Analysis on Depreciation – Admissible Deductions [Section 32] :
(1) Section 32 allows a deduction in respect of depreciation resulting from the diminution or exhaustion in the value of certain capital assets.
The Explanation to this section provides that deduction on account of depreciation shall be made compulsorily, whether or not the assessee has claimed the deduction in computing his total income.
(2) The allowance of depreciation which is regulated by Rule 5 of the Income-tax Rules, 1962, is subject to the following conditions which are cumulative in their application.
(a) The assets in respect of which depreciation is claimed must belong to either of the following categories, namely:
(i) buildings, machinery, plant or furniture, being tangible assets;
(ii) know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after 1st April, 1998. The depreciation in the value of any other capital assets cannot be claimed as a deduction from the business income. No depreciation is allowable on the cost of the land on which the building is erected because the term ‘building‘ refers only to superstructure but not the land on
which it has been erected. The term ‘plant‘ as defined in section 43(3) includes books, vehicles, scientific apparatus and surgical equipments. The expression ‘plant‘ includes part of a plant (e.g., the engine of a vehicle); machinery includes part of a machinery and building includes a part of the building. However, the word ‘plant‘ does not include an animal, human body or stock-in-trade. Thus plant includes all goods and chattels, fixed or movable, which a businessman keeps for employment in his business with some degree of durability. Similarly the term ‘buildings‘ includes within its scope roads, bridges, culverts, wells and tubewells.
(b) The assets should be actually used by the assessee for purposes of his business during the previous year – The asset must be put to use at any time during the previous year. The amount of depreciation allowance is not proportionate to the period of use during the previous year.
Asset used for less than 180 days – However, it has been provided that where any asset is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than 180 days, depreciation shall be allowed at 50 per cent of the allowable depreciation according to the percentage prescribed in respect of the block of assets comprising such asset. It is significant to note that this restriction applies only to the year of acquisition and not for subsequent years.
If the assets are not used exclusively for the business of the assessee but for other purposes as well, the depreciation allowable would be a proportionate part of the depreciation allowance to which the assessee would be otherwise entitled. This is provided in section 38.
Depreciation would be allowable to the owner even in respect of assets which are actually worked or utilized by another person e.g., a lessee or licensee. The deduction on account of depreciation would be allowed under this section to the owner who has let on hire his building, machinery, plant or furniture provided that letting out of such assets is the business of the assessee. In other cases where the letting out of such assets does not constitute the business of the assessee, the deduction on account of depreciation would still be allowable under section 57(ii).
Use includes passive use in certain circumstances: One of the conditions for claim of depreciation is that the asset must be “used for the purpose of business or profession”. Courts have held that, in certain circumstances, an asset can be said to be in use even when it is “kept ready for use”. For example, stand by equipment and fire extinguishers can be capitalized if they are “ready for use‘‘. Likewise, machinery spares which can be used only in connection with an item of tangible fixed asset and their use is expected to be irregular, has to be capitalised. Hence, in such cases, the term “use” embraces both active use and passive use. However, such passive use should also be for business purposes.
(c) The assessee must own the assets, wholly or partly – In the case of buildings, the assessee must own the superstructure and not necessarily the land on which the building is constructed. In such cases, the assessee should be a lessee of the land on which the building stands and the lease deed must provide that the building will belong to the lessor of the land upon the expiry of the period of lease. Thus, no depreciation will be allowed to an assessee in respect of an asset which he does not own but only uses or hires for purposes of his business.
However, in this connection, students may note that the Explanation 1 to section 32 provides that where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occu pancy, and any capital expenditure is incurred by the assessee for the purposes of the business or profession or the construction of any structure or doing of any work by way of renovation, extension or improvement to the building, then depreciation will be allowed as if the said structure or work is a building owned by the assessee.
Depreciation is allowable not only in respect of assets “wholly” owned by the assessee but also in respect of assets “partly” owned by him and used for the purposes of his business or profession.
(3) In case of succession of firm/sole proprietary concern by a company or amalgamation or demerger of companies – In order to restrict the double allowance under the proviso to section 32, in the cases of succession or amalgamation or demerger, the aggregate deduction in respect of depreciation allowable in the hands of the predecessor and the successor or in the case of amalgamating company and the amalgamated company or in the case of the demerged company and the resulting company, as the case may be, shall not exceed the amount of depreciation calculated at the prescribed rates as if the succession/amalgamation, demerger had not taken place. It is also provided that such deduction shall be apportioned between the two entities in the ratio of the number of days for which the assets were used by them.
