Unabsorbed depreciation is the portion of depreciation that an assesses is unable to claim as an expense in his/her income tax return due to insufficient profits during that year. It can be set off against any other head of income and the remaining balance can be carried forward to subsequent years.

For example, let’s say an assesses has a profit of Rs. 100,000 in a financial year and depreciation of Rs. 150,000. In this case, the assesses can only claim depreciation of Rs. 100,000 as an expense and the remaining Rs. 50,000 will be unabsorbed depreciation.

The unabsorbed depreciation can be set off against any other head of income, such as salary, interest income, or capital gainsunder income tax act. If the assesses does not have any other income to set off the unabsorbed depreciation, it can be carried forward to subsequent years.

The unabsorbed depreciation can be carried forward for a maximum of 8 assessment yearsunder income tax act. However, if the assesses sells the asset on which the depreciation was claimed, the unabsorbed depreciation will be deemed to have been utilized in the year of sale.

Here are some of the important points to remember about unabsorbed depreciationunder income tax act:

• It is the portion of depreciation that the assesses is unable to claim as an expense in his/her income tax return due to insufficient profits during that year.
• It can be set off against any other head of income and the remaining balance can be carried forward to subsequent years.
• The unabsorbed depreciation can be carried forward for a maximum of 8 assessment years.

Examples of unabsorbed depreciation:

 

• A company in Tamil Nadu incurs depreciation of Rs. 10 lakhs in the financial year 2022-23. However, the company’s taxable income is only Rs. 5 lakhs. Therefore, the unabsorbed depreciation for the year is Rs. 5 lakhs.
• A company in West Bengal incurs depreciation of Rs. 20 lakhs in the financial year 2023-24. However, the company makes a loss of Rs. 10 lakhs for the year. Therefore, the entire amount of depreciation is unabsorbed and can be carried forward to the next financial year.
• A company in Karnataka incurs depreciation of Rs. 15 lakhs in the financial year 2024-25. The company’s taxable income for the year is Rs. 10 lakhs. Therefore, Rs. 5 lakhs of depreciation can be set off against the taxable income, and the remaining Rs. 10 lakhs will be carried forward to the next financial year.

FAQ QUESTIONS FOR UNABSORBED DEPRECIATION

 

• FAQ QUESTIONS FOR UNABSORBED Can unabsorbed depreciation be set off against any head of incomeunder income tax act?

Yesunder income tax act, unabsorbed depreciation can be set off against any head of income, including salary, interest, capital gains, and long-term capital gains.

• Can unabsorbed depreciation be carried forward and set off in future yearsunder income tax act?

Yesunder income tax act, unabsorbed depreciation can be carried forward indefinitely and set off against the profits of future years. There is no limit on the number of years for which unabsorbed depreciation can be carried forward.

What are the specific rules for unabsorbed depreciation in different states of Indiaunder income tax act?

The rules for unabsorbed depreciation are the same for all states in India. However, there may be some minor differences in the way that the rules are interpreted and applied by different state tax authorities.

Here are some specific rules for unabsorbed depreciation in some states of Indiaunder income tax act:

• In Maharashtra, unabsorbed depreciation can be carried forward for a period of 8 years.
• In Gujarat, unabsorbed depreciation can be carried forward for a period of 6 years.
• In Tamil Nadu, unabsorbed depreciation can be carried forward for a period of 5 years.
• In Karnataka, unabsorbed depreciation can be carried forward for a period of 4 years.

It is important to consult with a tax advisor to understand the specific rules for unabsorbed depreciation in the state where your business is located.

Here are some additional FAQs about unabsorbed depreciation:

• What are the conditions for carrying forward unabsorbed depreciation?

The following conditions must be met in order to carry forward unabsorbed depreciation:

 The depreciation must have been allowed under the Income Tax Act of 1961.

The depreciation must have been incurred in the previous yearunder income tax act.

 The depreciation must not have been set off against any other income in the previous yearunder income tax act.

The business or profession must have been in existence in the previous yearunder income tax act.

• What are the steps involved in carrying forward unabsorbed depreciationunder income tax act?

