DEPRECIATION UNDER INCOME-TAX ACT
DEPRECIATION UNDER INCOME-TAX ACT
WHAT IS DEPRECIATION?
As per law of lexicon depreciation is defined as positive decline in the real value of a tangible asset because of consumption, wear and tear or obsolescence. In accountancy, depreciation refers to two aspects of the same concepts:
The decrease in value of assets;
- The allocation of cost of assets over a period in which the assets are used.
In Income Tax, depreciation is a charge against the income. It is an allowance on capital assets acquired and put to use. There are different methods of calculating the depreciation like straight-line method or written down value (WDV) method. The Income-tax Act, 1961 (‘the Act’) recognizes WDV method, save and except for undertaking engaged in generation or generation and distribution of power.
BLOCK OF ASSETS [SECTION 2(11)]
Prior to the 1986, the Income-tax Act allowed the calculation of depreciation in respect of each capital asset separately. The computation of depreciation allowance was a detailed and time-consuming exercise on part of taxpayer and the tax department due to difference in rate of depreciation depending on the date of purchase, the type of asset, the intensity of use etc. 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.
To simplify the cumbersome process of calculating depreciation and maintenance of records, the Finance Minister in his budget speech for the year 1986-87 announced new provisions for allowing depreciation in respect of blocks of asset. The concept of ‘block of assets’ was introduced by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 with effect from 1-4-1988 and subsequently amended by the Finance (No.2) Act, 1998 with effect from 1-4-199 to include intangible assets as well.
“block of assets means a group of assets falling within a class of assets comprising –
a. tangible assets, being building, machinery, plant or furniture;
b. intangible assets, being knowhow, patents, copyrights, trade-marks, licenses, franchises or any other business or commercial rights of similar nature “not being goodwill of a business or profession,”,
in respect of which the same percentage of depreciation is prescribed.”
CONDITIONS FOR CLAIMING DEPRECIATION [SECTION 32(1) OF THE ACT]
The following are four basic conditions for claiming the depreciation:
The asset must be owned, wholly or partly, by the assessee. (not necessary to be a registered owner)
The asset should be actually used for the purpose of business or profession of the assessee.
The asset should have been used during the relevant year in which depreciation allowance is claimed
The assets must fall under eligible block of assets
Further, the following points can be noted in respect of depreciation:
Co-owners are entitled to claim depreciation to the extent of the value of the asset owned by each co-owner.
Depreciation is not allowable on the cost of land.
Depreciation is mandatory from A.Y. 2002-03 and shall be allowed or deemed to have been allowed irrespective of claim made in the profit & loss account or not [Explanation 5 to section 32(1)(ii)].
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 [section 38(2)].
WRITTEN DOWN VALUE [SECTION 43(6) OF THE ACT]
Section 32(1) of the Act 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’.
WDV under the Act, means —
Where the asset is acquired in the previous year the actual cost to the assessee shall be treated as WDV.
Where the asset is acquired in earlier year WDV shall be equal to the actual cost incurred less depreciation actually allowed under the Act or under the Indian Income-tax Act, 1922 or any Act repealed by that Act, or under any executive orders issued when the Indian Income-tax Act, 1886 (2 of 1886) was in force.
Sr. No. | Particulars | Amount | Amount |
1 | In case of any P.Y. relating to A.Y. 1988-89 | ||
a. The aggregate WDV of all assets falling within the same block in the beginning of P.Y. relating to A.Y. commencing from 1-4-1988 | XXX | ||
b. Add : Actual cost of assets acquired during the previous year falling in the same block | XXX | ||
c. Less: 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 slump sale in relation to any P.Y. relating to A.Y. 1988-89 | ||
a. Actual cost of assets falling in the same block | XXX | ||
b. Less : Depreciation actually allowed in A.Ys. prior to 1988-89 | (XXX) | ||
c. Less : : Depreciation allowable in respect of A.Y. beginning on or after 1-4-1988 as if the asset was the only asset in the relevant block. (However deduction under b & c shall not exceed a.) | (XXX) | XXX | |
3. | In case of P.Y. relevant to A.Y. commencing on 1-4-1989 the WDV would be the amount of WDV of block of assets in immediately preceding P.Y. as reduced by depreciation actually allowed in respect of said preceding P.Y. and “as further adjusted by, (A) the increase or the reduction referred to in clause b and c of clause 1 above, not being increase on account of acquisition of goodwill of a business or profession; (B) the reduction by an amount which is equal to the actual cost of the goodwill falling within that block as decreased by— (a) the amount of depreciation actually allowed to the assessee under this Act or under the corresponding provisions of the Indian Income-tax Act, 1922 for such goodwill in respect of any previous year relevant to the assessment year commencing before the 1st day of April, 1988; and (b) the amount of depreciation that would have been allowable to the assessee for such goodwill for any assessment year commencing on or after the 1st day of April, 1988 as if the goodwill was the only asset in the relevant block of assets, in respect of the previous year relevant to the assessment year commencing on the 1st day of April 2021, in a case where the goodwill of a business or profession was part of the block of assets on which depreciation was obtained by the assessee for the immediate preceding previous year, so, however, that the amount of such reduction does not exceed the written down value”. | ||
• The WDV in the case of the assessee whose income includes agricultural income shall be computed as the assets were used for the purpose of business and the whole depreciation is allowed under this Act. | |||
ACTUAL COST [SECTION 43(1)]
