Section 43(1)

Section 43(1) — the law in short

What the courts have decided on section 43(1), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• CIT v Woodward Governor India P Ltd Supreme CourtHelps taxpayerNo later treatment found
  I restated my foreign currency creditors at the closing rate and debited an unrealised loss. Can the AO throw it out as a contingent liability?
  No. Under the mercantile system, the loss on restating foreign currency monetary items at the balance sheet date is an item of expenditure under s.37(1), and the word 'expenditure' is wide enough to cover a loss that has not gone out of the assessee's pocket. Section 43A is a separate regime that applies only to an asset acquired from a country outside India, and after its substitution by the Finance Act 2002 it operates only at the time of actual payment.
• CIT, Dibrugarh v Doom Dooma India Ltd Supreme CourtHelps taxpayer
  I grow and manufacture tea, so only part of my income is taxed under the Income-tax Act. When I carry the written down value forward, does the Assessing Officer deduct the whole year's depreciation or only the taxable proportion?
  Only the taxable proportion. Under s.10(1) read with rule 8 of the Income-tax Rules, 1962, 40 per cent of the income from the sale of tea grown and manufactured in India is the part liable to tax, and the Supreme Court held that in a rule 8 case the depreciation 'actually allowed' within s.43(6)(b) is the proportionate depreciation only. The Department's appeals, which sought to reduce the written down value by 100 per cent of the depreciation computed at the prescribed rate, were dismissed.
• DCIT v Core Health Care Ltd Supreme CourtCuts both ways
  I borrowed to buy machinery for my existing factory and the machine was not commissioned by 31 March. Can I still claim the interest under section 36(1)(iii)?
  Yes, for years before 1 April 2004. The Supreme Court held that section 36(1)(iii) asks only three things: capital was borrowed, it was borrowed for the purpose of the business, and interest was paid on it. Whether the asset bought with the money was put to use in that year is irrelevant, and Explanation 8 to section 43(1) does not cut down the deduction because it belongs to the depreciation provisions. Interest of Rs 1.56 crore on borrowings used to install three new machines was allowed for assessment years 1992-93 onwards.
• CIT v Bokaro Steel Ltd Supreme CourtHelps taxpayer
  While my plant is still being built I recover rent, hire charges and interest from my own contractors. Is that taxable income before the business starts?
  No, where the receipts are inextricably linked with setting up the plant. The Supreme Court held that rent charged to contractors for housing their workers, hire charges for plant and machinery lent to them, interest on advances made to keep their work moving, and royalty for stone excavated from the company's own land are all capital receipts that go to reduce the cost of construction. They arise from arrangements intrinsically connected with building the plant, not from any independent source. Tuticorin Alkali was distinguished: interest on surplus borrowed funds parked in short-term deposits is an independent source and remains taxable.
• CIT v P.J. Chemicals Ltd Supreme CourtHelps taxpayerSuperseded by amendment
  I received a central or state capital subsidy worked out as a percentage of my plant cost. Must I reduce the actual cost by it before claiming depreciation?
  No, not a subsidy of that kind. The Supreme Court held that a government subsidy given as an incentive to set up industry in a backward area does not become a payment towards the cost of assets merely because it is quantified as a percentage of the fixed capital cost. The percentage is only a measure for working out the aid. Such a subsidy is therefore not met directly or indirectly towards the actual cost within section 43(1), and depreciation is allowed on the full cost. The Court preferred the view of the majority of the High Courts to that of Punjab and Haryana.
• Challapalli Sugars Ltd v CIT Supreme CourtHelps taxpayerSuperseded by amendment
  I borrowed to buy and install my plant and paid interest before production started — can I add that interest to the cost of the plant and claim depreciation on it?
  Yes. The Supreme Court held that interest paid on money borrowed to acquire and install plant and machinery, for the period before production commences, forms part of the actual cost of the asset. 'Actual cost' is not defined in the Act, so it must be read in the sense no commercial man would misunderstand — that is, by the accepted accountancy rule, which brings in all expenditure necessary to bring the asset into existence and put it in working condition. Depreciation and development rebate are therefore admissible on the capitalised interest.
