Start with the depreciation route
For FY 2025–26 and AY 2026–27, section 32(1)(iii) of the Income-tax Act, 1961 applies only to a qualifying building, machinery, plant or furniture for which depreciation was claimed and allowed under section 32(1)(i). That clause covers assets of an undertaking engaged in generation, or generation and distribution, of power under the prescribed actual-cost method. Confirm the tax method actually used and any valid election for the block method; the book method does not decide the route. Do not apply a standalone deficiency calculation to assets on the ordinary block route under clause (ii).
Read the applicable text: Income-tax Act, 1961: sections 32, 41 and 43 CBDT: notified ITR-6 for AY 2026–27.
Prove both the disposal event and year
Confirm sale, discarding, demolition or destruction in the relevant previous year. A planned retirement or a bookkeeping label is not enough. Section 32(1)(iii) excludes the previous year the asset was first brought into use. Preserve the dated evidence of first use, prior allowance, actual event, consideration and scrap.
Compute the shortfall from tax records
Compare the asset’s tax written-down value (WDV) with moneys payable for the event and any scrap value. The explanation to section 32(1)(iii) includes relevant sale price and insurance, salvage or compensation moneys within moneys payable. Distinguish cash received from moneys payable and do not count the same proceeds both as moneys payable and scrap. The deficiency must actually be written off in the books. If moneys payable plus scrap exceed WDV, test section 41(2) separately. Its business income amount, where the conditions are met, is capped at actual cost less WDV and belongs to the previous year in which the moneys payable became due. Review any further gain independently.
Use the notified return row once
Schedule BP Part A item 27 of notified ITR-6 identifies the deduction under section 32(1)(iii). Reconcile the tax deduction to the starting profit and actual book write-off, ensuring the same loss is not deducted twice. The notified form’s ordinary business computation starts with book profit; trace any book disposal loss to the applicable adjustment before taking the statutory deduction once. Do not infer the applicable route from how the accounting asset was depreciated. Examples assume a supported tax WDV and otherwise qualifying assets unless stated.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Sale below tax WDV
Tax WDV is ₹50 lakh and sale proceeds are ₹32 lakh with no separate scrap. Deficiency is ₹18 lakh, subject to actual book write-off and the other conditions.
Illustrative example 2: Destruction with insurance and scrap
Tax WDV is ₹70 lakh; insurance moneys payable are ₹25 lakh and separate scrap value ₹5 lakh. The deficiency is ₹40 lakh before the write-off check.
Illustrative example 3: Amounts already include salvage
Tax WDV is ₹36 lakh. A supported ₹14 lakh amount already includes ₹2 lakh of salvage. With no separate scrap to add, the deficiency is ₹22 lakh; counting that salvage again would wrongly reduce it to ₹20 lakh.
Illustrative example 4: Disposal in the first-use year
First use and sale are both in FY 2025–26. Assume ₹20 lakh tax WDV and ₹14 lakh sale proceeds. The ₹6 lakh arithmetic shortfall does not qualify under section 32(1)(iii) in the first-use year.
Illustrative example 5: No actual write-off
Tax WDV is ₹24 lakh and supported proceeds and scrap total ₹9 lakh. The ₹15 lakh shortfall alone is insufficient because no deficiency has actually been written off.
Illustrative example 6: Excess rather than deficiency
Tax WDV is ₹30 lakh, actual cost ₹45 lakh and proceeds ₹52 lakh. There is no deficiency. The excess above WDV is ₹22 lakh and the section 41(2) ceiling is ₹15 lakh. If its conditions are met, ₹15 lakh is business income under that subsection. The remaining ₹7 lakh is outside this balancing charge and must be analysed separately.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Confirm the FY and applicable enactment | Return and tax computation |
| 2 | Verify the undertaking and depreciation route | Asset classification and past allowance |
| 3 | Establish the first-use previous year | Commissioning and operational evidence |
| 4 | Identify the actual disposal or destruction event | Dated sale or retirement documentation |
| 5 | Rebuild the asset-specific tax WDV | Cost and depreciation history |
| 6 | Trace moneys payable and distinct scrap | Sale, insurance and salvage evidence |
| 7 | Recalculate the deficiency or excess | Tax disposal working |
| 8 | Verify actual deficiency write-off | Approved journals and ledger |
| 9 | Reconcile Schedule BP item 27 once | Book-to-tax bridge and notified return |
| 10 | Review excess or another depreciation regime separately | Reasoned computation and evidence file |
Sixteen practitioner FAQs
1. Does every power-sector asset use this rule?
Verify that depreciation for the asset was claimed and allowed under section 32(1)(i).
2. Can it be used for ordinary block assets?
No. Analyse the ordinary block route under its own provisions.
3. Does a book straight-line method establish eligibility?
No. Check the actual tax route and allowance.
4. Does first use in an earlier year need proof?
Yes. The provision excludes the first-use previous year.
5. Is an idle asset necessarily discarded?
Establish the actual event from the facts.
6. Is a planned sale enough?
No. Identify whether a covered event occurred in the relevant year.
7. Is book carrying amount the tax WDV?
Use the supported tax amount.
8. Can insurance be ignored until cash arrives?
Review moneys payable under the statute rather than equating the test to receipts.
9. How should salvage already included in proceeds be handled?
Reconcile its inclusion once and avoid adding it again as scrap.
10. What if proceeds exactly equal WDV?
There is no deficiency on those facts.
11. Does the computation itself prove actual write-off?
No. Verify the books and evidence.
12. Can a negative deficiency go to item 27?
No. Consider the separate excess provisions.
13. Which AY 2026–27 field identifies the deduction?
Schedule BP Part A item 27.
14. How is a book disposal loss handled?
Reconcile it to the statutory deduction so only one net tax effect remains.
15. What if an amount is payable in a later period?
Review the statutory event and payable dates and their effect on the relevant provisions.
16. What should reviewers retain?
Keep route, first use, tax WDV, actual event, proceeds and write-off evidence together.
Official sources
Income-tax Act, 1961: sections 32, 41 and 43 CBDT: notified ITR-6 for AY 2026–27