Is ⅓ Accelerated Depreciation Rate Optional?
Provisions of the law
Schedule 2 of the Income Tax Act, 2058 read with Section 19 outlines a system for categorizing and depreciating properties for tax purposes. It introduces five categories (A to E) for various types of depreciable property, such as buildings, computers, automobiles, and intangible assets. The categorization depends on the nature of the property and its use for business or investment. The Schedule also details the computation of depreciation costs, specifying formulas and methods for different categories. It also introduces rates of depreciation for each category, with additional considerations for specific projects and entities. The section on disposal of depreciable property explains how to handle excess amounts in case of disposal or dissolution of a property class.
As per Schedule 2 of the Income Tax Act, 2058 the depreciable properties are categorized as follows and the pool basis WDV method is applied as per the specified rates:
|
Pool |
Description of Property |
Rate |
|
A |
Building, structure and similar other structures of permanent nature |
5% |
|
B |
Computer, data processing equipment, furniture, fixture and office equipment |
25% |
|
C |
Automobiles, buses and mini-buses |
20% |
|
D |
Construction and excavation equipment, and the depreciable properties not included elsewhere including in Section 17(3), Section 18(3) and Schedule 2(3) |
15% |
|
E |
Intangible properties except the depreciable properties mentioned in category “D” |
SLM |
The accelerated rate of depreciation
The entities as referred to in Section 11(2Kha), Section 3(3Cha), Section 2(3Tha), Schedule 1(2)(3) shall get an additional one-thirds to the rate of depreciation applicable to the normal rates of depreciation offered in Schedule 2(3) of the Income Tax Act, 2058.
Here is what the specific subsections in Section 11 covers:
- Section 11(2Kha) – Special industry in full operation throughout the income year
- Section 3(3Cha) – Operation of tram or trolley bus, Build and operation of ropeway, cable car, railway, tunnel or sky bridge, Construction and operation of road, bridge, tunnel, railway or airport
- Section 2(3Tha) – Building and operation a public infrastructure to be transferred to the GoN or building a powerhouse, generation and transmission of electricity
- Schedule 1(2)(3) – A cooperative registered under the Cooperatives Act, 2074
But is the additional rate compulsory or optional? It's Compulsory.
In the case of त्रिवेणी स्पिनिङ्ग मिल्स विरुद्ध ठूला करदाता कार्यालय Case Number 074-RB-0345 the Supreme Court examined the legal provisions related to the case, focusing on the application of depreciation rates for specific projects and entities as outlined in the Income Tax Act. The dispute revolved around whether the one-third addition to the rate of depreciation, as mentioned in Section 3(2) of Schedule 2 of the Income Tax Act, 2058, was voluntary or mandatory. The court considered the appellant’s argument that Section 19(1) of the Income Tax Act was compulsory that required the businesses to determine their depreciation rates, while the provision in Schedule 2(3)(2) was an additional facility.
However, the court ruled in favor of upholding the decision made by the Large Taxpayers Office stating that Section 19(1) was the main legal basis for depreciation expenses. The court emphasized that the provisions in Section 3(2) of Schedule 2 were subject to the implementation of the original Section 19(1). Consequently, the court concluded that, based on the legal framework, Section 19(1) and its derivatives in Section 3(2) of Schedule 2 was deemed mandatory and not voluntary for the appellant taxpayer.
ATMs and Generators: Group B or Group D?
Why is this an issue?
To which category, Group B or Group D, do ATMs and Generators belong in Schedule 2 of the Income Tax Act, 2058? Group B comprises Computer, data processing equipment, furniture, fixture, and office equipment, while Group D includes Construction and excavation equipment, along with depreciable properties not covered elsewhere, such as in Section 17(3), Section 18(3), and Schedule 2(3).
Due to the higher depreciation rate of 25% for items in Group B compared to the 15% rate for those in Group D, tax authorities tend to categorize office equipment, rightfully belonging to Group B, under Group D. This results in the denial of additional depreciation claims made by taxpayers.
The Supreme Court says it belongs to Pool B
In the case of किष्ट बैंक विरुद्ध आन्तरिक राजस्व विभाग Case Number 073-RB-0146 and in the case of एस डेभलपमेण्ट बैंक विरुद्ध ठुला करदाता कार्यालय Case Number 075-RB-0158 the decision from the Supreme Court revolves around the classification and depreciation of assets by these Banks, specifically focusing on the treatment of ATM machines, lockers, and generators. The court mainly emphasized the need for a clear interpretation of the law that allows organizations to adapt their business transactions to the changing needs of the context, as long as such adaptations are not expressly prohibited by the law.
The Supreme Court rejects the argument of the Inland Revenue Department that the assets like ATMs and Generators do not fall under the category ‘B’ of Schedule 2 of the Income Tax Act, 2058, which includes ‘Office Equipment’. These assets, including ATM machines, lockers, and generators, are integral to the regular administrative functions of the business. Given their role in supporting day-to-day operations, they should qualify as items falling under Pool B, specifically categorized as ‘Office Equipment’ in Schedule 2 of the Income Tax Act, 2058. This classification would make them eligible for relevant tax benefits and depreciation considerations applicable to administrative assets because they fall within the specified categories, providing benefits to customers and contributing to regular business growth. The court supports the view that items like ATM machines, lockers, and generators purchased and used by the bank for commercial purposes fall within the category ‘B’ and should be considered as office equipment. The main argument of the Supreme Court is that organizations conducting commercial transactions have the flexibility to adapt their processes and methodologies to be customer-friendly, as long as it is not expressly prohibited by the law.