In case of conversion of a private company or an unlisted public company into an LLP, fulfilling the conditions mentioned in section 47(xiiib), the aggregate depreciation allowable to the predecessor company and successor LLP shall not exceed, in any previous year, the depreciation calculated at the prescribed rates as if the conversion had not taken place. Such depreciation shall be apportioned between the predecessor company and the succ essor LLP in the ratio of the number of days for which the assets were used by them.
(4) Hire purchase – In the case of assets under the hire purchase system the allowance for depreciation would under Circular No. 9 of 1943 R. Dis. No. 27(4) I.T. 43 dated 23-3-1943, be granted as follows :
1. In every case of payment purporting to be for hire purchase, production of the agreement under which the payment is made would be insisted upon by the department.
2. Where the effect of an agreement is that the ownership of the asset is at once transferred on the lessee the transaction should be regarded as one of purchase by instalments and consequently no deduction in respect of the hire amount should be made. This principle will be applicable in a case where the lessor obtains a right to sue for arrears of installments but has no right to recover the asset back from the lessee. Depreciation in such cases should be allowed to the lessee on the hire purchase price determined in accordance with the terms of hire purchase agreement.
3. Where the terms of an agreement provide that the asset shall eventually become the property of the hirer or confer on the hirer an option to purchase an asset, the transaction should be regarded as one of hire purchase. In such case, periodical payments made by the hirer should for all tax purposes be regarded as made up of (i) the consideration for hirer which will be allowed as a deduction in assessment, and (ii) payment on account of the purchase price, to be treated as capital outlay and depreciation being allowed to the lessee on the initial value namely, the amount for which the hired assets would have been sold for cash at the date of the agreement. The allowance to be made in respect of the hire should be the amount of the difference between the aggregate amount of the periodical payments under the agreement and the initial value as stated above. The amount of this allowance should be spread over the duration of the agreement evenly. If, however, agreement is terminated either by outright purchase of the asset or by its return to the seller, the deduction should cease as from the date of termination of agreement
For the purpose of allowing depreciation an assessee claiming deduction in respect of the assets acquired on hire purchase would be required to furnish a certificate from the seller or any other suitable documentary evidence in respect of the initial value or the cash price of the asset. In cases where no such certificate or other evidence is furnished the initial value of the assets should be arrived at by computing the present value of the amount payable under the agreement at an appropriate per centum. For the purpose of allowing depreciation the question whether in a particular case the assessee is the owner of the hired asset or not is to be decided on a consideration of all the facts and circumstances of each case and the terms of the hire purchase agreement. Where the hired asset is originally purchased by the assessee and is registered in his name, the mere fact that the payment of the price is spread over the specified period and is made in installments to suit the needs of the purchaser does not disentitle the assessee from claiming depreciation in respect of the asset, since the assessee would be the real owner although the payment of purchase price is made subsequent to the date of acquisition of the asset itself.
(5) Computation of Depreciation Allowance – Depreciation allowance will be calculated on the following basis:
(i) In the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost to the assessee as prescribed by Rule 5(1A).
Rule 5(1A) – As per this rule, the depreciation on the abovementioned assets shall be calculated at the percentage of the actual cost at rates specified in Appendix IA of these rules. However, the aggregate depreciation allowed in respect of any asset for different assessment years shall not exceed the actual cost of the asset. It is further provided that such an undertaking as mentioned above has the option of being allowed depreciation on the written down value of such block of assets as are used for its business at rates specified in Appendix I to these rules.
However, such option must be exercised before the due date for furnishing return under section 139(1) for the assessment year relevant to the previous year in which it begins to generate power. It is further provided that any such option once exercised shall be final and shall apply to all subsequent assessment years.
(ii) In the case of any block of assets, at such percentage of the written down value of the block, as may be prescribed by Rule 5(1). Block of Assets – 1. A “block of assets” is defined in clause (11) of section 2, as a group of assets falling within a class of assets comprising—
(a) tangible assets, being buildings, machinery, plant or furniture;
(b) intangible assets, being know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed.
Know-how – In this context, ‘know-how‘ means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil – well or other sources of mineral deposits (including searching for discovery or testing of deposits for the winning of access thereto).
(iii) Additional depreciation on Plant & Machinery acquired by an Industrial Undertaking: Additional depreciation is allowed on any new machinery or plant (other than ships and aircraft) acquired and installed after 31.3.2005 by an assessee engaged in the business of manufacture or production of any article or thing or in the business of generation or generation and distribution of power at the rate of 20% of the actual cost of such machinery or plant.
Such additional depreciation will not be available in respect of:
(i) any machinery or plant which, before its installation by the assessee, was used within or outside India by any other person; or
(ii) any machinery or plant installed in office premises, residential accommodation, or in any guest house; or
(iii) office appliances or road transport vehicles; or
(iv) any machinery or plant, the whole or part of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and Gains of Business or Profession” of any one previous year.
