Meaning of unabsorbed depreciation:
- In a financial year, it is possible that an assessee does not have sufficient profits to cover the depreciation expenses. In this case, we refer to the amount of unutilized depreciation as unabsorbed depreciation.
- According to guidelines set by the Income Tax Act of 1961, one can set off any unabsorbed depreciation against any other heads of income except Salary head.
- unabsorbed depreciation shall be carry forward indefinite no.of years till it is full set off.
Manner of set off current year depreciation
The current year depreciation for any assessment year shall be set off:
- Firstly, against the profits and gains of any business or profession carried on by the assessee assessable for that assessment year and
- The balance if any, against the income under any other head for that assessment year.
There might be a situation where there is still a balance of unadjusted depreciation even after set-off against all other heads of income. In such a case, you may carry forward unabsorbed (unadjusted) depreciation to next years for set-off against future taxable income.
Set-off unabsorbed depreciation in future years:
Depreciation to the extent not set off and carried forward to the next assessment year shall be set-off in subsequent years against:
- Profits and gains of any business or profession carried on by the assessee and
- The balance if any against the income under any head.
- It means that in the subsequent years also, the assessee can adjust unabsorbed depreciation of earlier years against income from any other heads but exception to this is Income under the head Salary.
Time-limit of carry forward for unabsorbed depreciation
- The unabsorbed depreciation can be carried forward indefinitely. The conditions of 4 years/ 8 years are not applicable in the case of unabsorbed depreciation.
- Depreciation shall be carried forward even if the business or profession has been discontinued.
Order of set-off for the purpose of ITR:
Order of set-off for the purpose of ITR
- First, adjust current year depreciation
- Then, adjust the brought forward business losses (as only 8 years are available in case of brought forward business losses)
- Lastly, you should adjust unabsorbed depreciation
Carry forward of unabsorbed depreciation in case of change in the constitution of the assessee:
Depreciation can be carried forward only if the assessee is the same i.e. the assessee who claimed the depreciation and the assessee who wants to carry forward the depreciation must be the same.
However, there are certain exceptions to this rule where depreciation can be carried forward even when the assessee has changed:
- Firm succeeded by a company
- Conversion of proprietorship concern into a company
- Conversion of an unlisted public company or private limited company into LLP
- Amalgamation or Demerger
- Amalgamation and Demerger of Co-operative Bank referred u/s 72AB
Most Asked FAQ’s
Q1. Can you carry forward depreciation?
Ans: According to Section 32 of the Income Tax Act, an assessee can carry forward depreciation to the next financial year. Thus, the income you earn in the future can be utilised to set off any depreciation you incurred in the past.
Q2. Can I set off unabsorbed depreciation against capital gains?
Ans: Yes, it is possible to set off unabsorbed depreciation against capital gains after adjusting them against profits from the business. These capital gains can be short term or long term, arising from various sources, like the sale of business assets.
Q3. What happens to unabsorbed depreciation when business shutdowns?
Ans: The closing down or discontinuation of a business does not impact the carrying forward of unabsorbed depreciation. Thus, one can continue to set off or carry forward the depreciation balance for an indefinite period.
Q4. Can different assessees set off the same unabsorbed depreciation?
Ans: Carrying forward of depreciation can only take place when the assessee remains the same during the adjustment period. Thus, it is not possible for different assessees to set off the same unabsorbed depreciation. Nonetheless, there are some exceptions, like amalgamation, demerger, etc.
Q5. What is the time limit to carry forward depreciation?
Ans: The Income Tax Act has set up time restrictions on carrying forward various depreciations. For example, one can set off a business loss till a maximum of eight years. However, there is no time limit in the case of unabsorbed depreciation.
