The answer for the stated return period
For FY 2025–26 and AY 2026–27, section 43(1) Explanation 11 of the Income-tax Act, 1961 provides a special actual-cost rule where an asset acquired outside India by an assessee, being a non-resident, is brought by that assessee to India and used for business or profession. The starting acquisition cost is reduced by depreciation calculated at the applicable rate that would have been allowable had the asset been used in India for that purpose since acquisition. Import-date market value is not the statutory starting point under this explanation.
Read the applicable text: Income-tax Department: section 43(1), Explanation 11.
Establish the same-owner history
Match the foreign acquisition invoice, legal owner, asset identifier, import documentation and Indian business-use record. This provision is not simply a rule for buying a used imported machine from someone else. Identify the assessee's non-resident status in the statutory acquisition facts and obtain a separate status analysis where the ownership or residence chronology is uncertain. A group company transferring equipment to another company creates a different ownership question; do not treat a common group name as the same assessee.
Reconstruct a hypothetical Indian depreciation history
Prepare a period-by-period schedule from acquisition to the relevant entry into Indian business use. Establish asset classification, the rates in force and the eligibility assumptions needed to determine what would have been allowable. Do not substitute foreign tax allowances, foreign accounting depreciation or an arbitrary annual haircut. Rates may change across the history. In the illustrations, historical hypothetical allowances are assumed inputs. Their subtraction and aggregation are shown, but those examples do not supply the acquisition dates, asset categories or historical rate schedules needed to validate an actual asset’s allowances.
Separate the import valuation from the tax basis
Customs valuation, insurance value, foreign carrying amount and an independent market estimate answer different questions. Keep them in distinct columns. Currency conversion and any separately eligible acquisition or installation expenditure require their own applicable-law working; this article does not prescribe a universal exchange rate or automatically add every import-related charge. Preserve the original-currency evidence and the supported rupee computation before applying the actual-cost adjustment.
Bridge to the Indian depreciation register once
The reconstructed actual cost is an input to the applicable Indian depreciation computation, not a second current-year expense. Identify the correct block, use conditions and other movements separately. If the bookkeeping system imports a foreign carrying amount, reconcile it to the tax register with a clearly explained adjustment. Do not both substitute the reduced tax cost and claim the same historical hypothetical depreciation again as a fresh deduction.
Review uncertainty explicitly
Missing acquisition evidence or an incomplete rate history should remain an identified issue, not be replaced by an import-date valuation for convenience. Preserve the reason for each difference and obtain the necessary records before signing the return position. This is a cost-reconstruction guide for the stated AY, not a general migration rule or an instruction to use Income-tax Act, 2025 section numbering for FY 2025–26.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Supported cumulative allowance
Established rupee acquisition cost is ₹1,000,000 and the independently reconstructed hypothetical Indian depreciation is ₹280,000. The Explanation 11 cost is ₹720,000. A foreign carrying amount of ₹800,000 does not replace that result merely because it appears in the imported ledger.
Illustrative example 2: Foreign depreciation is a different input
Cost is ₹1,200,000. Foreign book depreciation is ₹200,000, while the supported Indian hypothetical allowance is ₹360,000. Foreign net book value is ₹1,000,000, but the tax-cost working gives ₹840,000: a ₹160,000 book-to-tax basis difference. Do not deduct both depreciation figures from the acquisition cost.
Illustrative example 3: More than one historical period
Cost is ₹800,000. Supported period allowances are ₹80,000, ₹72,000 and ₹64,800. Their sum is ₹216,800 and the reconstructed cost is ₹583,200. These are assumed verified schedule outputs, not a representation that every imported asset uses those rates.
Illustrative example 4: Different assets need different histories
Two assets cost ₹600,000 and ₹400,000, with supported hypothetical allowances of ₹150,000 and ₹60,000. Their reconstructed costs are ₹450,000 and ₹340,000, totalling ₹790,000. A single unsupported average allowance would obscure the asset-specific evidence.
Illustrative example 5: Keep market value out of the substitution
Acquisition cost is ₹900,000, supported hypothetical depreciation ₹250,000 and an import-date market appraisal ₹750,000. The stated cost rule gives ₹650,000, not ₹750,000. The appraisal exceeds that basis by ₹100,000 but does not itself create additional tax cost.
Illustrative example 6: Correct an imported ledger bridge
Foreign net book value entered in the Indian fixed-asset ledger is ₹700,000. A supported cost of ₹1,000,000 less hypothetical Indian depreciation of ₹380,000 gives tax cost ₹620,000. The tax register starts ₹80,000 below the ledger value for this comparison. That basis bridge alone does not establish the current year's depreciation deduction.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Fix the applicable period | FY 2025–26 and AY 2026–27 return working. |
| 2 | Confirm the statutory population | Non-resident acquisition facts, foreign acquisition and Indian business use. |
| 3 | Trace the legal owner | Same-assessee documents and any separate transfer analysis. |
| 4 | Identify each asset | Invoice, serial number, specifications and import references. |
| 5 | Establish acquisition cost | Original-currency evidence and supported rupee computation. |
| 6 | Rebuild the depreciation history | Period-specific classification, rates and allowance assumptions. |
| 7 | Compare independent values | Foreign book value, customs value and market appraisal kept separately. |
| 8 | Calculate reduced actual cost | Acquisition cost less supported hypothetical Indian depreciation. |
| 9 | Link the Indian tax register | Block, use conditions and separately assessed current deduction. |
| 10 | Preserve the review trail | Source evidence, exceptions and a nonduplicated book-to-tax bridge. |
Sixteen practitioner FAQs
1. Is this a rule for every imported used asset?
No. Check the specific non-resident acquisition, same-assessee import and business-use facts.
2. Does common group ownership satisfy same ownership?
Not automatically. Separate legal entities require a separate transaction analysis.
3. What is reduced from acquisition cost?
The specified hypothetical depreciation calculated under the Indian-use counterfactual.
4. Does foreign book depreciation supply that amount?
No. Reconstruct the allowance required by the Indian provision.
5. Is foreign tax depreciation necessarily the right figure?
No. It follows a different tax framework.
6. Can an import-date valuation replace the working?
Not merely for convenience under Explanation 11.
7. Does customs value automatically become tax cost?
No. Keep the valuation purposes distinct.
8. Must old rates be checked?
Yes. The provision refers to depreciation calculated at the rate in force.
9. Can all assets use a convenient blended percentage?
Only a legally supported computation is acceptable; retain asset-specific history.
10. Does the article prescribe an exchange rate?
No. Establish the applicable conversion treatment separately.
11. Is historical hypothetical depreciation a new current deduction?
No. It reduces the actual-cost input under this rule.
12. Does reduced cost establish the current depreciation rate?
No. Classification and current-use eligibility still need verification.
13. What if acquisition evidence is missing?
Record the unresolved point and recover evidence before finalising the position.
14. Are import-related charges all automatically included?
No. Assess their treatment under the applicable cost provisions separately.
15. Which enactment does this article use?
The Income-tax Act, 1961 for FY 2025–26 and AY 2026–27.
16. What should the reviewer reproduce?
Ownership and acquisition history, hypothetical allowances, reduced cost and the Indian tax-register bridge.