• CIT v Alps Theatre Supreme CourtHelps department
  I built a cinema and capitalised the land with the building. Can I claim depreciation on the whole cost, or must the land be taken out?
  The land must be taken out. The Supreme Court held that building in the depreciation provision means the structure and does not include the site. Depreciation is a decrease in value through wear, deterioration or obsolescence, and in that sense land cannot depreciate. The same word is used in the neighbouring clauses on insurance against destruction and on current repairs, neither of which can sensibly cover the site, and the prescribed rates turn on the class of construction, which makes no sense if applied to land. Allowing depreciation on land would give a wrong picture of the real income of the business. Rs 12,000 of land cost was rightly excluded from the Rs 85,091 written off.
• Hameed Marine Pvt Ltd v ACIT — Explanation 3 to s.43(1) needs a recorded satisfaction and the Joint Commissioner's prior approval ITATHelps taxpayerNo later treatment found
  I bought second-hand machinery and claimed depreciation on what I paid. The Assessing Officer has substituted the previous owner's written down value as my actual cost. Can he do that?
  Not without satisfying the conditions of Explanation 3 to s.43(1). The Chennai Bench held that the Explanation can be invoked only where the Assessing Officer records a satisfaction that the main purpose of the transfer of the assets was the reduction of a liability to income-tax by claiming depreciation on an enhanced cost, and only where he determines the actual cost with the previous approval of the Joint Commissioner; both conditions are mandatory, and neither having been met, the substitution had no jurisdictional basis and the disallowance was deleted.
• Nirma Ltd v DCIT — depreciation on goodwill from amalgamation, and the date the Finance Act 2021 closed it ITATHelps taxpayerSuperseded by amendment
  The Assessing Officer has disallowed depreciation on goodwill that arose when a company amalgamated into mine. Which years can I still claim it for?
  Only assessment years up to AY 2020-21. The Finance Act 2021 removed goodwill of a business or profession from the definition of block of assets in s.2(11) and from s.32, excluded it from Explanation 3(b) to s.32(1), and amended s.43(6)(c)(ii) to require the written down value of goodwill to be reduced from the opening WDV where goodwill already formed part of a block; those amendments apply prospectively from AY 2021-22. For earlier years the Tribunal here allowed the claim on Smifs Securities, and the amendment gives the Assessing Officer no ground to disturb it.
• Pagro Frozen Foods Pvt Ltd v ITO — a government grant-in-aid towards plant reduces the actual cost under Explanation 10 to s.43(1) ITATHelps departmentNo later treatment found
  I received a government grant towards building a cold chain facility. Must I reduce it from the cost of the assets before claiming depreciation?
  Yes, where the grant was given towards the cost of specified assets. The Chandigarh Bench held that actual cost under s.43(1) is the cost to the assessee reduced by so much of it as has been met directly or indirectly by any other person or authority, and upheld the reduction of a Rs. 2.5 crore grant-in-aid from the Ministry of Food Processing Industries from the cost of the assets on which depreciation was claimed. The appeal was dismissed.
• Gati Kintetsu Express Pvt Ltd v DCIT ITATHelps taxpayerSuperseded by amendment
  We took over a business under a business transfer agreement and assumed liabilities far in excess of the assets, paying no cash. The Assessing Officer says we paid nothing, so there is no cost and no depreciation on the intangibles. Is that right?
  No, on these facts. The Mumbai Tribunal held that where the buyer took over liabilities exceeding the assets by about Rs.125 crores and discharged those liabilities in later years, that discharge is consideration for acquiring the intangibles — business and commercial rights and goodwill — and depreciation follows. It also held that the fifth proviso to s.32(1) does not apply to a succession by way of slump sale.
