Block of assets, and set-off and carry forward of unabsorbed depreciation and non-speculative business losses (as set, 1961 Act, AY 2020-21)

Block of assets

Section 2(11) defines a block of assets as a group of assets falling within one class, on which the same percentage of depreciation is prescribed. The class is either:

1. tangible assets: buildings, machinery, plant or furniture; or
2. intangible assets: patents, copyrights, know-how, trade marks, licences and franchises, and other business or commercial rights of that kind.

So two machines bearing depreciation at 15% belong to one block, and a machine at 40% belongs to another, even if both are used in the same business. Depreciation is not computed asset by asset but on the block as a whole. The system makes the working simple: assets bought go into the block, money from assets sold comes out of it, and the rate is applied to the written down value of the block.

How depreciation works on a block

1. Written down value (section 43(6)(c)): the opening written down value of the block, plus the actual cost of assets of that block acquired in the year, less the money payable for any asset of the block sold, discarded, demolished or destroyed in the year (with any scrap value), but not reduced below nil; on a slump sale it is also reduced by the actual cost of the block's asset transferred, less the depreciation actually allowed on it for assessment years before 1988-89 and the depreciation that would have been allowable on it from 1988-89 onwards had it been the only asset in the block, the reduction not exceeding the written down value (section 43(6)(c)(i)(C)).
2. Depreciation (section 32(1)(ii)): the prescribed percentage of that written down value. It is allowed only on assets owned, wholly or partly, by the assessee and used for his business or profession, and an intangible asset qualifies only if acquired on or after 1 April 1998 (section 32(1)); an undertaking generating, or generating and distributing, power takes instead a prescribed percentage of actual cost (section 32(1)(i)). Where an asset bought in the year is put to use for less than 180 days in that year, depreciation on it is half the rate (second proviso to section 32(1)).
3. When the block ends or turns negative (section 50): for a block on which depreciation has been allowed, if the full value of the consideration for the assets of the block transferred in the year exceeds the total of the expenditure incurred wholly and exclusively on the transfers, the opening written down value of the block and the actual cost of assets of the block acquired in the year, the excess is a short-term capital gain, whatever the period for which the assets were held (section 50(1)). If every asset of the block is transferred, the block ceases to exist; its cost of acquisition is the opening written down value plus the year's additions, and the consideration less that cost and the transfer expenses (section 48(i)) is a short-term capital gain, or a short-term capital loss where it falls short (section 50(2)).

Set-off in the same year

1. Within the head (section 70(1)): a loss from one business can be set off against the income of another business of the same year. A loss from a speculation business, however, can be set off only against speculation income (section 73(1)).
2. Against other heads (section 71(1) and (2)): a non-speculative business loss still left can be set off against income under any other head, including capital gains, except income under the head Salaries, which section 71(2A) keeps out.

Carry forward of business losses

A non-speculative business loss that cannot be set off in the year is carried forward (section 72(1)):

1. it is set off only against profits and gains of any business or profession of a later year, not against other heads;
2. the business in which it arose need not be carried on in the later year; the set-off is against any business income;
3. it can be carried forward for not more than eight assessment years immediately following the year in which it was first computed (section 72(3)); the exception is a loss of a business referred to in section 33B (discontinued in the circumstances that section names and later re-established), which follows the proviso to section 72(1): it is set off against that business's profits and, while the business continues, carried forward for up to seven assessment years;
4. it is carried forward only if the loss was determined on a return of loss filed under section 139(3), within the time allowed by section 139(1) and in the prescribed form, verified in the prescribed manner with the prescribed particulars (section 80);
5. it can be carried forward only by the assessee who suffered it: a successor to the business otherwise than by inheritance cannot carry forward the predecessor's loss, though an heir can (section 78(2)); and when a partner retires or dies, the firm cannot carry forward the part of the loss proportionate to his share beyond his share of the year's profits (section 78(1)).

Unabsorbed depreciation

Where depreciation of a year cannot be given full effect because profits are absent or too small, the part not absorbed is added to the depreciation of the next year and treated as part of it, and so on for later years (section 32(2)). So:

1. there is no limit of eight years: it can be carried forward indefinitely;
2. as part of the next year's depreciation, it is set off first against business income and then against income under other heads, except salaries;
3. the business need not continue; and
4. section 80 does not apply to it: it may be carried forward even if the return for the year of loss was late.

Order of set-off

In a later year the deductions come in this order:

1. current year's depreciation (section 32(1));
2. brought forward business loss (section 72(1)), because section 72(2) gives it effect before any unabsorbed depreciation (section 32(2)) or unabsorbed scientific research allowance (section 35(4)) carried forward; and
3. unabsorbed depreciation (section 32(2)).

The business loss is set off before the unabsorbed depreciation because it is the one with the time limit; the unabsorbed depreciation can wait.

Illustration (our own figures)

In the previous year 2019-20 a trader has business profit of ₹5,00,000 before depreciation, current depreciation of ₹1,50,000, a brought forward business loss of ₹2,00,000 (of 2016-17), unabsorbed depreciation of ₹3,00,000 and income from house property of ₹1,00,000.

Unabsorbed depreciation of ₹50,000 is carried forward to 2020-21, with no time limit.