1. Depreciation under the Income Tax Act does not merely a provision for charging against taxable profits the capital expenditure incurred by an undertaking on the depreciable asset over the useful lives of the assets, but it is also aimed at working as a tax incentive measure affecting the cash flow of business enterprises and generation of internal resources for replacement of assets which have outlived their utility.
2. The tax-payer should have the option in respect of the actual quantum of depreciation to be claimed against the profits from year to year subject, however, to a maximum rate specified in the law which will be applied to the value except in the caw of ocean-going ships where the existing pattern continue. In this regard the maximum reacts of depreciation should be:
Building including roads, culverts, bridges, etc.: 10%
Furniture and Fixtures: 20%
Plant and machinery: 40%
3. The option given to the tax-payer should be limited to this choosing one single rate for all assets falling within a class viz. building, furniture and fixtures, plant and machinery and he should not be allowed to adopt different rates for different items falling within the same class.
4. A total latitude to the tax-payers is in the matter of choosing depreciation rates is not desirable as that might disturb the budgetary position of the Government.
5. The tax incentives should be retained with the business for further development and not frittered away by the tax-payer.
6. Full write off (i.e., depreciation at 100%) should be allowed in the case of all assets where the actual cost of an asset does not exceed $10,000.
7. In cases where no books of account are maintained depreciation should be allowed at the uniform rate of 10%, buildings, 20% on plant and machinery, furniture and fixtures on the reducing balance method.
8. If a company desires a nil allowance in income tax, it should not charge the profit and loss account of that year but should disclose such areas of depreciation by way of a note on the accounts as permitted by the Companies Act.
9. In dealing with business concerns as going concerns not operating with a view to liquidation, calculation of depreciation separately for each item of asset is unnecessary. At every stage of addition of new assets, the cost of the new assets should be aggregated with the written down value of the existing block and depreciation allowed on such consolidated block.
10. The provisions for extra shift allowance in respect of machinery and plant used in factories and approved hotels should be discontinued.
11. The existing provisions for carrying forward of the absorbed depreciation should continue. The benefit of carrying forward and set off unabsorbed depreciation should be allowed whether or not the asset in question continue to be used for the purposes of the business in the succeeding accounting years.
12. Where depreciable assets of a business are taken over by the Government or any statutory authority, no profit will be taxed under Section 41 (2) if the tax-payer reinvests the sale proceeds or compensation money as the acquisition of other depreciable assets for any business within a period of three years from the date of acquisition.
13. The law should be classified to provide that depreciation under Section 32 shall be allowable in respect of capital expenditure for Scientific research qualifying for deduction under Section 35.
14. The following items of expenditure, in particular, should also be eligible for amortization against profits of a business over a ten year period for tax purposes:
- Pre-operative expenses on administration and accounts. Department and such other expenditure which does not directly relate to creation or acquisition of assets.
- Expenses on shifting of a factory.
- Payment for acquisition of intangible assets for which there is no other provision for amortization.
- Expenses on construction of railway sidings and roads on land not belonging to the tax-payer
15. Any instance of business expenditure, which results in Disallowance as revenue expenditure and non-allowance of depreciation should be promptly notified under Section 35D(2)(d) as and when the attention of the Government is drawn thereto.
16. The limitation on the totality of preliminary expenditure now appearing under Sub-section(3) of Section 35D should be removed.
17. The following simple formula should be presented for amortization of expenditure on production of feature films in place of the complicated procedure laid down in Rule 9A of Income Tax Rules.
- If the film is released 90 days prior to the close of the accounting years in which the production is completed, the entire cost of production should be allowed as a deduction in the relevant previous year.
- If the film is released at any time within the period of the aforesaid 90 days prior to the expiry of the accounting year 60% cost of production should be allowed in that accounting year and the remaining 40% in the immediately succeeding accounting year.
18. As the rupee is now de-linked from the shirting and the foreign exchange value of the rupee fluctuates from time to time as computed with reference to a basket of currencies, the provisions of Section 48A have become quite cumbersome and difficult to apply.