The Hindu Business Line : The shell-kernel divide

Exterior-interior divide and, its extension, shell-kernel divide, have always fascinated poets, storytellers and even debaters. Don’t go by the outer appearance; instead, go into the merits of the issue is the bottom-line. The Indian Accounting Standards Board, constituted by the ICAI, also waxes eloquent at many places about the need for according importance to substance of a transaction over its form.

Depreciation on fixed assets

In India, both under the company law and the income-tax law, depreciation is allowed on fixed assets based on their classification — plant and machinery, buildings, furniture and intangible assets, with plant and machinery getting the best deal in the form of accelerated depreciation, especially under the income-tax law. In the event, the ubiquitous truck which criss-crosses the Indian roads, especially the highways, is treated as a single unit disregarding the theoretical reality that it can be separated and identified as chassis and body as is done in the US, where depreciation is granted based on the utility of an asset rather than its classification.

Under the US scheme of things, a truck’s body and its chassis does not beget the same rate of depreciation, though it is used as a composite unit and have a symbiotic relationship, so to speak, given their varied usage and life. Its chassis comprising machinery, to be sure, would suffer much more rapid wear and tear, necessitating accelerated depreciation, but its body might not suffer at the same rate because it is a lot sturdier. But, then, it is possible to argue that a truck’s body might suffer greater damage in inhospitable climes, for example in Assam, where rain lashes more at it than, say, in the salubrious climes of Bangalore and Mysore.

Methods of classification

The need for distinction between the shell and kernel is real, but would it serve a material purpose in accounting and taxation, given that depreciation at the end of the day is nothing but amortisation. Amortisation is the process of writing off the cost over a period of time, with the aggregate remaining unchanged irrespective of the method or rate of depreciation. And that is why in the accounting lingo, the adoption of two methods of depreciation is said to be giving rise to only a timing difference and not a permanent one. If the kernel-shell classification in the context of a truck is carried to its logical conclusion, it would degenerate into a lot of hair-splitting, accomplishing little at the end of the day.

Similarly, an aircraft can be broadly divided into chassis and body. One does not know for sure but one can surmise that an aircraft’s machinery would constitute the major part of its cost even though lavish furnishings and interiors could also cost a fortune. However, like a truck, an aircraft is always perceived as a single composite unit and it would, perhaps, not serve any great purpose in pedantically rendering them as under on paper for granting and claiming depreciation.

Increase litigation

The kernel-shell distinction is indeed real, but its pedantic and peremptory extension to depreciation might not serve any great purpose. If anything it would only increase litigation. Our tax laws do not grant depreciation with reference to the actual number of days’ of use just as it does not ask any questions as to the places the truck traversed — the ratio of difficult terrain versus smooth terrain traversed. Broad classifications are enough. When, for example, buildings were sought to be classified as plant, the government put its foot down.

(The author is a Delhi-based chartered accountant. blfeedback@thehindu.co.in)

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