Direct Tax

Report No. 20 of 2014 - Performance Audit on Allowance of Depreciation and Amortisation

Date on which Report Tabled:
Fri 28 Nov, 2014
Date of sending the report to Government
Government Type
Union Department
Direct Tax
Sector Taxes and Duties


Income Tax Act, 1961, (Act) lays down diverse provisions on depreciation and/or amortisation for tax purposes as deduction to an assessee/ a company in the course of its business with the intention for promoting economic growth within the Country. It is important to ensure that these provisions are properly utilised as per the existing tax laws to avoid any major revenue loss. The objective of this study was to focus on whether the systems and procedures are sufficient and in place to ensure compliance with the provisions of the Act/Rules and instructions issued by Central Board Direct Taxes (CBDT) in this regard. The study also seeks assurance that adequate internal control mechanism exists within the Income Tax Department (ITD) for monitoring the allowance of depreciation in general and under special circumstances viz., amalgamation, demerger, reconstruction etc.

We audited assessments completed during the period FY 10 to FY 13 and all cases of scrutiny assessments, appeal and rectification cases etc, within the selected units. We covered all circles/wards taken up for regular audit during the period from July to September 2013. We checked 87,023 records of the assessees. This report contains 725 cases of deficiencies in the implementation of provisions of the Act with tax effect of RS 2,464.06 crore.

Rates of depreciation on different assets/ block of assets as provided in the Act differ from those prescribed under the Companies Act 1956 for the same assets. We found that depreciation as per the Act was higher in 6,267 cases and lower in 5,926 cases by a difference aggregating RS 57,665.41 crore and RS 11,754.80 crore respectively. We suggested harmonising these rates as assessees and ITD make additional efforts in computation of taxable income. The intended purpose for allowing depreciation in the Act has also not been evaluated. Due to non-existence of proportionate allowance of depreciation depending upon the use of assets, assessees have claimed unintended benefits. We observed that 986 assessees made additions of various assets worth RS 1,41,725.45 crore in the month of March and claimed depreciation of RS 15,617.86 crore instead of allowable depreciation of RS 2,602.61 crore on pro rata basis for the month of March only, the assets being purchased in the month of March itself. Besides this, there are inconsistencies in allowance of depreciation on assets owned by Charitable/Religious Trusts and Association of Persons.

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