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    Depreciation Under IT Act - Some Interesting Issues

    Section 32 of the Income Tax Act, 1961 provide deduction for depreciation on assets used for the business or profession. Depreciation is calculated with reference to actual cost either by SLM (undertaking engaged in generation or generation and distribution of power) or WDV method. As per Explanation 5 to Section 32 allowance of depreciation is mandatory in computing total income of the assessee.

    Appendix I, Income Tax Rules provides for rate of depreciation in respect of block of assets (WDV method). Income Tax Act provides for depreciation on block assets. Section 2 defines block of assets. As per said section block of assets means a group of assets falling within a class of assets comprising‑

    • tangible assets, being buildings, machinery, plant or furniture;
    • intangible assets, being know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature,

    in respect of which the same percentage of depreciation is prescribed ;

    Depreciation rates are provided for tangible assets like building, plant and machinery and as well as intangibles like know -how. patents, copyrights etc.

    Some interesting issues on Depreciation:‑

    Ø Is Mobile Phone a Capital asset and amount incurred on it eligible for deprecation?

    To answer the question first we need to understand how the Mobile Phone is classified. Two classifications are possible. One classification could be as Plant and Machinery and other classification as a computer (based on functions it performs).

    We analyse first view i.e whether Mobile Phone be classified as Plant and Machinery. The word "Plant" defined in section 43(3). According to it plant includes ships, vehicles, boats, scientific apparatus and surgical equipment.

    This is inclusive definition and not exhaustive definition. In the ordinary sense Mobile Phones can't termed as Plant.

    The term "Machinery" is not defined in the Act. So Mobile Phone can't be a machinery.

    Let's analyse second view i.e whether Mobile Phone be classified as Computer. This view is based on argument that Mobile Phone can send and receive emails, display spread sheets, video calls and process data like computer. However, department has not accepted this view.

     

    Depreciation is a measure of wearing out, obsolescence due to technological changes and passage of time. Usage of Mobile varies from person to person based on business or work carried by the person. If a person's work is heavily depend upon usage on Mobile, it depreciates faster than usual. This view was supported in Kusum Jain Vs ITO ( ITAT- Chandigarh).

    There is still ambiguity whether the amount incurred on purchase of Mobile Phone qualifies as capital expenditure. A clarification in this regard either by way of amendment or circular would do a lot good.

    Ø Whether ATM (Automatic Teller Machine) is a Computer and hence eligible for higher depreciation of 60%?

    As per Information Technology Act, 2000 the term " Computer" includes "Computer Network". The term "Computer Network" means inter-connection of one or more computers through use of satellite, microwave, terrestrial line or other communication media and terminals or a complex consisting of two or more inter-connected computers whether or not the inter-connection is continuously maintained.

    In Dy CIT Vs Global Trust Bank Ltd it was held that ATM is a computerized telecommunication device that allows bank customers to access bank at places other than normal bank without necessity to visit bank in person. The ATM machines are computerized machines which not only allow the customers to withdraw money but they can check the account balance, pay bills, purchase goods and services, and, therefore, unless it is computerized and linked with the main server, it is not possible to operate the ATM.

    This view was also supported in NCR Corp (p) Ltd Vs Asst CIT and Saraswat Infotech Ltd Vs Asst CIT.

    However contrary view was taken by ITAT Mumbai in Venture Infotek Global (p) Ltd. In this case it was held that POS terminals and ATM cannot be called as computers.

    Ø Whether natural pond which is specifically designed for rearing prawns be classified as " Plant"?

    It was held in Asst CIT Vs Victory Aqua Farm Ltd Supreme Court held that since ponds were specially designed for rearing or breading of prawns they have to be treated as tools of the business and the depreciation was admissible on these ponds. So these ponds are plants and they are eligible for depreciation under the Income Tax Act at the rates applicable to Plant and Machinery.

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