Depreciation Under the Companies Act, 2013 vs Depreciation Under the Income Tax Act,1961

by Income Tax

Depreciation is a crucial accounting concept that reflects the reduction in value of a fixed asset over time due to usage, wear and tear, or obsolescence. Both the Companies Act, 2013 and the Income Tax Act, 1961 address depreciation, but they differ significantly in terms of methods, rates, and applicability. This blog will compare depreciation as per the Companies Act, 2013 and the Income Tax Act, 1961, providing an in-depth understanding of their differences and implications.

1.Depreciation Under the Companies Act, 2013 :

The Companies Act, 2013 mandates the accounting treatment for depreciation for companies in India. Depreciation is accounted for as per the provisions laid down in Schedule II of the Companies Act, which outlines the rates, methods, and other criteria for depreciation on various fixed assets.

Key Features of Depreciation as per the Companies Act, 2013:

a) Method of Depreciation:

  • The Companies Act allows two methods of depreciation: the Straight-Line Method (SLM) and the Written Down Value (WDV) Method.
  • SLM is used where the asset’s benefit is expected to be uniform over its useful life.
  • WDV is used when the asset’s usage or benefit decreases over time at a higher rate in the earlier years.

b) Useful Life of Assets:

  • Schedule II provides specific useful lives for different classes of assets, which companies must adhere to while calculating depreciation.
  • The useful life may be reviewed periodically, and adjustments can be made if required.

c) Residual Value:

  • A residual value is considered in calculating depreciation, and the minimum residual value is generally taken as 5% of the original cost of the asset.
  • The residual value should not exceed the asset’s cost, unless specifically indicated.

d) Depreciation on Revalued Assets:

  • If an asset is revalued, depreciation must be calculated based on the revalued amount, with the accumulated depreciation adjusted accordingly.
  • Revaluation surplus may be credited to a revaluation reserve

e) Transition to New Provisions :

  • For assets existing as of April 1, 2014, companies were required to adopt the provisions of Schedule II for depreciation calculation, considering the remaining useful life of assets.

Rates of Depreciation :

  1. The rates for depreciation are provided for various categories of assets under Part C of Schedule II of the Companies Act, 2013. For example:
  • Buildings: 5% (SLM) or 10% (WDV)
  • Furniture & Fixtures: 10% (SLM) or 20% (WDV)
  • Machinery: 15% (SLM) or 25% (WDV)

2. Depreciation Under the Income Tax Act, 1961 :

Depreciation under the Income Tax Act, 1961 is governed by Section 32 of the Act. The Income Tax Act provides specific rates of depreciation on assets used for business or professional purposes, primarily to calculate taxable income.

Key Features of Depreciation as per the Income Tax Act, 1961:

1. Method of Depreciation:

  • The Income Tax Act mandates the Written Down Value (WDV) method for calculating depreciation.
  • SLM is not allowed for tax purposes. Depreciation is deducted from the WDV of the asset each year.

2. Rates of Depreciation:

  • The Income Tax Act specifies different rates for various categories of assets, which are subject to change through Finance Acts.
  • These rates are typically higher compared to the Companies Act to encourage investment.

Example of depreciation rates under the Income Tax Act:

  • Buildings: 10% (if used for business or office)
  • Furniture and Fittings: 10%
  • Machinery and Plant: 15% (general category), 40% (computers and related equipment)

3. Accelerated Depreciation:

  • The Income Tax Act offers higher depreciation rates on certain assets (e.g., computers, windmills, and solar power systems) to incentivize businesses to invest in specific assets.
  • This is designed to promote capital investment and growth in sectors like technology and renewable energy.

4. Depreciation on Revalued Assets:

Revaluation of assets does not affect depreciation for tax purposes. Depreciation is calculated on the original cost of the asset, irrespective of any revaluation.

5. Additional Depreciation:

  • A business can claim additional depreciation of 20% on new machinery and plant (excluding office buildings) in the first year of purchase, subject to certain conditions.

6. Block of Assets:

  • Depreciation is calculated on a block of assets, where assets of similar nature are grouped together. The block is depreciated at a prescribed rate on the aggregate cost of the block rather than individual asset cost.

