Limit of actual cost while allowing depreciation - Income Tax - 577/CBDT

INSTRUCTION NO. 577/CBDT Dated : July 30, 1973 Section(s) Referred: 41(2) Statute: Income - Tax Act, 1961 Attention is invited to para 47(b) of the Comptroller and Auditor General's report for the year 1970-71 wherein the following mistakes have been pointed out in the computation of income. (a) The total amount of depreciation allowed on various assets including initial depreciation was not limited to the cost of the asset. (b) While computing profit under Section 41(2) on the sale of an asset, an estimated profit of 50% of the sale price was taken instead of treating the entire sale proceeds to the extent of cost of the asset as profit and the balance as capital gains, as the value of the asset was completely written down. 2. Section 34(2)(1) of the Income-tax Act, 1961 provides that the aggregate of all deductions in respect of depreciation made under subsection (1) or sub-section 1(a) of Section 32 or under the Income-tax Act, 1922(11 of 1922) or under any act repealed by that act or under the Income-tax Act, 1866 (to of 1886) shall in no case, exceed the actual cost to the assessee of the building, machinery, plant , furniture, structure or work, as the case may be. In view of this the initial depreciation allowed should have been taken into account in determining whether the total cost of the asset had been allowed or not and depreciation allowance should have been given accordingly. 3. Section 41(2) of the Income-tax Act clearly provide that profit under this Section will be the difference between the sale price land the written down value of an asset to the extent of actual cost of the asset. The sale price in excess of the actual cost of the asset should be taxed as capital gains. In view of this the method adopted by the Income-tax Officer in estimating the profit under section 41(2) as 50% of the sale price is highly irregular. 4. The Board views with serious concern such mistakes in regard to the computation of profits under Section 41(2) particularly when the W.D.V. of a particular asset was ascertainable with reference to the assessment records. 5. The Board has repeatedly asked for maintenance of depreciation charts in company cases and other important case to keep track of the written down value and the initial depreciation allowed on a particular asset. The Inspecting Assistant Commissioners have been asked vide M-30/100/70/DILT, dated 16th November, 1970 to check depreciation and development rebate in about a dozen big cases in a year to ensure correct allowance of depreciation. The Internal Audit parties have been asked vide F.No.5/4/69-IT(Audit) dated 26th May, 1960 to check depreciation calculation in a greater details than hitherto. The Board desires that you should ensure strict compliance of the above instructions. 6. Necessary instructions may please be issued to the Officers working in your charge. The Board would also like a general review of cases decided to be undertaken to ascertain whether this irregular practice of estimating profit under Section 41(2) has been followed in other cases. The compliance report indicating the number of mistakes detected and suitable action taken thereon to retrieve the loss of revenue on this account in your Charge should be submitted by 30th August, 1973 positively.