WHY CLAIM OF DEPRECIATION U/S 32(1)(ii) IS MANDATORY ?
We should understand the reason/logic behind making the claim of depreciation mandatory. To understand this better lets have a look at the two sections related herewith - section 32(1)(ii) and section 50:
Depreciation - Section 32
32. (1) In respect of depreciation of-
(i) buildings , machinery , plant or furniture, being tangible assets;
(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned , wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed-
(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed ;
(ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed :
Notwithstanding anything contained in clause (42A) of section 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act , the provisions of sections 48 and 49 shall be subject to the following modifications :-
(1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amounts, namely :-
(i) expenditure incurred wholly and exclusively in connection with such transfer or transfers;
(ii) the written down value of the block of assets at the beginning of the previous year; and
(iii) the actual cost of any asset falling within the block of assets acquired during the previous year,
such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets;
(2) where any block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets.
On analyzing the above two provisions one can easily make out that once depreciation is claimed on any capital assets the capital gain on it will always be Short term. Now coming to the point of making the claim mandatory, if the above provision of being the claim of depreciation mandatory was not there the assessee would never claim any depreciation on it, to benefit himself with the following, since :
if the assessee claims depreciation, the capital gain would be Short term (by virtue of Section 50) and the assessee would be taxed @30%, rather if he does not claim deprecation he will taxed @20% (long term) subject to the provisions of period of holding, so claiming depreciation at one stage ultimately give rise to more tax liability on the later stage of taxation;
also if he claims depreciation he would not be eligible to claim the indexation benefit on Cost of acquisition and Cost of improvement under Second proviso to Section 48 which will invariably reduce the cost that is to be deducted from the Sales/Net consideration, and will ultimately increase the capital Gain resulting in more tax;
the other benefit the assessee would be getting by not claiming the depreciation would be the benefit of Section 54, 54F and other series of Section 54.
Since the assessee can involve himself in the practice of not claiming the depreciation to avail the above benefits the claim for depreciation has been made mandatory to defeat any such tax planning by the assessee