• Statutory position — s.43(5): what a speculative transaction is, and the five clauses of the proviso that take a transaction out of it — raw-material hedging, stocks-and-shares hedging, jobbing and arbitrage by a member, eligible derivative transactions on a recognised stock exchange, and commodity derivatives — with the effective date of each CBDT Circulars & InstructionsCuts both ways
  The Assessing Officer says our loss is a speculation loss under s.43(5) and cannot be set off. We settled the contracts without taking delivery, but they were hedges against our own raw-material purchases — and separately we trade exchange derivatives. Which of the proviso clauses do I get, and from which year?
  Settlement without delivery is what makes a transaction speculative, and the proviso then takes five described kinds of transaction back out. The definition, as printed on the departmental Year 2021 edition, is that "speculative transaction" means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. The proviso then provides that, for the purposes of the clause, (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or (b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or (c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member; or (d) an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange; or (e) an eligible transaction in respect of trading in commodity derivatives carried out in a recognised stock exchange, which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 (17 of 2013), shall not be deemed to be a speculative transaction. DATES, from the footnotes. Clauses (a), (b) and (c) are the original limbs and are printed on the departmental Year 1985 edition. Clause (d) was inserted by the Finance Act, 2005 with effect from 1 April 2006, with "(ac)" substituted for "(aa)" by the Finance Act, 2006 with effect from 1 April 2006. Clause (e) was inserted by the Finance Act, 2013 with effect from 1 April 2014, and originally read "carried out in a recognised association"; the words "recognised stock exchange" were substituted for "recognised association" by Act No. 12 of 2020 with effect from 1 April 2020. A second proviso now provides that for the purposes of clause (e) of the first proviso, in respect of trading in agricultural commodity derivatives, the requirement of chargeability of commodity transaction tax under Chapter VII of the Finance Act, 2013 shall not apply; it is absent from the Year 2014 edition and present on the Year 2021 edition, and the departmental copy of the Finance Bill, 2018 carries it at clause 12 to take effect from 1 April 2019 — I did NOT read the Finance Act, 2018 as enacted and say so.
• Statutory position — the second proviso to s.32(1): where an asset is acquired during the previous year AND put to use for less than 180 days in that year, depreciation is restricted to fifty per cent — the exact words, what the 180 days is counted on, and the further proviso giving the balance of the additional allowance in the succeeding year CBDT Circulars & InstructionsCuts both ways
  We bought plant in February and used it from March. The Assessing Officer has halved the depreciation. Is the 180 days counted from acquisition or from the date the asset was put to use, and what happens to the other half of the additional depreciation under s.32(1)(iia)?
  The proviso is worded on BOTH events, and that is the whole fight. As printed on the most recent departmental edition, it reads: "Provided further that where an asset referred to in clause (i) or clause (ii) or clause (iia) or the first proviso to clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this sub-section in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (i) or clause (ii) or clause (iia), as the case may be :". So the restriction applies only where TWO things are true of the same previous year — the asset was acquired by the assessee during that previous year, and it was put to use for the purposes of business or profession for a period of less than 180 days in that previous year. The 180-day count is on the period of USE ("is put to use ... for a period of less than one hundred and eighty days"); acquisition during the previous year is a separate, cumulative condition, not the thing counted. An asset acquired in an earlier previous year is outside the proviso even if it is used for less than 180 days in the year in question. The further proviso, printed immediately after, gives back the missing half of the ADDITIONAL depreciation only: where an asset referred to in clause (iia) or the first proviso to clause (iia) is acquired during the previous year and put to use for less than 180 days in that year and the deduction is accordingly restricted to fifty per cent, "then, the deduction for the balance fifty per cent of the amount calculated at the percentage prescribed for such asset under clause (iia) shall be allowed under this sub-section in the immediately succeeding previous year in respect of such asset". The footnote evidence I could read attaches that further proviso to an insertion effective 1 April 2016; the Act number as the departmental page prints it is set out in the editor note and I could not reconcile it.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.