Key Differences Between Depreciation under the Companies Act, 2013 and the Income Tax Act, 1961 :

AspectCompanies Act, 2013Income Tax Act, 1961
Method of DepreciationStraight Line Method (SLM) and Written Down Value (WDV)Only Written Down Value (WDV)
Rate of DepreciationAs per Schedule II of the Companies Act (specific rates)Prescribed under Income Tax Act (usually higher rates)
Asset ClassificationSpecific life for each class of asset (Schedule II)Assets grouped into blocks (e.g., machinery, building)
RevaluationDepreciation is recalculated based on revalued amountDepreciation is based on original cost, even if assets are revalued
Additional DepreciationNot availableAvailable for new machinery (20% in the first year)
Treatment of Residual ValueMinimum residual value of 5% is consideredNo specific residual value; depreciation is calculated on WDV

Conclusion :

Both the Companies Act, 2013 and the Income Tax Act, 1961 provide mechanisms for calculating depreciation, but with different objectives. The Companies Act governs the accounting of depreciation for financial reporting, while the Income Tax Act focuses on providing tax benefits to businesses. For businesses, it is essential to understand both frameworks to ensure compliance with financial reporting standards and optimize tax planning. In most cases, the depreciation calculated under the Income Tax Act will differ from the depreciation under the Companies Act due to differences in rates, methods, and criteria

For more information you can contact us at Groomtax

Exemptions and Benefits for Small Companies Under the Companies Act, 2013

by Legal

The Companies Act, 2013, provides several exemptions and benefits to small companies in India, recognizing their unique needs and limited resources. Below is a detailed analysis:

1. Definition of a Small Company :

As per Section 2(85) of the Companies Act, 2013, a small company is defined as a company, other than a public company:

  • Paid-up Share Capital: Not exceeding ₹50 lakh (or a higher amount prescribed, up to ₹5 crore).
  • Turnover: As per the last profit and loss account, not exceeding ₹2 crore (or a higher amount prescribed, up to ₹20 crore).

Exceptions: The following are not considered small companies:

2. Exemptions Available to Small Companies :

The Act grants the following exemptions to small companies:

  • Board Meetings (Section 173): Small companies are required to hold only two board meetings annually, with a minimum gap of 90 days between them, instead of four.
  • Cash Flow Statement (Section 2(40)): Preparation of a cash flow statement as part of financial statements is not mandatory.
  • Annual Return (Section 92): Small companies can have their annual return signed by the company’s director instead of a company secretary, simplifying compliance.
  • Auditor Rotation (Section 139(2)): Small companies are exempt from the mandatory rotation of auditors.

3. Benefits in Compliance Framework :

  • Less Stringent Penalties: Smaller penalties and leniency in certain cases of non-compliance.
  • Filing Fees: Reduced fees for filings with the Registrar of Companies (RoC).
  • Declaration of Solvency: Simplified procedures for schemes like mergers or amalgamations (Section 233).

4. Simplified Accounting and Auditing :

  • No mandatory inclusion of certain notes or disclosures in the financial statements, which reduces complexity.
  • Exemption from specific procedural requirements under the Act.

5. Corporate Governance Relaxations :

  • Fewer requirements for holding general meetings and related documentation.
  • Simplified quorum requirements and voting procedures.

    6. Merger and Amalgamation Benefits :

    Section 233 allows small companies to merge without going through the cumbersome process of seeking approval from the National Company Law Tribunal (NCLT), subject to certain conditions and notifications to the Registrar and Official Liquidator.

    Conclusion :

    Small companies play a critical role in the Indian economy, and these exemptions and benefits are designed to reduce their compliance burden, enabling them to focus on growth and innovation. However, it is essential to stay updated with amendments and notifications to leverage these advantages fully.