Balance 50% of additional depreciation to be allowed in the subsequent year, where the plant and machinery is put to use for less than 180 days during the previous year of acquisition and installation [Sections 32(1)]
To remove the discrimination in the matter of allowing additional depreciation on plant or machinery used for less than 180 days vis-a-vis used for 180 days or more, third proviso to section 32(1)(ii) has been inserted to provide that the balance 50% of the additional depreciation on new plant or machinery acquired and used for less than 180 days which has not been allowed in the year of acquisition and installation of such plant or machinery, shall be allowed in the immediately succeeding previous year.
Illustration
XYZ Ltd., a manufacturing concern, furnishes the following particulars:
| Particulars | Rs | |
| (1) | Opening WDV of plant and machinery as on 1.4.2015 | 30,00,000 |
| (2) | New plant and machinery purchased and put to use on 08.06.2015 | 20,00,000 |
| (3) | New plant and machinery acquired and put to use on 15.12.2015 | 8,00,000 |
| (4) | Computer acquired and installed in the office premises on 2.1.2016 | 3,00,000 |
Compute the amount of depreciation and additional depreciation as per the Income -tax Act, 1961 for the A.Y. 2016-17
Solution
Computation of depreciation and additional depreciation for A.Y. 2016-17
| Particulars | Plant & Machinery (15%) | Computer (60%) |
| Normal depreciation | ||
| · @ 15% on Rs 50,00,000 [See Working Notes 1 & 2] | 7,50,000 | – |
| · @ 7.5% (50% of 15%, since put to use for less than 180 days) on Rs 8,00,000 | 60,000 | – |
| · @ 30% (50% of 60%, since put to use for less than 180 days) on Rs 3,00,000 | – | 90,000 |
| Additional Depreciation | ||
| · @ 20% on Rs 20,00,000 (new plant and machinery put to use for more than 180 days)
|
4,00,000 | – |
| · @10% (50% of 20%, since put to use for less than 180 days) on Rs 8,00,000 | 80,000 | – |
| Total depreciation | 12,90,000 | 90,000 |
Working Notes:
(1) Computation of written down value of Plant & Machinery as on 31.03.2016
| Plant & Machinery | Computer | |
| Written down value as on 1.4.2015 | 30,00,000 | – |
| Add: Plant & Machinery purchased on 08.6.2015 | 20,00,000 | – |
| Add: Plant & Machinery acquired on 15.12.2015 | 8,00,000 | |
| Computer acquired and installed in the office premises | – | 3,00,000 |
| Written down value as on 31.03.2016 | 58,00,000 | 3,00,000 |
(2) Composition of plant and machinery included in the WDV as on 31.3.2016
| Particulars | Plant & Machinery | Computer |
| Plant and machinery put to use for 180 days or more | 50,00,000 | |
| [` 30,00,000 (Opening WDV) + Rs 20,00,000 (purchased on 8.6.2015)]
Plant and machinery put to use for less than 180 days |
8,00,000 |
|
| Computers put to use for less than 180 days | 3,00,000 | |
| 58,00,000 | 3,00,000 |
Notes:
(1) As per the second proviso to section 32(1)(ii), where an asset acquired during the previous year is put to use for less than 180 days in that previous year, the amount of deduction allowable as normal depreciation and additional depreciation would be restricted to 50% of amount computed in accordance with the prescribed percentage.
Therefore, normal depreciation on plant and machinery acquired and put to use on 15.12.2015 and computer acquired and installed on 02.01.2016, is restricted to 50% of 15% and 60%, respectively. The additional depreciation on the said plant and machinery is restricted to ` 80,000, being 10% (i.e., 50% of 20%) of ` 8 lakh
(2) As per third proviso to section 32(1)(ii), the balance additional depreciation of Rs 80,000 being 50% of ` 1,60,000 (20% of ` 8,00,000) would be allowed as
deduction in the A.Y.2017-18.
(3) As per section 32(1)(iia), additional depreciation is allowable in the case of any new machinery or plant acquired and installed after 31.3.2005 by an assessee engaged, inter alia, in the business of manufacture or production of any article or thing, @20% of the actual cost of such machinery or plant.
However, additional depreciation shall not be allowed in respect of, inter alia, any machinery or plant installed in office premises, residential accommodation or in any guest house.
Accordingly, additional depreciation is not allowable on computer installed in the office premises.
(iv) Terminal depreciation: In case of a power concern as covered under clause (i) above, if any asset is sold, discarded, demolished or otherwise destroyed in the previous year, the depreciation amount will be the amount by which the monies payable in respect of such building, machinery, plant or furniture, together with the amount of scrap value, if any, falls short of the written down value thereof. The depreciation will be available only if the deficiency is actually written off in the books of the assessee.
