control of tax matters.

Special rate of depreciation:

Special rates are prescribed for allowing depreciation allowance on many items. Such rate may be higher or lower then general. To make fully functional such equipments various other assets or accessories may be required. In some cases, special foundation, cables, power supply and control equipment, other supporting equipments to feed inputs and take delivery of outputs may be  required. All these items form an integral part of specified equipment. For example in case of a boiler or wind mill. The question that arises is whether special rate (higher or lower)  of depreciation  will be applicable on all such supporting items when they are used as necessary adjunct of the specified equipment to which special rate apply.

Higher rate is an incentive:

Accelerated depreciation to certain equipment is a conscious policy decision taken by the Government to achieve certain socio-economic purposes. At present we find higher rates of depreciation for energy saving equipment, water pollution control equipment, air pollution control equipment, etc. In some cases higher rate is provided on consideration of higher obsolescence for example in case of computers including software. A businessman using such equipment is eligible for higher depreciation allowance in the initial year of installation of the equipment; sometimes even 100 per cent. depreciation is allowed if such plant or machinery is purchased and used for 180 days or more during the first year. In case it is used for less than 180 days then in the first two years, the assessee gets deduction of 100 per cent. of the cost of such items.

The allowable depreciation is many times not based on actual wear and tear but just for sake of achieving some specific purpose including some political purposes or jut to satisfy business segments who have force to demand some relief. For example, in case of commercial vehicles recently higher depreciation has been prescribed to satisfy pulls and pressures from forceful lobby of transporters and vehicle manufacturers. For special and higher rate of depreciation readers may refer to the Appendix to find out rates applicable in particular year.

In many other cases like general plant and machinery we find the rate of depreciation is a meager 15 per cent. Many items falling under such category suffer significant wear and tear and may have short useful life and over such short life its cost may not be fully written off and one has to claim either terminal depreciation or reduce the sale value or scrap value of such item from the block of assets. For example only 15 per cent. depreciation is allowed on WDV of motor cars. Therefore, in five years, only 56 per cent. of the cost is allowed by way of depreciation leaving a WDV of about 44 per cent. of original cost. By that time usually, even after proper maintenance, the value realizable on sale of the used car may be only around 20-25 per cent. of cost. Therefore the depreciation rate in this case is quite low.

Utility of special rate item is in its entirety:

A special rate item cannot operate itself. For example, an   energy saving or a pollution control equipment by itself cannot achieve its intended purposes. To achieve the purpose of energy saving or pollution control certain accessories, fittings and adjunct plant and machinery are also required. For example, to run a boiler, foundation and cables, equipment for feeding fuel, equipment for removal of ash, chimney or exhaust pipes and fan are all required. After generation of power the power has to be sent to the transmission equipment. Therefore, equipment required for feeding fuel up to the boiler and taking the power from the boiler to the transmission line are all power-generation equipment. To maintain the boiler some spare parts are also to be maintained as stand by items. Therefore these necessary accessories should also be eligible for higher rates of depreciation, if the main equipment, i.e., boiler, itself is eligible for the same.

Some judgments on related spects:

 In DCIT, Spl. Range-2, Indore v. Vippy Solvex Products Ltd. [2007] 164 Taxman 483 (MP) a matter came for consideration  for allowing higher rate of depreciation on the automatic coal supply system that was required to feed coal to the boiler. The assessee claimed 100 per cent. depreciation on boiler and also other necessary apparatus. However, the Assessing Officer restricted it such other apparatus to only the normal rate of depreciation. On appeal, the Commissioner (Appeal) allowed the assessee's claim and on Revenue's appeal, the Tribunal upheld the order of the Commissioner (Appeal) and held that coal supply system including coal containers, coal conveyer, bucket elevator and dust collecting system were required for utilization of boiler and the assessee was entitled to depreciation at 100 per cent. on all such items also.

