Claiming capital expenditures of INR 5,000 or less as revenue: Income tax law revisited

This post pertains to an industry practice wherein if the cost of an individual capital asset is equal to or less than INR 5,000 the same is claimed as revenue expenditure.

This position has been altered way back via Finance Act, 1995.  Hence this post. 

The law as it stands today

Extant provisions of the Income-tax Act, 1961 (hereinafter "IT Act") provide for ‘block of asset’ concept wherein capital assets owned, wholly or partly by the assessee and used for the purpose of business form part of the relevant block of asset and tax depreciation is allowed thereon at specified rates without any regard to the purchase price. 

Section 32(1) of the IT Act in the first proviso stated: 

Provided that where the actual cost of any machinery or plant does not exceed five thousand rupees, the actual cost thereof shall be allowed as a deduction in respect of the previous year in which such machinery or plant is first put to use by the assessee for the purposes of his business or profession:

This proviso was deleted by Finance Act, 1995 which had earlier provided for full claim of tax depreciation in the initial/first year when the asset was first put to use, wherein the cost of the independent asset was up to INR 5,000.

Memorandum explaining the Finance Act, 1995 [page 615 of this bulky compilation] explains that the said proviso was omitted since some of the taxpayers were found to be pricing a large number of assorted items below INR 5,000 each and thus were claiming 100% write-off of the cost in the year of purchase itself. Further, judicial precedents on this matter provide that after the omission of the said proviso from AY 1996 – 97 (FY 1995-96), all the assets would necessarily be required to be added to the relevant block of assets and tax depreciation thereon would be governed by Rule 5 of Income-tax Rules, 1962.