Question

Explain the treatment of unabsorbed depreciation carrried forward in the books of amalgamating company at the time of amalgamation.

Answer 1

Answer:

Explanation:

Unabsorbed Depreciation is that amount of unutilized depreciation which the assessee will not be able to claim as an expense due to lack of sufficient profit in P&L Account. Such unabsorbed depreciation can be set off against any heads of income and the remaining balance can be carried off till for any number of periods.

It is that portion of the depreciation which has not been taken into consideration in the books of accounts, which is made for tax purposes. The main reason for such treatment can be a huge amount of depreciation against the profits. In such scenario, the portion of depreciation which is unabsorbed can be carried forward to be absorbed against the future taxable profits.

It must be noted that the unabsorbed depreciation has nothing to do with the books of accounts prepared for the financial statements. However, if the profits in the books of accounts for financial statements and tax purposes are different due to the change of rates of depreciation, then the concept of deferred tax would arise, and it must be dealt accordingly.

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