Actual Cost as per the Act, means:
Sr. No. | Particulars | 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 directly or indirectly (in the form of subsidy or grant or reimbursement). However, if any 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 1-3-1975 but after Further, expenditure incurred for acquisition of any assets or part thereof shall be ignored while determining actual cost, if the payment for that expenditure is made otherwise than:
|
2. | Asset acquired and used for scientific research when ceases to be so used on which depreciation has to be allowed | The amount of actual cost of asset to the assessee as reduced by any deduction allowed u/s. 35(1)(iv) of the Act or similar deductions allowed under the Income-tax Act, 1922. |
3. | Conversion of inventory into capital asset | Fair market value of inventory as on the date of conversion will be considered as actual cost for the purpose of claiming depreciation. |
4. | 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 1-4-1988; and b. The amount that would have been allowed to the assessee for assessment year starting from 1-4-1988 (taking the asset as the only asset in the block). |
5. | The assets which were previously used by any other person | If the assessing officer 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 Assessing Officer with prior approval of Joint Commissioner of Income Tax. |
6. | 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 related to Assessment Year commencing from 1-4-1988 and the amount that would have been allowed to the assessee for assessment year starting from 1-4-1988 (taking the asset as the only asset in the block) Or The actual price for which the asset is reacquired WHICHEVER IS LESS. |
7. | 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 |
8. | A building previously the property of the assessee is brought into use for the purpose of the business or profession after 28-2-1946 | 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. |
9. | Any asset is transferred by a holding company to its subsidiary company or vice versa, and if conditions of clauses (iv) or (v) of section 47 of the Act are satisfied | The actual cost shall be the same as if the transferor company continued to hold the asset. |
10. | 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. |
11. | 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. Provided the actual cost shall not exceed the WDV of such asset in the hands of demerged company. |
12. | 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 as if the asset had been used in India for the business or profession since the date of its acquisition by the assessee. |
13. | Any asset is acquired under a scheme of Corporatisation of a recognised stock exchange in India, approved by SEBI | The amount which would have been regarded as actual cost had there been no such Corporatization |
14. | Any asset on which deduction has been allowed or allowable u/s. 35AD of the Act | NIL In either case of assessee or the other assessee acquiring the asset by way of gift, will, trust or distribution of liquidation of a company or any such mode referred to in Clauses (i), (iv), (v), (vi), (vib), (xiii), (xiiib) and (xiv) of section 47 of the Act. However, if the deduction under section 35AD of the Act is withdrawn, the actual cost of assets shall be the actual cost of the assets to the assessee, as reduced by an amount equal to the amount of depreciation calculated at the rate in force that would have been allowable had the asset been used for the purpose of business since the date of acquisition |
15. | Any block of assets is transferred by a private company or unlisted public company to an LLP where conditions u/s. 47(xiiib) of the Act are satisfied | The actual cost shall be WDV of the block of assets as in the case of the said company on the date of conversion of the company into an LLP. |
Notes:
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.
The actual cost for the assets acquired on or after 1-3- 1994 shall be reduced by the amount of duty of excise or additional duty leviable under section 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 assessees 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 assessees — Under Section 32(1)(i) in case of undertaking engaged in generation or generation and distribution 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(1A). Such undertaking however has an option to claim depreciation on Written Down Value method at the rates provided in Appendix I read with Rule 5(1) if such option is exercised before the due date of filing the return as per provisions of section 139(1) —
- for the AY 1998-99, in case of an undertaking which began to generate power prior to 1-4-1997; and
- In case of other undertaking, for the A.Y. relevant to the P.Y. in which it begins to generate power.
- Once the option is exercised to claim depreciation on WDV method, it will apply for all subsequent assessment years.
- The rate of depreciation should be restricted to fifty per cent of rates prescribed if the assets acquired by the assessee during the previous year and put to use for the period less than one hundred and eighty days in that previous year.
- Depreciation allowable to predecessor and successor company in case of succession of business due to amalgamation or demerger shall not exceed in any previous year the amount of depreciation that would have been allowed as if there was no such succession and the depreciation so computed shall be divided between the amalgamating and amalgamated company or demerged and resulting company as the case may be on the basis of number of days the assets were used by such companies.
- In case of manufacturing domestic company which has exercised option under section 115BA(4), depreciation under section 32(1)(ii) in respect of any block of assets entitled to more than forty per cent shall be restricted to forty per cent on the written down value of such block of assets.
- Accounting standard on lease issued by ICAI requires capitalisation of the assets by the lessees in financial lease transaction. In such leases, the lessee can exercise the rights of the owner in his own right and hence depreciation is available to the lessee.