“Moneys payable” in respect of any building, machinery, plant or furniture includes—
(a) any insurance, salvage or compensation moneys payable in respect thereof;
(b) where the building, machinery, plant or furniture is sold, the price for which it is sold, so, however, that where the actual cost of a motor-car is, in accordance with the proviso to section 43(1), taken to be ` 25,000, the moneys payable in respect of such motor-car shall be taken to be a sum which bears to the amount for which the motor-car is sold or, as the case may be, the amount of any insurance, salvage or compensation moneys payable in respect thereof (including the amount of scrap value, if any) the same proportion as the amount of ` 25,000 bears to the actual cost of the motor-car to the assessee as it would have been computed before applying the said proviso;
“Sold” includes a transfer by way of exchange or a compulsory acquisition under any law for the time being in force but does not include a transfer, in a scheme of amalgamation, of any asset by the amalgamating company to the amalgamated company where the amalgamated company is an Indian company or a transfer of any asset by a banking company to a banking institution in a scheme of amalgamation of such banking company with the banking institution, sanctioned and brought into force by the Central Government.
(6) Actual Cost [Section 43(1)] :The expression “actual cost” means the actual cost of the asset to the assessee as reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority.
Actual cost in certain special situations [Explanations to section 43(1)]
(i) Where an asset is used for the purposes of business after it ceases to be used for scientific research related to that business, the actual cost to the assessee for depreciation purposes shall be the actual cost to the assessee as reduced by any deduction allowed under section 35(1)(iv) [Explanation 1].
(ii) Where an asset is acquired by way of gift or inheritance, its actual cost shall be the written down value to the previous owner [Explanation 2].
(iii) Where, before the date of its acquisition by the assessee, the asset was at any time used by any other person for the purposes of his business or profession, and the Assessing Officer is satisfied that the main purpose of the transfer of the asset directly or indirectly to the assessee was the reduction of liability of income-tax directly or indirectly to the assessee (by claiming depreciation with reference to an enhanced cost) the actual cost to the assessee shall be taken to be such an amount which the Assessing Officer may, with the previous approval of the Joint Commissioner, determine, having regard to all the circumstances of the case [Explanation 3].
(iv) Where any asset which had once belonged to the assessee and had been used by him for the purposes of his business or profession and thereafter ceased to be his property by reason of transfer or otherwise, is re-acquired by him, the actual cost to the assessee shall be —
(a) the written down value at the time of original transfer; or
(b) the actual price for which the asset is re-acquired by him whichever is less [Explanation 4].
(v) Where before the date of acquisition by the assessee say, Mr. A, the assets were at any time used by any other person, say Mr. B, for the purposes of his business or profession and depreciation allowance has been claimed in respect of such assets in the case of Mr. B and such person acquires on lease, hire or otherwise, assets from Mr. A, then, the actual cost of the transferred assets, in the case of Mr. A, shall be the same as the written down value of the said assets at the time of transfer thereof by Mr. B [Explanation 4A].
We can explain the above as follows—
A person (say “A”) owns an asset and uses it for the purposes of his business or profession. A has claimed depreciation in respect of such asset. The said asset is transferred by A to another person (say “B”). A then acquires the same asset back from B on lease, hire or otherwise. B being the new owner will be entitled to depreciation. In the above situation, the cost of acquisition of the transferred assets in the hands of B shall be the same as the written down value of the said assets at the time of transfer.
Explanation 4A overrides Explanation 3 – Explanation 3 to section 43(1) deals with a situation where a transfer of any asset is made with the main purpose of reduction of tax liability (by claiming depreciation on enhanced cost), and the Assessing Officer, having satisfied himself about such purpose of transfer, may determine the actual cost having regard to all the circumstances of the case.
In Explanation 4A, a non-obstante clause has been included to the effect that Explanation 4A will have an overriding effect over Explanation 3. The result of this is that there is no necessity of finding out whether the main purpose of the transaction is reduction of tax liability. Explanation 4A is activated in every situation described above without inquiring about the main purpose.
(vi) Where a building which was previously the property of the assessee is brought into use for the purposes of the business or profession, its actual cost to the assessee shall be the actual cost of the building to the assessee, as reduced by an amount equal to the depreciation calculated at the rates in force on that date that would have been allowable had the building been used for the purposes of the business or profession since the date of its acquisition by the assessee [Explanation 5].
