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Depreciation

15 December 2018

a assesse receives a govt. Grant of Rs.1000 crore he claimed depreciation of Rs.2000 crore for plant and mechinary. can he be allowed to claimed of Rs.2000 crore including Rs.1000 crore from Grant.

with regards
Rani

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MOHAMMED IMRAN (1020 Points)
Replied 15 December 2018

depreciation is allowed on closing written down value of block of assets
actual cost - actual cost to the assessee as reduced by that portion of the cost thereof, if any, AS HAS BEEN MET DIRECTLY OR INDIRECTLY BY ANY OTHER PERSON OR AUTHORITY
closing WDV(of specific block) =
opening WDV +addition -disposal

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Nitesh bind (Student CA Final ) (12692 Points)
Replied 15 December 2018

When Assessee receives Grant/Subsidy from Govt or anyone it would simply be Reduced from the Actual cost of the against against which it has been awarded. [Explanation 10 to section 43(1)]

On remaining amount (i.e. on 31st March not before that) of block Depreciation shall be allowed.

Depreciation quantum depends upon the WDV of BLOCK as on 31st March. Grant Just reduced at the time when it given from the actual cost of assets. Don't Mix up these two things - in easy language Grant is adjusted at beginning (i.e Purchase of Assets) and Depreciation is allowed at the end (i.e. 31march).

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jyoti bhagchandani (fresher) (595 Points)
Replied 15 December 2018

As per Accounting Standard 12,

Two methods are prescribed for recognition of grants in form of grants for specific fixed assets:

Method 1 – The amount of grant is reduced from the gross amount of the asset to calculate book value. This signifies that the grant is being recognized in profit and loss account as a reduced charge of depreciation over the life of such asset.

Illustration:

ABC Ltd. Purchases a machinery for Rs. 30 lakhs with a useful life of 5 years and ‘Nil’ salvage value. It gets Rs. 10 lakhs as a grant from the government for this machinery.

a) The gross value of machinery will be shown as Rs. 20 lakhs (30 lakhs – 10 lakhs) in the balance sheet

b) Rs. 4 lakhs (20 lakhs / Useful life i.e. 5 years) will be charged to profit and loss account each year as a depreciation on this machinery.

Method 2 – The grants are treated as a deferred income in the financial statements. This income is recognized gradually in the profit and loss account over the useful life of an asset or say in the proportion of depreciation on such asset.

Illustration:

ABC Ltd. Purchases a machinery for Rs. 30 lakhs with a useful life of 5 years and ‘Nil’ salvage value. It gets Rs. 10 lakhs as a grant from the government for this machinery.

a) The Gross value of machinery will be shown as Rs. 30 lakhs in the balance sheet along with Rs. 10 lakhs as ‘Deferred Government Grant’.

b) Rs. 6 lakhs (30 lakhs / Useful life i.e. 5 years) will be charged to profit and loss account each year as a depreciation along with an income of Rs. 2 lakhs (10 lakhs / Useful life i.e. 5 years).

thus, in your case you cannot claim total 1000 cr of grant as depreciation. you have to reduce the cost of your plant and machinery by 1000 cr grant received and then charge depreciation on the remaining value of block of assets.

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