    For more information you can contact us at Groomtax

    Income Tax Provisions on Sale of Listed Equity Shares

    by Income Tax
    • Income Tax Provisions on Sale of Listed Equity Shares:
      • Short-Term Capital Gains (STCG):
        • Applicable if shares are held for 12 months or less.
        • Tax Rate: 20% (under Section 111A) + surcharge + cess.
        • Condition: Sale must take place on a recognized stock exchange and attract Securities Transaction Tax (STT).
      • Long-Term Capital Gains (LTCG):
        • Applicable if shares are held for more than 12 months.
        • Tax Rate: 12.5% (under Section 112A) on gains exceeding ₹1,25,000 in a financial year, without indexation benefit.
        • Condition: Sale must take place on a recognized stock exchange and STT must be paid.
    • Exemptions Available Under the Capital Gains Head:
      • Under Section 54F:
        • Applicable if the entire net sale consideration (not just capital gain) is reinvested in a residential house property within the specified time limits:
          • Purchase: Within 1 year before or 2 years after the sale.
          • Construction: Completed within 3 years of the sale.
        • Conditions:
          • The taxpayer should not own more than one residential house (other than the new house) on the date of transfer.
          • Exemption is proportionate if only part of the sale consideration is invested.
    • Set-Off of Capital Gains:
      • STCG can be set off against any capital loss (short-term or long-term).
      • LTCG can be set off only against long-term capital loss.
    • Special Cases and Notes:
      • Non-Resident Taxation:
        • For non-residents, tax on LTCG and STCG is the same, but exemptions under Sections 54F and 112A may not apply unless specified in Double Taxation Avoidance Agreements (DTAAs).

    If you need any clarification, you can contact us at Groomtax

    valuations of shares

    What Is The Valuation Of Shares In Corporate Accounting?

    by Blog

    Knowing the worth of a company’s shares is done through the valuation of shares process. Share valuation is based on quantitative methods, and the value of a share will change depending on market supply and demand. It is simple to find out the share price of listed corporations that are traded publicly. However, the valuation of shares is extremely significant and difficult with regard to private corporations whose shares are not sold publicly. Here, in this article we will know about how valuation of shares in corporate accounting is done.

     

    When is a Share Valuation necessary?

    The following are some scenarios where the share valuation is necessary:

    * One significant factor is when you are preparing to sell your firm and need to determine its value.

    * As soon as you ask your bank for a loan using shares as security

    * Share value is crucial during mergers, acquisitions, reconstruction, amalgamations, and other business transactions.

    * When your company’s shares are about to be converted, going from equity to preference

    * When creating an employee stock ownership plan, valuation is necessary (ESOP)

    * When determining tax obligations under the wealth tax or gift tax legislation

    * When share valuation is mandated by law during a court proceeding shares that a brokerage firm owns

    * The corporation is nationalised after paying the stockholders compensation.

     

    What are Share Valuation Methods?

    1. Asset-based

    The value of the company’s assets and liabilities, including intangible assets and contingent liabilities, is the foundation of this strategy, called Asset-Based. For manufacturers, wholesalers, and other businesses that use a significant amount of capital assets, Asset-based may be quite helpful. The conclusions drawn using the income or market methodologies are likewise verified using this method as a reasonableness check. Here, the value of each share is calculated by dividing the company’s net assets by the total number of shares.

     

    2. Income Based

    When only a small number of shares are being valued, this method is employed. In Income Based, the emphasis is on the anticipated returns on the business investment, or what the company will produce in the future. A popular technique is to divide predicted earnings by a capitalization rate to determine the worth of a company. Besides these two, DCF and PEC are also employed. A company that is well established can employ PEC, but more complex analyses like discounted cash flow analysis are better suited for freshly created businesses or firms with erratic short-term earnings assumptions.

     

    3. Market-Based

    The market-based method typically makes use of the stock or asset sales of comparable private organisations as well as the share prices of comparable publicly traded companies. There are numerous proprietary databases on the market that can be used to get information about private companies. What is more crucial is how to choose similar companies; there are several factors to take into consideration while making this decision, including the size, industry, size, financial standing, and date of the transaction, among others.

    To know more about the Share valuation methods, tap on the link to know more about it in detail.
    GroomTax

    The practice of share valuation is essential to your knowledge and success, regardless of whether you are a trader or a long-term investor. As a result, traders can compare the stocks of other companies using a variety of share value techniques. Long-term investors might assess their possibilities and approach them using a variety of techniques. Therefore, it’s crucial to keep up with the greatest share valuation techniques according to your needs and objectives.