(vii) When any capital asset is transferred by a holding company to its subsidiary company or by a subsidiary company to its holding company then, if the conditions specified in section 47(iv) or (v) are satisfied, the transaction not being regarded as a transfer of a capital asset, the actual cost of the transferred capital asset to the transferee company shall be taken to be the same as it would have been if the transferor company had continued to hold the capital asset for the purposes of its own business [Explanation 6].
(viii) In a scheme of amalgamation, if any capital asset is transferred by the amalgamating company to the amalgamated company, the actual cost of the transferred capital assets to the amalgamated company will be taken at the same amount as it would have been taken in the case of the amalgamating company had it continued to hold it for the purposes of its own business [Explanation 7].
In the case of a demerger, where any capital asset is transferred by the demerged company to the resulting company, the actual cost of the transferred asset to the resulting company shall be taken to be the same as it would have been if the demerged company had continued to hold the asset. However, the actual cost shall not exceed the WDV of the asset in the hands of the demerged company [Explanation 7A].
(ix) Certain taxpayers have, with a view to obtain more tax benefits and reduce the tax outflow, resorted to the method of capitalising interest paid or payable in connection with acquisition of an asset relatable to the period after such asset is first put to use. Certain judicial rulings also favoured this approach. This capitalisation implies inclusion of such interest in the ‘Actual Cost‘ of the asset for the purposes of claiming depreciation, investment allowance etc. under the Income-tax Act, 1961. This was never the legislative intent nor was it in accordance with recognised accounting practices. Therefore, with a view to counter acting tax avoidance through this method and placing the matter beyond doubt, Explanation 8 to section 43(1) provides that any amount paid or payable as interest in connection with the acquisition of an asset and relatable to period after asset is first put to use shall not be included and shall be deemed to have never been included in the actual cost of the asset [Explanation 8].
(x) Where an asset is or has been acquired by an assessee, the actual cost of asset shall be reduced by the amount of duty of excise or the additional duty leviable under section 3 of the Customs Tariff Act, 1975 in respect of which a claim of credit has been made and allowed under the Central Excise Rules, 1944 [Explanation 9].
(xi) Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee.
However, where such subsidy or grant or reimbursement is of such nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received, shall not be included in the actual cost of the asset to the assessee [Explanation 10].
(xii) Where an asset is acquired outside India by an assessee, being a non-resident and such asset is brought by him to India and used for the purposes of his business or profession, the actual cost of asset to the assessee shall be the actual cost the asset 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 in India for the said purposes since the date of its acquisition by the assessee [Explanation 11].
(xiii) Where any capital asset is acquired under a scheme for corporatisation of a recognised stock exchange in India approved by the SEBI, the actual cost shall be deemed to be the amount which would have been regarded as actual cost had there been no such corporatization[Explanation 12].
(xiv) Explanation 13 has been inserted in section 43(1) to provide that the actual cost of any capital asset, on which deduction has been al lowed or is allowable to the assessee under section 35AD, shall be nil. This would be applicable in the case of transfer of asset by the assessee where –
(1) the assessee himself has claimed deduction under section 35AD; or
(2) the previous owner has claimed deduction under section 35AD. This would be applicable where the capital asset is acquired by the assessee by way of –
(a) gift, will or an irrevocable trust;
(b) any distribution on liquidation of the company;
(c) any distribution of capital assets on total or partial partition of a HUF;
(d) any transfer of a capital asset by a holding company to its 100% subsidiary company, being an Indian company;
(e) any transfer of a capital asset by a subsidiary company to its 100% holding company, being an Indian company;
(f) any transfer of a capital asset by the amalgamating company to an amalgamated company in a scheme of amalgamation, if the amalgamated company is an Indian company;
(g) any transfer of a capital asset by the demerged company to the resulting company in a scheme of demerger, if the resulting company is an Indian company;
(h) any transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm, or any transfer of a capital asset to a company in the course of demutualization or corporatisation of a recognized stock exchange in India as a result of which an association of persons or body of individuals is succeeded by such company (fulfilling the conditions specified);
(i) any transfer of a capital asset or intangible asset by a sole proprietary concern to a company, where the sole proprietary concern is succeeded by a company (fulfilling the conditions specified) which would have been regarded as actual cost had there been no such corporatisation.
(j) any transfer of a capital asset by a company to an LLP as a result of conversion of the company into LLP (fulfilling the conditions prescribed).
Definition of plant [Section 43(3)] – ―Plant‖ includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of business or profession but does not include tea bushes or livestock or buildings or furniture and fittings.
(7) Written down value [Section 43(6)] – (i) In the case of assets acquired by the assessee during the previous year, the written down value means the actual cost to the assessee.
