why depreciation differs in companies act 1956 with that of income tax act 1961.?



and why companies prepare Depreciation Statement both as per companies act and income tax act. what is the need as such?

why depreciation differs in companies act 1956 with that of income tax act 1961.?
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4 Replies to “why depreciation differs in companies act 1956 with that of income tax act 1961.?”

  1. MINIMUM BOOK PROFITS till AY 2000-2001

    SECTION 115JA

    At present section 115JA provides fo levy of minimum tax on book profits of a company, where total taxable income as computed under the Income Tax Act in espect of any previous year relevant to assessment year 1997-98 onwards is less than 30% of its book profits, the total income of such company chargeable to tax shall be deemed to be the amount equal to 30% of such book profit.

    Book profit means net profit as shown in the profit and loss account prepared in accordance with the provisions of Part I and III of Schedule VI to the Companies Act, 1956, after making the following adjustments:

    profits increased by:
    a)Income tax paid or payable, and the provision thereof; or

    b)Amounts carried to any reserves by whatever name called:

    c)Provisions made for meeting liabilities, other than ascertained liabilities;

    d)Provision for losses of subsidiary companies;

    e)Dividends paid or proposed;

    f)Expenditure relatable to any income exempt under section 10 to 13A of the Income Tax Act, if any amount referred to in (a) to (f) above is debited to profit and loss account; and

    profits reduced by:
    i)Amount withdrawn from any reserves or provisions if any such amount is credited to the profit and loss account subject to the conditions that-

    the reserves or provisions was made in a previous year relevant to assessment year 1996-97 and earlier years,
    the reserves or provisions if any such amount is credited to profit and loss account subject to condition that reserves created or provisions made in a previous year relevant to assessment year 1997-98 and subsequent years, the book profit of the year in which reserves was created or provisions was made has been increased by such reserves or provisions (out of which the said amount has been withdrawn).
    ii)Income which is exempt under sections 10 to 13A of the Income Tax Act, if any sych amount is credited to the profit and loss account;

    iii)Amount of loss brought forward or unabsorbed depreciation, whichever is less as per the books of account. The loss shall not include depreciation;

    iv)The amount of profits derived by an industrial undertaking,-

    from the business of generation or generation and distribution of power,
    located in an industrially backward state or backward district as referred to in section 80-IB(4)/(5),for the assessment years such industrial undertaking is eligible to claim a deduction @ 100% of profits and gains u/s 80-IB(4)/(5).
    from the business of developing, maintaining and operating any infrastructure facility as defined in the Explanation to Section 80-IA(4) and subject to fulfilling the conditions laid down in that sub-section.
    v)The amount of profits of a sick industrial company, during the period the company is treated as a sick industrial company under Section 17(1) of the Sick Indistrial Companies (Special Provisions) Act, 1985;

    vi)In relation to assessment year 1998-99 onwards, the amount of profits eligible for-

    deduction u/s 80HHC, computed u/s 80HHC(3)/(3A) and subject to conditions specified in section 80HHC(4)/(4A)’
    deduction u/s 80HHE, computed u/s 80HHE(3)
    It has also been provided that the above provisions shall bot affect the determination of the amounts to be carried forward to subsequent year(s) relating to unabsorbed depreciation, unabsorbed investment allowance and unabsorbed losses u/s 72(1)(ii)/73/73/73A(3). All other provisions of Income Tax Act, save as those mentioned hereinabove, will apply to such a company.

    Under the amendement of section 115JA, the minimum tax on book profit will be levied upto assessment year 2000-2001.

    ——————————————————————————–

    MINIMUM BOOK PROFITS till AY 2001-2002

    Minimum tax on book profit will be levied, in relation to assessment year 2001 – 2002 and subsequent years, under new section 115JB

    I)Where the income tax payable on total income of a company computed under the Income tax Act, in respect of any previous year relevant to assessment year 2001-2002 and onwards, is less than 7.5%(as increased by surcharge on IT, if any) of such book profit

    II)For the purpose of S.115JB, every company should prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. While preparing the annual accounts including profit and loss account, the accounting policies, the accounting standards and the method and rates adopted for calculating the depreciation should be same as adopted for purpose of preparing such accounts including profit and loss account for the annual general meeting u/s 210 of the Companies Act, 1956.

    Where the company has adopted/adopts the financial year under the Companies Act, 1956, which is different from the previous year under the Income Tax Act, the accounts to be prepared for this purpose should corres


  2. The Depriciation to be provided in the companies act is for the pupose of preparation of annual account as per Schedule six of the companies act 1956 while in Income tax law uits for the purpose of calculating taxable income of the company.As per companies act the company is free to adopt method provided in income tax law provided the same is consistently followed and disclosed in the accounting policy statement.


  3. Simple, one is used for accounting (hence reporting) purpose and the other for calculating depreciation for tax purposes ie for calculating the tax liability.


  4. dear

    the very basic purpose is that by giving higher benefit in income tax the GOvt want you to invest more in capital infrastructure to save tax and by this way they want to build a chain of capital investment. there in nothing other moto in this.





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