What is depreciation?
Depreciation as per law of lexicon is defined as positive decline in the real value of a tangible asset because of consumption, wear and tear or obsolescence. The concept of depreciation is widely used for the purpose of writing off the cost of an asset against profit over an extended period (its depreciable life), irrespective of the real value of the asset. Depreciation is charged against income or the profit and loss account, and there are different methods of calculating it like straight line method or written down value method. The Income-tax Act save and except for undertaking engaged in generation and/or distribution of power the method of computing the depreciation is WDV method.
Block of Asset [Section 2(11)]
Prior to the 1986, the Income-tax Act required the calculation of depreciation in respect of each capital asset separately. Due to differences in depreciation rates depending on the date of purchase, the type of asset, the intensity of use etc., computation of depreciation allowance involved a detailed exercise on the part of the assessee and AO. Moreover, the system of granting the terminal allowance or taxing the balancing charge at the time an asset was sold, demolished, discarded, etc., necessitated the maintenance of records of depreciation already allowed in respect of each asset.
The amendments sought to simplify the system to a great extent by introducing the concept of "block of assets". Sec. 2(11) defines the term block of assets as "a group of assets falling within a class of assets, being building, machinery, plant & furniture, in respect of which the same percentage of depreciation is prescribed."
Conditions for claiming depreciation [section 32(1)]
a. The assets must be owned, wholly or partly, by the assessee.
b. Co-owners are entitled to claim depreciation to the extent of the value of the asset owned by each co-owner.
c. The asset should be actually used for the purpose of business or profession of the assessee.
d. Depreciation is not allowable on the cost of land.
e. Depreciation is mandatory from AY 2002-03 and shall be allowed or deemed to have been allowed irrespective of claim made in the profit & loss account or not.
f. Where the asset is not exclusively used for the purpose of business or profession, the depreciation shall be allowed proportionately with regards to such usage of assets (sec. 38).
Section 32(1) provides that depreciation is to be computed at the prescribed percentage on the written down value of the asset which in turn is calculated with reference to actual cost of the assets. In the context of computing depreciation, it is important to understand the meaning of the term ‘WDV’ & ‘Actual Cost’
Written Down Value [Section 43(6)]
WDV under the Income-tax Act, means
a. where the asset is acquired in the previous year the actual cost of asset shall be treated as WDV
b. where the asset is acquired in earlier year WDV shall be equal to the actual cost incurred less depreciation allowed under The Income Tax Act.
In case of Block of assets WDV is computed as under:
|
Sr. No. |
Particulars |
Amount |
Amount |
|
1 |
In case of assets acquired prior to 31.03.1988 |
||
|
a. The aggregate WDV of all assets falling within the same block in the beginning of PY relating to AY commencing from 01.04.1988 |
XXX |
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|
b. Add : Assets acquired during the previous year |
XXX |
||
|
c. Lees: Moneys payable (including the scrap value) on assets sold, discarded or demolished or destroyed during the previous year to the extent it does not exceed (a+b) |
(XXX) |
XXX |
|
|
2 |
In case of slum sale |
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|
a. Actual cost of assets falling in the same block |
XXX |
||
|
b. Less : Depreciation actually allowed prior A.Y.s 1988-1989 |
(XXX) |
||
|
c. Less : Depreciation allowable after 1.4.1988 However deduction under b & c shall not exceed the total WDV |
(XXX) |
XXX |
Note: In case of PY relevant to AY commencing on 01.04.1989 the WDV would be the amount of WDV of block of asset in immediately preceding PY as reduced by depreciation actually allowed in respect of said preceding PY and as adjusted by clauses b & c of 1 above.