(ii) In the case of assets acquired before the previous year, the written down value would be the actual cost to the assessee less the aggregate of all deductions actually allowed in respect of depreciation. For this purpose, any depreciation carried forward is deemed to be depreciation actually allowed [Section 43(6)(c)(i) read with Explanation 3].
The written down value of any asset shall be worked out as under in accordance with section 43(6)(c):
(1) The aggregate of the written down value of the block of assets at the beginning of the previous year.
(2) The sum arrived at as above shall be increased by the actual cost of any asset fal ling within that block which is acquired by the assessee during the previous year.
(3) The sum so arrived at shall be reduced by the sale proceeds and other amounts receivable by the assessee with regard to any asset falling within that block which is sold, discarded, demolished or destroyed during that previous year.
(iii) When in the case of a succession to business or profession, an assessment is made on the successor under section 170(2), the written down value of an asset or block of assets shall be the amount which would have been taken as the written down value if the assessment had been made directly on the person succeeded to [Explanation 1 to section 43(6)].
(iv) Where in any previous year any block of assets is transferred by a holding company to a subsidiary company or vice versa and the conditions of clause 47(iv) or (v) are satisfied or by an amalgamating company to an amalgamated company the latter being an Indian company then the actual cost of the block of assets in the case of transferee-company or amalgamated company as the case may be, shall be the written down value of the block of assets as in the case of the transferor company or amalgamating company, as the case may be, for the immediately preceding year as reduced by depreciation actually allowed in relation to the said previous year [Explanation 2 to section 43(6)].
(v) Where in any previous year any asset forming part of a block of assets is transferred by demerged company to the resulting company, the written down value of the block of assets of the demerged company for the immediately preceding year shall be reduced by the written down value of the assets transferred to the resulting company [Explanation 2A to section 43(6)].
(vi) Where any asset forming part of a block of assets is transferred by a demerged company to the resulting company, the written down value of the block of assets in the case of resulting company shall be the written down value of the transferred assets of the demerged company immediately before the demerger [Explanation 2B to section 43(6)].
(vii) The actual cost of the block of assets in the case of the successor LLP shall be the written down value of the block of assets as in the case of the predecessor company on the date of conversion [Explanation 2C to section 43(6)].
(viii) Where any asset forming part of a block of assets is transferred in any previous year by a recognised stock exchange in India to a company under a scheme for corporatisation approved by SEBI, the written down value of the block shall be the written down value of the transferred assets immediately before the transfer [Explanation 5 to section 43(6)].
(ix) Depreciation provided in the books of account deemed to be depreciation actually allowed [Explanation 6 to section 43(6)]
Section 32(1)(ii) provides that depreciation shall be allowed at the prescribed percentage on the written down value (WDV) of any block of assets. Section 43(6)(b) provides that written down value in the case of assets acquired before the previous year means the actual cost to the assessee less all depreciation actually allowed to him under the Income-tax Act, 1961. Persons who were exempt from tax were not required to compute their income under the head “Profits and gains of business or profession”. However, when the exemption is withdrawn subsequently, such persons became liable to income-tax and hence, were required to compute their income for income-tax purposes. In this regard, a question arises as to the basis on which depreciation is to be allowed under the Income-tax Act, 1961 in respect of assets acquired during the years when the person was exempt from tax.
Explanation 6 to section 43(6) provides that,-
(a) the actual cost of an asset has to be adjusted by the amount attributable to the revaluation of such asset, if any, in the books of account;
(b) the total amount of depreciation on such asset provided in the books of account of the assessee in respect of such previous year or years preceding the previous year relevant to the assessment year under consideration shall be deemed to be the depreciation actually allowed under the Income-tax Act, 1961 for the purposes of section 43(6);
(c) the depreciation actually allowed as above has to be adjusted by the amount of depreciation attributable to such revaluation.
(x) Explanation 7 provides that in cases of ‘composite income‘, for the purpose of computing written down value of assets acquired before the previous year, the total amount of depreciation shall be computed as if the entire composite income of the assessee is chargeable under the head “Profits and Gains of business or profession”. The depreciation so computed shall be deemed to have been “actually allowed” to the assessee.
For instance, Rule 8 prescribes the taxability of income from the manufacture of tea. Under the said rule, income derived from the sale of tea grown and manufactured by seller shall be computed as if it were income derived from business, and 40% of such income shall be deemed to be income liable to tax. If the turnover is, say, Rs 20 lakh, the depreciation Rs 1 lakh and other expenses Rs 4 lakh, then the income would be Rs 15 lakh. Business income would be Rs 6 lakh (being 40% of Rs 15 lakh). As per earlier Court decisions, only the depreciation “actually allowed” i.e., Rs 40,000, being 40% of Rs 1 lakh, has to be deducted to arrive at the written down value. The ambiguity in this case has arisen on account of the interpretation of the meaning of the phrase “actually allowed” used in section 43(6)(b). However, the correct legislative intent is that the WDV is required to be computed by deducting the full depreciation attributable to composite income i.e. Rs 1 lakh in this case. Explanation 7 clarifies this legislative intent.
