1. Block of Assets [section 2(11)]

1. Depreciation is allowable on “Block of Assets” (S. 2(11))which is defined as a group of assets falling within a class of assets comprising

1. tangible assets, being buildings, machinery, plant or furniture;

2. intangible assets, being know-how, patents, copyrights, trade marks, licenses, franchises or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed. As per the legal precedence, goodwill is generally not considered as intangible asset for the purpose of depreciation.

2. Conditions for allowance [Section 32(1)]

1. The assets must be owned, wholly or partly, by the assessee.

2. Co-owners are entitled to claim depreciation to the extent of the value of the asset owned by each co-owner.

3. The asset should be actually used for the purpose of business or profession of the assessee.

4. Depreciation is not allowable on the cost of land.

5. Depreciation will be allowed if due, irrespective of whether or not it is claimed by the assessee. [Explanation 5 to section 32(1)(ii)] .

3. Calculation of Depreciation allowance [Section 32(1)]

1. On Block of Assets

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).

2. For Power Sector

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.

Such undertaking however has option to claim depreciation on Written Down Value Method at the rates provided in Appendix I.

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 u/s 32(1)(i) 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. 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.

4. 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).

5. In case of succession referred to in clause (xii) and clause (xiv) of section 47 or Section 170, amalgamation and demerger, the depreciation allowable to

— the predecessor and the successor,
— the amalgamating company and the amalgamated company,
— the demerged company and the resulting company, shall be apportioned in the ratio of the number of days for which the assets were used by them.

6. 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”.

7. 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.
—	Machinery or plant installed in any office premises or any residential accommodation, including a guest house.
—	Any office appliances or road transport vehicles.
—	Any machinery or plant, 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.
—	In respect of Machinery or Plant acquired between 1-4-2002 and 31-3-2005, additional depreciation of 15% was available. However, such additional depreciation was restricted to cases where such addition resulted into increase in the installed capacity by not less than 10% (25% up to A.Y. 2004-05).

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 or
— in his business or profession outside India.

9. From A.Y. 2002-03 claim of the depreciation has been made mandatory.

Note : For details under items listed above please refer new Appendix I (New) & 1A (power companies) to Rule 5