Actual Cost [Section 43(1)]
Actual Cost as per Income Tax Act, means
|
Sr. No. |
In case where |
Actual Cost would mean |
|
1. |
Asset is acquired by the assessee in previous year |
Actual cost of asset to the assessee as reduced by cost met by any other person or authority (in the form of subsidy or grant or reimbursement) If such amount of subsidy or grant or reimbursement is of such nature that it cannot be directly related to asset acquired, then the cost of the asset would be reduced on proportionate basis In case of Motor car acquired before 01.03.1975 but after 31.3.1967 and not used for run it on hire the actual cost shall be restricted to Rs. 25000/-. |
|
2. |
Asset acquired and used for scientific research when ceases to be so used |
The amount of actual cost of asset to the assessee less any deduction allowed u/s. 35(1)(iv) or similar deductions allowed under the Income-tax Act,1922 |
|
3. |
An asset is acquired by way of gift or inheritance |
Actual cost to the previous owner as reduced by a. the depreciation actually allowed under the Income-tax Act,1922 or this Act in respect of previous years prior to 01.04.1988 and b. the amount that would have been allowed to the assessee for assessment year starting from 01.04.1988 (taking the asset as individual asset in the block) |
|
4. |
The assets which were previously used by any other person and in the opinion of AO they are acquired to reduced the liability of Income Tax |
If the AO is satisfied that the main purpose of transfer of assets is to reduce the tax liability the actual cost shall be an amount as determined by the AO with prior approval of JCIT. |
|
5. |
An asset once belonging to the assessee and was used by him for the purpose of his business or profession and thereafter it ceased to be his property which is reacquired by him |
Actual cost when he first acquired it, as reduced by the depreciation actually allowed in respect of previous year prior to 01.04.1988 and the amount that would have been allowed to the assessee for assessment year starting from 01.04.1988 (taking the asset as individual asset in the block) OR The actual price for which the asset is reacquired WHICHEVER IS LESS |
|
6. |
Where the assessee acquires the assets which were previously used at any time by any other person for the purpose of his business or profession & depreciation was allowed to such other person and such other person acquires the same assets on lease, hire or otherwise from the assessee |
The written down value of such assets at the time of transfer by the other person to the assessee in his books of account. |
|
7. |
A building previously the property of the assessee is brought into use for the purpose of the business or profession after 28.02.1946 |
Actual cost of building to the assessee as reduced by an amount equal to the depreciation calculated at the rate in force on that date that would have been allowable had the building been used for the business or profession since the date of its acquisition by the assessee. |
|
8. |
Any asset is transferred by a holding company to its subsidiary company or vice versa, and if conditions of clause (iv) or (v) of sec 47 are satisfied |
The actual cost shall be the same as if the transferor company continued to hold the asset. |
|
9. |
In a scheme of amalgamation, asset transferred by amalgamating company to amalgamated Indian company |
The actual cost shall be the same as if the amalgamating company had continued to hold the asset for the purpose of its own business. |
|
10. |
In a scheme of demerger, asset transferred by demerged company to resulting Indian company |
The actual cost shall be the same as if the demerged company had continued to hold the asset for the purpose of its own business. |
|
11. |
Asset is acquired outside India by a non-resident assessee and is brought into India for the use in business or profession |
Actual cost to the assessee as reduced by an amount equal to the depreciation calculated at the rate in force that would have been allowable had the asset been used in India for the business or profession since the date of its acquisition by the assessee. |
|
12. |
Any asset is acquired under a scheme of Corporatisation of a recognized stock exchange in India, approved by SEBI |
The amount which would have been regarded as actual cost had there been no such Corporatisation |
Notes:
a. Any amount paid or payable as interest in connection with the acquisition of an asset and the same is related to the period after the asset is first put to use shall not be included in actual cost of the asset.
b. The actual cost for the assets acquired on or after 01.03.1994 shall be reduced by the amount of duty of excise or additional duty leviable under Sec. 3 of The Customs and tariff Act,1975 in respect of which a claim of credit has been made and allowed under the Central Excise Rules,1944.
The term actual cost has not been defined under the Act and hence this expression has to be construed in accordance with the generally accepted principles of accounting. Accordingly, the actual cost of a depreciable asset comprises its purchase price (including import duties and other non-refundable taxes or levies) and any directly attributable cost of bringing the asset to its working condition for its intended use. Actual cost to the assessee would be what the assessee has in fact expended or laid out for the purpose of acquiring the asset.
Depreciation allowed [section 32(1)]
For all Assessee other than Power Sector - Depreciation is calculated on written down value of "Block of Assets", except for Power Sector, at rates provided in Appendix I read with Rule 5(1).