(xi) The written down value of any block of assets, may be reduced to ni l for any of the following reasons:
(a) The moneys receivable by the assessee in regard to the assets sold or otherwise transferred during the previous year together with the amount of scrap value may exceed the written down value at the beginning of the year as increased by the actual cost of any new asset acquired, or
(b) All the assets in the relevant block may be transferred during the year.
(8) Rates of depreciation – All assets have been divided into four main categories and rates of depreciation as prescribed by Rule 5(1) are given below:
| PART A | TANGIBLE ASSETS | |
| I | Buildings | |
| Block 1. | Buildings (other than covered by sub-item (3) below) which are used mainly for residential purposes | 5% |
| Block 2. | Buildings which are not used mainly for residential purposes and not covered by sub-items (1) above and (3) below | 10% |
| Block 3. | Buildings acquired on or after 1st September, 2002 For installing machinery and plant forming part of water supply project or water treatment system and which is put to use for the purpose of business of providing infrastructure facilities under clause (i) of sub-section (4) of section 80-IA | 100% |
| Block 4. | Purely temporary erections such as wooden structures | 100% |
| II | Furniture and Fittings | |
| Block 1. | Furniture and fittings including electrical fittings | 10% |
| III | Plant & Machinery | |
| Block 1. | Motors buses, motor lorries, motor taxis used in the business of running them on hire | 30% |
| Block 2 | Aeroplanes, aeroengines | |
| Block 3. | Specified air, water pollution control equipments, solid waste control equipment and solid waste recycling and resource recovery systems | 100% |
| Block 4. | Energy Saving Devices (as specified) | 80% |
| Block 5. | Motor cars other than those used in a business of running them on hire, acquired or put to use on or after 1-4-1990. | 15% |
| Block 6 | Computers including computer software | 60% |
| Block 7. | Annual publications owned by assessees carrying on a profession | 100% |
| Block 8. | Books owned by assessees carrying on business in running lending libraries | 100% |
| Block 9. | Books, other than annual publications, owned by assesses carrying on a profession | 60% |
| Block 10. | Plant & machinery (General rate) | 15% |
| IV | Ships | |
| Block 1. | Ocean-going ships | 20% |
| Block 2. | Vessels ordinarily operating on inland waters not covered by sub-item (3) below | 20% |
| Block 3. | Speed boats operating on inland water | 20% |
| PART B | INTANGIBLE ASSETS | |
| Know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature | 25% |
Students should refer to Income-tax Rules, 1962 for the detailed classification of assets under Rule 5(1) and the rates applicable thereto.
Note – (1) 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 purposes of business or profession” would be classified under the head MACHINERY AND PLANT and would be eligible for depreciation at the rate of 50%.
(2) Windmills and any specially designed devices which run on windmills installed on or after 1.4.2014 would be eligible for depreciation @ 80%. Likewise, any special devices including electric generators and pumps running on wind energy installed on or after 1.4.2014 would be eligible for depreciation @ 80%. In respect of windmills and any specially designed devices running on windmills installed on or before 31.3.2014 and any special devices including electric generators and pumps running on wind energy installed on or before 31.3.2014, the rate of depreciation is 15%.
(9) Increased rate of depreciation for certain assets [Rule 5(2)] – Any new machinery or plant installed to manufacture or produce any article or thing by using any technology or other know-how developed in a laboratory owned or financed by the Government or a laboratory owned by a public sector company or a University or an institution recognized by the Secretary, Department of Scientific and Industrial Research, Government of India shall be treated as a part of the block of assets qualifying for depreciation@40%.
Conditions to be fulfilled:
1. The right to use such technology to manufacture such article has been acquired from the owner of such laboratory or any person deriving title from such owner.
2. The return filed by the assessee for any previous year in which the said machinery is acquired, should be accompanied by a certificate from the Secretary, Department of Scientific and Industrial Research, Government of India to the effect that such article is manufactured by using such technology developed in such laboratory or such article has been invented in that laboratory.
3. The machinery or plant is not used for the purpose of business of manufacture or production of any article or thing specified in the Eleventh schedule.
The depreciation ordinarily allowable to an assessee in respect of any block of assets shall be calculated at the above specified rates on the WDV of such block of assets as are used for the purposes of the business or profession of the assessee at any time during the previous year.
