This document discusses the correct treatment of depreciation for tax purposes. It describes a case involving a distillery business where depreciation on casks used for whiskey maturation was included in the stock figure and not initially charged to the profit and loss account. When whiskey was sold, depreciation was charged to profit. Both UK tax courts and the House of Lords ruled that only the net depreciation amount, which was effectively charged to profit, should be added back in the tax computation.

1. CORRECT TO ADD BACK?
DEPRECIATI
ON
PRESENTED BY:
Swati Motwani
Suvasmita Rout
Vaishali Vaishishtha

2. Introduction
To understand, correct to add back the depreciation while
preparing tax computations
Reference case : Distillery Business
The House of Lords decision, which ruled unanimously in
favor of the taxpayers, i.e. add back of the net depreciation.

3. PREDICAMENT
o Case of a distillery business- It consisted of distillation and
maturation of whiskey.
o As part of the maturation process, the whiskey was stored
in casks for a number of years.
o The depreciation of the casks was included in the figure
for stock.
o The effect was that the depreciation of those casks was not
charged to the P&L A/C in the years that the whiskey was
stored in the casks.
o When whiskey was sold depreciation was charged to the
P&L A/C in that year.

4. TAX TREATMENT
For determining the treatment of the depreciation for tax
purpose:
o Depreciation which was included in stock should not be added
back in tax computation because it had been not charged to
P&L A/C and was not included in PBT figure.
o When whiskey was sold , dep. was added in tax computation
as it had been charged to P&L A/C.

5. U.K CASE LAWS
 U.K Tax Cases:
(1.) U.K High Court / Scottish Court of session.
(2.) U.K House of Lords.
o Judgment was delivered in House of Lords on 28 march
2007.
o Tax Payers
Mars U.K LTD. (Mars), makes confectionery and pet food.
William Grant & Sons Distillers Ltd.(Grant),makes Scottish
whiskey.

6. The Arguments In Favor
and Against
Revenue's argument was that, the taxpayers must be deemed to
have deducted the full amount of depreciation and then added a
sum equal to the amount of depreciation being included in
closing stock back into profits. Hence, the full amount of
depreciation should be added back in the tax computation.
The taxpayer's argument was that it was only the net
depreciation figure that was deducted in the computation of
profits in accordance with generally accepted accounting
practice. Hence, the net amount should be added back in the tax
computation.

7. 11/30/14
› (Net Depreciation) - The full amount of
depreciation less the credit adjustment is referred
to in this article as the Net depreciation.
› full amt. of dep. Refers to the amt. of dep. On the
whiskeys sold in a year plus the amt. of dep. Of
casks which are not being sold in that year.
› credit adjustment refers to the amt . Of
depreciation of the whiskeys (casks) being sold in
that year
› For example: lets assume full amt. of dep. Is 35000
and credit adjustment is 15,000. so net depreciation
is 20,000(35,000- 15,000).

8. ACCOUNTING
TREATMENT
 In computing tax, starting point is PBT.
 Accounting treatment for depreciation (77 of FRS 15):
It lays year’s dep. Shown in balance sheet, should be deducted in
that years P&L A/C.
Exception for a case: The depreciation charge for each period
should be recognized as an expense in the profit and loss
account, Exception ''permitted to be included in the carrying
amount of another asset''
Carrying forward an appropriate part of the depreciation as part
of the cost of stocks, to be deducted as and when the stocks
are sold in a future year.
According to tax computation perspective, only net deprecation
amount should be add back.

9. 11/30/14
› UK House of Lords ruled in favor of the taxpayer in the
appeal and ruled that only the net depreciation, which was in
effect charged to the profit and loss account, should be added
back in the tax computation. So the casks can go back to
doing what they were built
› to do - protecting that precious liquid until it matures!
CONCLUSION

10. 11/30/14
THANK
YOU
!!!