Dibrugarh University - Direct Tax Law' 2011 (Solved)

Depreciation as per law of lexicon is defined as positive decline in the real value of a tangible asset because of consumption, wear and tear or obsolescence. The concept of depreciation is widely used for the purpose of writing off the cost of an asset against profit over an extended period (its depreciable life), irrespective of the real value of the asset. Depreciation is charged against income or the profit and loss account, and there are different methods of calculating it like straight line method or written down value method. The Income-tax Act save and except for undertaking engaged in generation and/or distribution of power the method of computing the depreciation is WDV method.

Conditions for Claiming Deduction under section 32(1)

(i)   Depreciation is allowed on:
                (a)  buildings, machinery, plant and furniture; being tangible assets; and
                (b)  know how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature being intangible assets acquired on or after 1-4-1998.
The expression building does not include land because the land does not depreciate.  As per section 43(3), Plant includes ships, vehicles, books, scientific apparatus and surgical equipments used for the purpose of the business or profession but does not include tea bushes, livestocks, buildings or furniture and fittings.

(iia)       Allowed to the owner of the asset. Fractional ownership will also be taken in to account for the purpose of claiming depreciation.

(iib)       It is allowed even if the asset is wholly or partly owned by the assessee.

(iii) Allowed only when the asset is used for the purpose of business or profession.

(iv) Allowed on the basis of the actual cost to the owner. Actual cost means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. The above definition contains 3 elements:

(a)  It should be the actual cost of the asset
(b)  It should be the actual cost of the asset to the assessee
(c)   It should be exclusive of any portion of the cost which has been met directly or indirectly by any other person or authority.

(v)  Allowed on the system of block of assets; but in case of electricity companies it is allowed on each and every asset separately. .  "Block of assets" means a group of assets falling within a class of asset. Assets eligible for depreciation have been classified into four classes i.e.
(a)  building;
(b)  plant and machinery;
(c)   furniture;
(d)  intangible assets of the type discussed above, acquired on or after 1-4-1998.

(vi) Allowed on the basis of written down value method. However, in the case of assets of an undertaking engaged in generation or generation and distribution of power, depreciation may be claimed on the basis of straight line method. The written down value of a block of asset shall be computed in the following steps:
Step I    determine the written down value of the entire block at the beginning of the previous year which will be written down value of that block of assets in the immediately preceding previous year as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous year;
Step II   add the actual cost of any asset falling within the block, acquired during the previous year;
Step III  deduct the money payable, in respect of the asset of the same block, which is sold or discarded or demolished or destroyed during the previous year together with the amount of scrap value, if any;
Step IV the resultant figure will be the written down value of the block at the end of the year for the purpose of charging current year depreciation.

Meaning of the word "Money payable": As per Explanation to section 41, "money payable" in respect of any building, machinery, plant and furniture includes:
(a)  any insurance, salvage or compensation money payable in respect thereof;
(b)  where the building, machinery, plant or furniture is sold, the price for which it is sold.

(vii) Depreciation is Computed on the written down value of the asset as on the last day of the previous year at the rate prescribed for full year. But Depreciation will be restricted to 50% of the normal depreciation, if the following conditions are satisfied:
(a)  The asset is acquired during the previous year; and
(b)  It is put to use during the previous year; and
(c)   It has been used for a period of less than 180 days during the previous year.