The Revenue being aggrieved, filed an appeal before the High Court and the High Court confirmed the order of the Tribunal. The High Court noted that it has not been shown by Revenue that the coal container, coal conveyer, bucket elevator, and dust collecting system can be used individually for any other purpose or were used for any other purpose in the assessee's business. These items were integral component of the boiler and therefore, they also became eligible to 100 per cent. depreciation. The High Court relied on CIT v. Cochin Refineries Ltd. [1988] 173 ITR 461 (Ker) in which the Kerala High Court considered the matter relating to various assets forming part of a refinery and held that waste ponds, fresh water tanks, alloy piping, jetty facilities, cherry picker cranes, etc., formed and were an integral part of the refinery and therefore, higher rate of depreciation and development rebate applicable to a refinery was allowable on these items also.

Rate of depreciation allowable with regard to computer peripherals and accessories

Printers, scanners and other peripherals are part and parcel of computer and depreciation against such asset are allowable @ 60 per cent.

In Container Corporation of India Ltd. Vs. ACIT ITA Nos. 2851 & 3680/Del/2007 decided on February 27, 2009 by  ITAT, BENCH 'B' : NEW DELHI matter for consideration was depreciation @ 60% on computers including accessories and peripheral. The Tribunal considered the issue as to operational aspects and held thatThe accessories and peripherals of computers provide input processing, storage and various output devices. The output devices such as printer, scanner etc. are computer peripherals and form essential parts of PC

 These output devices cannot work in isolation and also working on computer system without an output device such as printer would be futile. In view of the above, the claim of depreciation at 60% on printer, scanner and other computer peripherals is completely justified. The claim of depreciation of 60% further gets justified in view of the fact that even computer software which is installed on computer system supports the computer hardware and is eligible for depreciation at 60%.

In ITO vs. Samiran Majumdar (2006) 98 ITD 119 (Kol)  the Tribunal allowed the claim by observing as under :

"Therefore, the printer and scanner were integral part of the computer system and were to be treated as computer for the purposes of allowing higher rate of depreciation, i.e., 60 per cent and accordingly, no interference was required in the order passed by the Commissioner (Appeals) on that account." Therefore, the effective ground remains with regard to deduction under section 80IA in respect of inland ports.

In view of these the Tribunal upheld the order of the CIT(A) in allowing depreciation @ 60% on computer peripherals and accessories by treating them as computers.

Computer and related items:

Computers like Personal Computer, Desk-top computer,  laptop  or Pam top computers , cellular phone with data storage, internet or computing and printer attachment  and also big computers running with  main frame  cannot function independently but need various attachments. Even UPS is a necessary adjunct, because without clean, regulated power in uninterrupted  manner computers cannot function properly and there will be risk of data loss and computer failures.

Additional items may be of general category:

Accessories and  supporting  items  may  be capable of being used for other purposes also, but that will not make a difference so long the item is used as a part and parcel of the specified item eligible for the higher rate of depreciation. In the author's view mere usability of such additional item as an independent item or as an adjunct of other plant or machinery will not make difference. In each case we have to consider the main equipment to which such accessories or attachments are added.

For example, crane used as necessary adjunct of boiler will be part of boiler though similar cranes may be used for other material handling in other departments. Cranes which are used in other departments will not be eligible for higher depreciation applicable to boiler but will be eligible for depreciation only at general rate or the rate applicable to the other plant or machinery with which it is used.

Similarly in the case of computers, the switch boards, cables, networking wiring and equipment, UPS, printer, etc., working as necessary adjunct to the computer and also software to operate the computer are part and parcel of the computer and these are eligible for higher depreciation of 60 per cent. An identical UPS if used for providing back-up electricity for some other general equipment will be part of the other equipment and the rate applicable to that equipment may be  applied  to the UPS. In case the UPS is used as a part of a power monitoring system, it will be eligible for higher rate of depreciation of 80 per cent.

Practical aspects understand with technical team and by on spot analysis:

When a special rate of depreciation is under consideration   an enquiry from technical team should be made to find out what other items can be considered as part of specified items. A visit to the site with drawings of equipment and adjunct items can be helpful in ascertaining true nature of  such items to ascertain applicable rate of depreciation and other allowances as may be applicable in a particular year. This exercise will help the client to claim depreciation correctly and can be considered necessary in course of accounting and audit to check and verify provision for tax, and in case of need to advise client properly.