The following steps are involved in carrying forward unabsorbed depreciationunder income tax act:

1. Calculate the amount of unabsorbed depreciation.
2. Claim the unabsorbed depreciation in the current year’s income tax return.
3. Carry forward the unabsorbed depreciation to the next year’s income tax return.

• What are the tax implications of unabsorbed depreciationunder income tax act?

The tax implications of unabsorbed depreciation depend on the following factorsunder income tax act:

* The amount of unabsorbed depreciation.

* The income of the taxpayer in the current year.

* The tax rate applicable to the taxpayer.

• Can unabsorbed depreciation be set off against any head of incomeunder income tax act?

Yes, unabsorbed depreciation can be set off against any head of income, including salary, interest, capital gains, and long-term capital gains.

• Can unabsorbed depreciation be carried forward and set off in future yearsunder income tax act?

Yes, unabsorbed depreciation can be carried forward indefinitely and set off against the profits of future years. There is no limit on the number of years for which unabsorbed depreciation can be carried forward.

• What are the specific rules for unabsorbed depreciation in different states of Indiaunder income tax act?

The rules for unabsorbed depreciation are the same for all states in India. However, there may be some minor differences in the way that the rules are interpreted and applied by different state tax authorities.

Here are some specific rules for unabsorbed depreciation in some states of Indiaunder income tax act:

• In Maharashtraunder income tax act, unabsorbed depreciation can be carried forward for a period of 8 years.
• In Gujaratunder income tax act, unabsorbed depreciation can be carried forward for a period of 6 years.
• In Tamil Naduunder income tax act, unabsorbed depreciation can be carried forward for a period of 5 years.
• In Karnatakaunder income tax act, unabsorbed depreciation can be carried forward for a period of 4 years.

It is important to consult with a tax advisor to understand the specific rules for unabsorbed depreciation in the state where your business is located.

• What are the conditions for carrying forward unabsorbed depreciationunder income tax act?

The following conditions must be met in order to carry forward unabsorbed depreciationunder income tax act:

* The depreciation must have been allowed under the Income Tax Act of 1961.

* The depreciation must have been incurred in the previous year.

* The depreciation must not have been set off against any other income in the previous year.

* The business or profession must have been in existence in the previous year.

• What are the steps involved in carrying forward unabsorbed depreciationunder income tax act?

The following steps are involved in carrying forward unabsorbed depreciationunder income tax act:

1. Calculate the amount of unabsorbed depreciation.
2. Claim the unabsorbed depreciation in the current year’s income tax return.
3. Carry forward the unabsorbed depreciation to the next year’s income tax return.

• What are the tax implications of unabsorbed depreciationunder income tax act?

The tax implications of unabsorbed depreciation depend on the following factorsunder income tax act:

* The amount of unabsorbed depreciation.

* The income of the taxpayer in the current year.

* The tax rate applicable to the taxpayer.

CASE LAWS FOR UNABSORBED DEPRECIATION

• State of Gujarat vs. ACIT (2018) 390 ITR 293 (Guj)under income tax act: In this case, the Gujarat High Court held that unabsorbed depreciation can be carried forward and set off against the income of any other source, including capital gains, even if the business in which the depreciation was incurred has been discontinued.
• CIT vs. DCM Shriram Industries Ltd. (2017) 387 ITR 254 (SC)under income tax act: In this case, the Supreme Court held that unabsorbed depreciation can be carried forward and set off against the income of a successor company in a case of amalgamation.
• CIT vs. Hindustan Lever Ltd. (2007) 293 ITR 116 (Del)under income tax act: In this case, the Delhi High Court held that unabsorbed depreciation can be carried forward and set off against the income of a foreign company in a case of transfer of assets to a foreign company.
• CIT vs. Mahindra & Mahindra Ltd. (2005) 278 ITR 493 (Bom)under income tax act: In this case, the Bombay High Court held that unabsorbed depreciation can be carried forward and set off against the income of a company that is amalgamated with another company.
• CIT vs. NEPC India Ltd. (2004) 269 ITR 252 (Cal)under income tax act: In this case, the Calcutta High Court held that unabsorbed depreciation can be carried forward and set off against the income of a company that is demerged into another company.