Depreciation:
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.
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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.
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(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.