TERMINAL DEPRECIATION [ASSET SOLD OR DISCARDED]
Where depreciation is allowed on individual asset and such asset 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) of the Act. 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) of the Act up to the amount of actual cost of the asset. Since Section 50 of the Act 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.
ADDITIONAL DEPRECIATION
In case of any new machinery or plant (other than ships and aircraft) 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. From A.Y. 2013-14 the same is also allowed to assessee engaged in the business of generation or generation and distribution of power, where the depreciation is provided on WDV method as per Appendix I.
From assessment year 2017-18 the same is also allowed to the assessee engaged in the business of transmission of power.
However no such additional depreciation 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.
From assessment year 2016-17 where an assessee set up an undertaking for manufacture or production of articles on or after 1st April, 2015 in any notified backward area in the State of Andhra Pradesh, Bihar, Telangana or in West Bengal and acquires or install any new machinery or plant (other than ships or aircraft) after 1st April, 2015 but before 1st April, 2020 then the additional depreciation shall be allowed at 35% of cost of acquisition as against 20%.
Additional depreciation shall not be allowed to companies opting for reduced rate of taxation as prescribed under section 115BA/115BAA/115BAB of the Act.
- Where an asset acquired during the previous year and 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, w.e.f. 1st April, 2016 the balance amount of 50% of such depreciation shall be allowed in the immediate subsequent year.
- 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).
- 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).
- 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”.
- 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.
- 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 condition is subject to Section 72(2) of the Act & Section 73(3) of the Act].
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) of the Act | 40 | |
(d) Purely temporary erections such as wooden structures | 40 | |
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. | ||
(II) | Furniture and fittings including electrical fittings | 10 |
• Electrical fittings include electrical wiring, switches, sockets, other fitting and fans, etc. | ||
(III) | Machinery and plant: Plant has been held to include : • Movable partitions • Sanitary & pipeline fitting • Ceiling and pedestal fans • Wells • Hospital 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: • Machinery and plant includes pipes needed for delivery from the source of supply of raw water to the plant and from the plant to the storage facility | 15 | |
2) (i) Motor-cars (other than those used in business of running them on hire) acquired or put to use on or after 1st April, 1990 except those covered under entry (ii); | 15 | |
(ii) Motor cars, other than those used in a business of running them on hire, acquired on or after the 23rd day of August, 2019 but before the 1st day of April, 2020 and is put to use before the 1st day of April, 2020. (Notification No. 69/2019-Income Tax Dated 20th September, 2019) | 30 | |
3) (i) Aeroplane-Aeroengines | 40 | |
(ii) (a) Motor buses, Motor lorries and Motor used in a business of running them on hire other than those covered under entry (b). | 30 | |
(b) Motor buses, motor lorries and motor taxis used in a business of running them on hire, acquired on or after the 23rd day of August, 2019 but before the 1st day of April, 2020 and is put to use before the 1st day of April, 2020 (Notification No. 69/2019-Income Tax Dated- 20th September, 2019) | 45 | |
(iii) Commercial vehicles 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 vehicles 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 vehicles of over 15 years of age for the purpose of business or profession | 40 | |
(v) New commercial vehicles acquired on or after 1-4-1999 but before 1-4-2000 in replacement of condemned vehicles of over 15 years of age and is put to use before 1-4-2000 for the purpose of business or profession | 40 | |
(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 | 40 | |
(vii) New Commercial vehicles 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 • “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”. | 40 | |
(viii) Moulds used in rubber and plastic goods factories | 30 | |
(ix) Air pollution control equipments | 40 | |
(x) Water pollution control equipments | 40 | |
(xi) Solid waste control equipments | 40 | |
(xii) Machinery and plant used in semi-conductor industry | 30 | |
(xiii) Life saving medical equipments | 40 | |
(xiv) Any new plant and machinery installed in or after the P.Y. pertaining to A.Y. 1988-89 for manufacture of articles or things by using any technology or know-how developed or an article invented in a laboratory owned by a public sector company, Government, recognised University subject to specified conditions [See Rule 5(2)] | 40 | |
4) Containers made of glass or plastic used as refills | 40 | |
5) Computers (including computer software) • “Computer Software” means any computer programme recorded on any disc, tape, perforated media or other information storage device. | 40 | |
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 | 40 | |
7) Machinery and plant, acquired and installed on or after 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) | 40 | |
8) For other items of Plant & Machinery refer to Rule 5 App. 1 | 40 | |
9) (i) Books owned by assessees carrying on a profession — Annual publications — Other books | 40 40 | |
(ii) Books owned by assessees carrying on business in running lending libraries | 40 | |
(IV) | Ships • “Speed boat” means a motor boat driven by a high speed internal combustion engine capable of propelling the boat at a speed exceeding 24 kilometres 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. | 20 |
(V) | Intangible Assets Know-how patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature “not being goodwill of a business or profession,” acquired on or after 1-4-1998. Finance Act, 2021 has excluded Goodwill from the definition of intangible assets w.e.f. 01.04.2020. Hence, from A.Y 2021-22 and onwards, goodwill is not eligible for depreciation. | 25 |
More details regarding the Rates of Depreciation under SLM and WDV methods
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