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    DEPRECIATION UNDER IT ACT

    INTRODUCTION 

    Depreciation in normal parlance refers to decrease in value of Asset due to 

    • WearandTear i.e. Usage
    • Effluxionof Time.
    • Obsolescence i.e. Technological changes 

    Depreciation is one of the allowable deduction from income under Business or profession.

    Basis for Calculation of Depreciation

    Under Section 32 of Income Tax Act 1961, (Here in thereafter referred to as ‘Act’), Depreciation shall be calculated on basis of block of assets at the rate as prescribed by Income Tax Department. 

    For the purpose of Computation of Income (in case of companies), depreciation already computed and charged to Profit and loss account under Companies Act 2013 (based on useful life of the Asset), will be added back and the depreciation computed as per ACT will be reduced.

    Method to Calculate the Depreciation: 

    As prescribed in the Act, Written Down Value (WDV) has to be followed while computing the depreciation, except where an assesse who engaged in business of generation or generation and Distribution of Electricity was given with an option to follow a method of Straight Line Basis instead of WDV. 

    Eligible conditions to claim depreciation

    Assesseeclaiming depreciation should be the owner of such asset.

    Explanation:

    • Co-owner i.e. the person holds ownership in asset partly. 
    • In case of lease assets, depreciation shall be claimed by lessor i.e. owner of such asset who provides it for lease, as lessee is allowed with lease charges. Whereas, in the case of Hire purchase agreement, depreciation shall be allowed to Hirer i.e. user of asset even though he may not be real owner, until he pay last instalment, it is because the person use the asset for his business and finally he will be the final owner.

    ?Assetmust be put to use for purpose of business or profession during the previous year in which depreciation claimed,thus it can said that, mere ready for use doesn’t enable an assessee to claim depreciation(This is to be considered during the first time that asset put into use, subsequently depreciation shall be charged irrespective of the usage of assets, due to passage of time/life of the asset). 

    ?Unlikeincompanies Act,the depreciation under Act is allowed in full irrespective of days of usage in the previous year. 

    Exception:

    Wherein the asset purchased during the previous year and usefor less than 180 days, then depreciation restricted to 50% of normal rate of eligible depreciation.

    CLASS OF ASSETS:

     

    NOTE: Goodwill and Land are not eligible for depreciation.

     

    BLOCK OF ASSETS:

    The term Block of assets means a group of assets falling within a same class of assets and attracting same rate of depreciation.

    Example:

     

    Type of Asset

    Rate of Depreciation

    Tangible Assets

     

    Computer

    40%

    Motor cars

    15%

    Plant and Machinery

    15%

    Books

    40%

    Furniture

    10%

    Building

    10%

    In-tangible Assets

     

    Licences

    25%

     

     

     

    Block of Assets for the above assets:

     

     

     

    Block No

     

    .Name of assets

     

    Rate of Depreciation

     

    Block 1

    Computer and Books

     

    40%

     

    Block 2

    Motor Cars and Plant & Machinery

     

    15%

     

    Block 3

    Licenses

     

    25%

     

    Block 4

    Furniture

     

    10%

     

    Block 5

    Building

     

    10%

     

    Rates of Depreciation for various Block of assets:

     

    Block Of assets

    Rates w.e.f 01.04.2017

    Buildings

    5%/10%/40%

    Furniture and Fittings

    10%

    Plant and Machinery

    15%

    Vehicles

    15%

    Computer including Computer Software

    40%

    Intangible Assets

    25%

     

    Depreciation with effect from FY 2017-18 onwards is restricted to maximum rate of 40% 

    Steps to calculate the depreciation

    Depreciation shall be calculated on WDV Value that was derived in following way: 

    Opening WDV of Block as on 1st April of the previous year

    Add: Actual cost of the assets acquired during the previous year related to Block.

    Less: Sale value of the asset related to block during previous year.

    WDV of Block relevant for applying depreciation

     

     

    Example: 

    A block of Assets has an opening value of Rs.15,00,000 and one of asset is purchased for Rs.2,00,000 and used less than 180 days during the year and one of asset is sold for Rs.6,00,000. 

    The rate of depreciation for this block assumed to be 15%,the calculation of depreciation is as follows: 

    Opening value of WDV

    15,00,000

    Add: Purchases during the year

    2,00,000

    Less: Sales during the year

    (6,00,000)

    Closing WDV

    11,00,000


    Based on Closing WDV, Assets up to the value of Rs. 2,00,000 is calculated at half of actual rate i.e.7.5% and remaining 9,00,000 is calculated at rate of 15%.

    No Depreciation:

    Case (i) If Sale value of an asset or assets related to a Block is more than Opening WDV and purchases of such Block during the previous year. 

    Case (ii)Whole Assets in the block are sold even though there was a balance of Closing WDV.

    This result either in Short term Capital Gain or Short-term Capital Loss.

    Example:

    Opening WDV of Block of assets is Rs.15,00,000, Additions during the previous year is Rs.5,00,000 

    • Case(i) One or All the assets in this block is sold for Rs.22,00,000, then Closing WDV of -2,00,000 is considered as Short-term capital gain U/s 50 of Act.
    • Case(ii) If all the assets of this Block are sold for Rs.18,00,000 then closing WDV of Rs.2,00,000 is considered as Short-term capital loss U/s 50 of Act.

    Additional depreciation: 

    ?Eligibility

    An Assessee engaged in Manufacture or production of any article or thingor in business of generation, transmission or distribution of power. 

    ?Assettobe Purchased

    Any New plant and machinery except following

     

    Ineligible plant and Machinery for claiming Additional Depreciation:

     

    • Any Plant and Machinery which is used already either within or outside India by any other person.
    • Any Plant and machinery which is used either for office purpose or personal purpose i.e. Machinery to be used only for manufacturing purpose.
    • Any Vehicles
    • Any Machinery or plant on which whole of actual cost is claimed as deduction or depreciation. For example, Scientific related deduction under section 35 of Act.

    ?RateofDepreciation

    An Assessee engaged in Manufacture or production activities or in business of generation, transmission or distribution of power can further claim Additional Deprecation u/s 32(1)(iia) of Act at the rate of 20% on new plant and machinery acquired and installed during the year.

    However, for enterprise which is set up in notified backward areas of Bihar, West Bengal, Andhra Pradesh and Telangana Additional depreciation is calculated at the rate of 35%ii instead of 20%.

    Note:

    Additional depreciation shall be restricted to 50% of actual rate (20% or 35%) if plant and machinery acquired and used less than 180 days during previous year and remaining 50% is allowed in immediately succeeding year.

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