Unabsorbed Depreciation

While accounting books of records of any business, depreciation caused by purchased/invested tangible assets is set-off as expense or loss of the business entity. However, said mechanism is not as simple as it seems; it has numerous technicalities with prerequisites and accounting methods. Narrow downing this general concept of depreciation; this article shall focus on the specific topic, i.e., Unabsorbed Depreciation.

Narrating this topic, the writer will discuss its meaning and its interconnection with general depreciation. After this, brief about its accounting treatment as per the legal provisions enumerating the conditions/criteria for adjusting the unabsorbed depreciation. Lastly, the writer will end this article with personal comments pointing out the possibilities of litigation in the present subject matter.

Unabsorbed Depreciation: Meaning & How it's different from general Depreciation

Understanding the meaning of the term, ‘Unabsorbed Depreciation’ is a kind of depreciation that has not been absorbed/set off the expenses or loss of the business. The reason behind its incompetency is the lack of proper accounting of the same in their books of records, making it unaccounted depreciation. Hence, depreciation that is not absorbable with the books of accounts shall be termed unabsorbed depreciation. The bare provisions of the Income Tax Act, 1961 (Act) have not specifically defined unabsorbed depreciation. The following simple illustrations can help understand it:

Illustration 1

1. X’s business profit is Rs. 100 cr.
2. Depreciation is Rs. 101 cr

Then, unabsorbed deprecation is Rs. 1 cr.

Illustration 2

1. Y’s business loss is Rs. 100 cr.
2. Depreciation is 99 cr.

Then, the business loss is Rs. 100 cr. & unabsorbed depreciation is Rs. 99 cr.

With the above examples, it is clear that unabsorbed depreciation is the situation of depreciation when profit is not even sufficient to adjust depreciation caused in the business.

Accounting Treatment of Unabsorbed Depreciation

From the above discussion, it's clear that unabsorbed depreciation is the excess amount of depreciation that is unaccounted for as it's not adjusted in profit & loss accounts. Then the question comes that what shall be done of the said amount. The answer to this concern is it perpetually carry-forward to the next assessment year to be adjusted/ set off against any head of income.

Legal Implications & Conditions

The provision enumerated in sections 32 (Depreciation) and 34 (Condition for depreciation allowance) of the Act, can adjust depreciation with business profit. However, Assessee doesn’t have sufficient profit. Leftover depreciation, i.e., unabsorbed, can be carried forward in terms of section 72 (Carry forward & set off of business losses) and 73 (Losses in Speculation Business) of the Act. For settling the unabsorbed depreciation in the forthcoming year, Assessee has to follow fix criteria/orders; briefed as under:

1. Before carry-forward, it has to be adjusted towards current expenditures like; scientific research, future planning, or any other deprecation;
2. Adjustment of business loss or capital expenditure (if any)

Closing Statement

Concluding the concept of Unabsorbed Depreciation it is important to highlight that the impugned mechanism of set-off, the leftover depreciation was in dispute. It gives options to the assessee to transfer the unabsorbed depreciation to the next assessment year without any restriction. Looking into the matter Hon’ble High Court has given benefit to Assessee and rejected the plea of the department to set a time limit for the same. However, it’s not settled as the department may file an appeal before the Hon’ble Supreme Court for reversing the decision. Further, litigation in the present subject matter is endless as there are many other aspects whereby Assessee/Taxpayers face issues like merger/amalgamation and insolvency/ bankruptcy, etc.