For Power Sector Assessee - Under Section 32(1)(i) in case of undertaking engaged in generation or generation and distributors of power, the depreciation will be allowed on actual cost (i.e., on straight line method) at the rates provided in Appendix IA read with Rule 5(IA) in respect of assets acquired on or after 1st April, 1997.
1. Such undertaking however has option to claim depreciation on Written Down Value Method at the rates provided in New Appendix I.
2. Such option is to be exercised before the due date for furnishing the return of income u/s 139(1) for the year in which it begins to generate power. Once the option is exercised it applies for all subsequent assessment years.
When such asset on which depreciation is allowed is sold discarded or demolished in a previous year, and if the insurance, salvage, compensation or sale value, as the case may be, receivable in respect of such asset falls short of the written down value, such difference would be allowed as deduction [Terminal Depreciation] u/s. 32(1)(iii). The condition for allowing such deduction is that such deficiency is actually written off in the books of account. Similarly, excess of insurance, salvage, compensation or sale value, as the case may be, receivable in respect of such asset over the written down value is chargeable to tax [Balancing Charge] u/s. 41 (2) up to the amount of actual cost of the asset. Since Section 50 does not apply to such assets, the provisions of capital gains in respect of these assets shall apply as if it is a transfer of asset not forming part of the block of assets.
3. In case of any new machinery or plant (excluding ships and aircrafts) acquired and installed after March 31, 2005 by an assessee engaged in the business of manufacture or production of any article or thing additional depreciation of 20% of actual cost shall be allowed.
However no such additional deduction will be allowed in respect of machinery or plant—
— used by any other person in India or outside India before its installation.
— installed in any office premises or any residential accommodation, including a guest house
Any office appliances or road transport vehicles
— the whole of actual cost of which is allowed as deduction in computing income chargeable under the head profit and gain of business or profession of any one previous year.
4. Where an asset acquired during the previous year is put to use for the purpose of business or profession for a period of less than 180 days in that previous year, depreciation allowance shall be restricted to 50% of the amount calculated at prescribed rates.
5. In case of an asset acquired under hire purchase agreement, where the terms of the agreement provide that the equipment shall eventually become the property of the hirer or confer on the hirer an option to purchase the equipment, the hirer is entitled to claim depreciation allowance.
For computing the depreciation allowance, the difference between the aggregate amount of the periodical payments under the agreement and the initial value (i.e., the amount for which the hired subject would have been sold for cash at the date of agreement) would be spread evenly over the term of the agreement. (Circular No. 9, dated 23-3-1943).
6. Fans, air-conditioners, refrigerators, etc., provided by the employer at the residence of the employees, is considered to have been used wholly for the purpose of the employer’s business and full depreciation in accordance with the rules, is allowed in the assessment of the employer. (F. No. 10/14/66-IT(A-I), dated 12-12-1966)
7. Where the business or profession is carried on in a building not owned by assessee and any capital expenditure is incurred for construction of any structure or for renovation, improvement or extension of the building, then depreciation will be allowed in respect of such capital expenditure at the rates prescribed for "building".
8. No depreciation is allowable in respect of motor car manufactured outside India acquired after 25th February, 1975 but before 1st April, 2001 unless it is used by the assessee
— In the business of running it on hire for tourists
— In his business or profession outside India.
9. In case of inadequate profit or loss any depreciation which could not be fully allowed for want of profit, the amount which could not be given full effect of shall be carried forward in the subsequent year and shall form part of the depreciation of such subsequent previous year. (This conditions is subjected to Sec. 72(2) & Sec. 73(3)).
