Depreciation – a non cash expenditure allowed under Income Tax Act, 1961 following block concept. Under the block concept, all the assets falling within the same class and subject to same rate of depreciation are clubbed together and considered as single asset. Any alterations to the value of the block have to be strictly in accordance with the provisions of Chapter IV D of Income Tax Act, 1961.
As per section 32 of Income Tax Act, 1961, a assessee is entitled to claim depreciation on fixed assets only if the following conditions are satisfied:
- Assessee must be owner of the asset – registered owner need not be necessary.
- The asset must be used for the purposes of business or profession.
- The asset must be used during the previous year.
The use of the asset during the previous year may be active use or passive [ie., kept ready for use]. I shall elaborate this topic at later part of this article.
As per the provisions of section 43(6) of the Income Tax Act, the WDV of block of assets as at start of the year has to be adjusted as follows so as to arrive at closing WDV:
· It has to be increased by actual cost [as per section 43(1)] of any asset falling within in the block acquired during the previous year.
· Thereafter, It shall be reduced by ‘moneys payable’ in respect of asset sold/discarded/demolished or destroyed during the previous year.
It has been held in Ashok Betelnut Case [
No deletion is permitted from the value of the block except when the asset is sold, discarded, demolished or destroyed. e.g., in case of theft of an asset, no deletion is permitted from the block of asset since the asset is neither sold nor demolished nor destroyed nor discarded.
· Further, scrap value, if any of any asset has to be reduced.
The question of deduction of scrap value from the block arises only when the asset is not sold.
Now lets analyse a interesting concept arising in relation to claiming of depreciation. In earlier part of this article, I have laid down the essential for claiming depreciation. One of the requirements was that asset must be used during the previous year. For the purposes of Income Tax Act, a previous year is a distinct unit. In case an asset is discarded by the business but not sold, section 43(6) permits the scrap value of the asset to be reduced from the block in the previous year in which such asset is discarded. The assessee is entitled to claim depreciation on the residual value of such discarded asset [ie., Opening WDV of such asset less scrap value] even though such discarded asset is not used for the purposes of business or profession in such year and subsequent years.
In case of CIT v. Yamaha Motor India Private Limited (2009) 226 CTR (
To conclude, the decision of the