Section 38 of the Income Tax Act, 1961 governs deductions for depreciation and other expenses related to assets (buildings, plant & machinery, furniture) that are partly used for business and partly for non-business purposes.
1. Key Provisions
A. Partial Business Use (Section 38(1))
- If an asset is not exclusively used for business, deductions are proportionately disallowed.
- Formula:
Allowable Expense = Total Expense × (Business Usage % / 100)
- Applies to:
- Depreciation(Section 32)
- Repairs & Maintenance(Section 31)
- Insurance Premiums(Section 36(1)(i))
B. Change in Usage (Section 38(2))
- If an asset switchesbetween business and non-business use:
- Depreciation recapture: If business use decreases, excess depreciation claimed earlier may be taxable as income.
- Adjustments in books
2. Examples & Tax Impact
| SCENARIO | TAX TREATMENT |
| Car used 60% for business, 40% personal | Only 60% of depreciation, insurance, and repairs allowed |
| Office building with a rented-out floor (30%) | 70% of expenses deductible (if 70% used for business) |
| Laptop used 50% for freelance work, 50% personal | 50% of depreciation claimable |
3. Compliance Requirements
✔ Maintain Logs: Track business vs. personal use (e.g., mileage logs for cars).
✔ Segregate Expenses: Clearly allocate costs (e.g., separate electricity bills for business/personal spaces).
✔ Adjust Depreciation: If usage changes, revise claims accordingly.
4. Penalty Risks
- Disallowance of Excess Claims: If incorrect usage % is reported.
- Interest & Penalties: For underreported income due to wrongful deductions.
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