|
RATES OF DEPRECIATION |
(%) |
|
|
(I) |
Buildings: |
|
|
(a) Buildings which are used mainly for residential purposes except hotels and Boarding House |
5 |
|
|
(b) Buildings which are not used mainly for residential purposes and other than mentioned in a & c |
10 |
|
|
(c) Buildings acquired on or after 1-9-2002 for installing P & M forming part of water supply project or water treatment system and put to use for the purpose of providing infrastructure facilities u/s. 80- IA(4)(i) |
100 |
|
|
(d) Purely temporary erections such as wooden structures |
100 |
|
|
Note: • "Buildings" include roads, bridges, culverts, wells and tube wells. • A building shall be deemed to be a building used mainly for residential purposes, if the built up floor area thereof used for residential purposes is not less than sixty-six and two-thirds per cent of its total built-up floor area and shall include any such buildings in the factory premises. • Water treatment system includes system for desalination, demineralisation and purification of water. |
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|
(II) |
Furniture and fittings including electrical fittings |
10 |
|
• Electrical fittings include electrical wiring, switches, sockets, other fitting and fans, etc |
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(III) |
Machinery and plant: |
|
|
Plant has been held to include : |
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• movable partitions |
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• sanitary & pipeline fitting |
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• ceiling and pedestal fans |
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• wells |
||
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• hospital |
||
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However, w.e.f. A.Y. 2004-05, it shall not include buildings, furniture and fittings. |
||
|
1) Machinery & plant other than those covered by sub-items 2, 3 and 8 below |
15 |
|
|
• Machinery and plant includes pipes needed for delivery from the source of supply of raw water |
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|
2) Motor-cars (other than those used in business of running them on hire) acquired or put to use on |
15 |
|
|
3) (i) Aeroplane-Aeroengines |
40 |
|
|
(ii) Motor buses, Motor lorries and Motor used in a business of running them on hire |
30 |
|
|
(iii) Commercial vehicle acquired on or after 1-10-1998 but before 1-4-1999 and is put to use before 1-4-1999 for the purposes of business or profession. |
40 |
|
|
(iv) New commercial vehicle acquired on or after 1-10-1998 but before 1-4-1999 and is put to use before 1-4-1999 in replacement of condemned vehicle of over 15 years of age for the purpose of business or profession. |
60 |
|
|
(v) New commercial vehicle acquired on or after 1-4-1999 but before 1-4-2000 in replacement of condemned vehicle of over 15 years of age and is put to use before 1-4-2000 for the purpose of business or profession. |
60 |
|
|
(vi) New commercial vehicles acquired on or after 1-4-2001 but before 1-4-2002 and is put to use before 1-4-2002 for the purpose of business or profession. |
50 |
|
|
(vii) New Commercial vehicle acquired on or after 1-1-2009 but before 1-10-2009 and put to use before 1-10-2009 for the purpose of business or profession |
50 |
|
|
• "Commercial vehicle" means — heavy goods vehicle, heavy passenger motor vehicle, light motor vehicle, medium goods vehicle, medium passenger motor vehicle. |
||
|
• It does not include "maxi-cab", "motor-cab", "tractor" and "road-roller". |
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(viii) Moulds used in rubber and plastic goods factories |
30 |
|
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(ix) Air pollution control equipments |
100 |
|
|
(x) Water pollution control equipments |
100 |
|
|
(xi) Solid waste control equipments |
100 |
|
|
(xii) P & M used in semi-conductor industry |
30 |
|
|
(xiii) Life saving medical equipments |
40 |
|
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4) Containers made of glass or plastic used as refills |
50 |
|
|
5) Computers (including computer software) |
60 |
|
|
• "Computer Software" means any computer programme recorded on any disc, tape, perforated media or other information storage device. |
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|
6) Machinery and plants used in weaving, processing and garment sector of textile industry purchased under TUFS on or after 1-4-2001 but before 1-4-2004 and is put to use before 1-4-2004 |
50 |
|
|
7) Machinery and plant, acquired and installed on or after the 1-9-2002 in a water supply project or a water treatment system and which is put to use for the purpose of business of providing infrastructure facility under 80-ia(4)(i) |
100 |
|
|
8) For other items of P & M refer to Rule 5 App. 1 |
100/80/60 |
|
|
9) (i) Books owned by assessees carrying on a profession |
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|
— Annual publications |
100 |
|
|
— Other books |
60 |
|
|
(ii) Books owned by assessees carrying on business in running lending libraries |
100 |
|
|
(IV) |
Ships |
20 |
|
• "Speed boat" means a motor boat driven by a high speed internal combustion engine capable of propelling the boat at a speed exceeding 24 kilometers per hour in still water and so designed that when running at a speed, it will plane, i.e., its bow will rise from the water. |
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|
(V) |
Intangible Assets |
25 |
|
Know-how patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature acquired on or after 1-4-1998. |
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