(10) Carry forward and set off of depreciation [Section 32(2)] – Section 32(2) provides for carry forward of unabsorbed depreciation. Where, in any previous year the profits or gains chargeable are not sufficient to give full effect to the depreciation allowance, the unabsorbed depreciation shall be added to the depreciation allowance for the following previous year and shall be deemed to be part of that allowance. If no depreciation allowance is available for that previous year, the unabsorbed depreciation of the earlier previous year shall become the depreciation allowance of that year. The effect of this provision is that the unabsorbed depreciation shall be carried forward indefinitely till it is fully set off.
However, in the order of set-off of losses under different heads of income, effect shall first be given to business losses and then to unabsorbed depreciation. The provisions in effect are as follows:
- Since the unabsorbed depreciation now falls part of the current year‘s depreciation, it can be set off against any other head of income.
- The unabsorbed depreciation can be carried forward for indefinite number of previous years.
- Set off will be allowed even if the same business to which it relates is no longer in existence in the year in which the set off takes place.
Current depreciation to be deducted first – The Supreme Court, in CIT v. Mother India Refrigeration (P.) Ltd. [1985] 23 Taxman 8, has categorically held that current depreciation must be deducted first before deducting the unabsorbed carried forward business losses of the earlier years in giving set off while computing the total income of any particular year.
Illustration
A newly qualified Chartered Accountant Mr. Dhaval, commenced practice and has acquired the following assets in his office during F.Y. 2015-16 at the cost shown against each item. Calculate the amount of depreciation that can be claimed from his professional income for A.Y.2016-17:
| Sl. No. | Description | Date of acquisition | Date when put to use | Amount Rs |
| 1. | Computer | 27 Sept.,15 | 1 Oct., 15 | 35,000 |
| 2. | Computer software | 2 Oct., 15 | 8 Oct., 15 | 8,500 |
| 3. | Computer printer | 1 Oct., 15 | 1 Oct., 15 | 12,500 |
| 4. | Books (of which books being annual publications are of Rs 12,000) | 1 Apr., 15 | 1 Apr., 15 | 1 Apr., 15 |
| 5. | Office furniture (Acquired from a practising C.A.) | 1 Apr., 15 | 1 Apr., 15 | 3,00,000 |
| 6. | Laptop | 26 Sep., 15 | 8 Oct., 15 | 43,000 |
Solution
Computation of depreciation allowable for A.Y.2016-17
| Asset | Rate | Depreciation | |
| Block 1 | Furniture | 10% | 30,000 |
| Block 2 | Plant (Computer, computer software, laptop, printers & books) | 60% | 44,550 |
| Block 3 | Plant (Books) | 100% | 12,000 |
| Total depreciation allowable | 86,550 |
Notes:
1. Computation of depreciation
| Block of Assets | Rs |
| Block 1: Furniture – [Rate of depreciation – 10%] | |
| Put to use for more than 180 days [Rs 3,00,000@10%] | 30,000 |
| Block 2: Plant [Rate of depreciation – 60%] | |
| (a) Computer (put to use for more than 180 days) [Rs 35,000 @ 60%] | 21,000 |
| (b) Computer Printer (put to use for more than 180 days) [Rs 12,500 @ 60%] | 7,500 |
| (c) Laptop (put to use for less than 180 days) [Rs 43,000 @ 30%] | 12,900 |
| (d) Computer Software (put to use for less than 180 days) [Rs 8,500@ 30%] | 2,550 |
| (e) Books (other than annual publications) (Put to use for more than 180 days) [Rs 1,000 @ 60%] | 600 |
| 44,550 | |
| Block 3: Plant [Rate of depreciation – 100%] | |
| Books (being annual publications) put to use for more than 180 days [Rs 12,000@100%] | 12,000 |
2. Where an asset is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than 180 days, the deduction on account of depreciation would be restricted to 50% of the prescribed rate. In this case, since Mr. Dhaval commenced his practice in the P.Y.2015-16 and acquired the assets during the same year, the restriction of depreciation to 50% of the prescribed rate would apply to those assets which have been put to use for less than 180 days in that year, namely, laptop and computer software.
Illustration
Gamma Ltd. was incorporated on 1.1.2015 for manufacture of tyres and tubes for motor vehicles. The manufacturing unit was set up on 1.5.2015. The company commenced its manufacturing operations on 1.6.2015. The total cost of the plant and machinery installed in the unit is Rs 120 crore. The said plant and machinery included second hand plant and machinery bought for Rs 20 crore and new plant and machinery for scientific research relating
to the business of the assessee acquired at a cost of Rs 15 crore.
Compute the amount of depreciation allowable under section 32 in respect of A.Y. 2016-17.
Solution
Computation of depreciation allowable for the A.Y.2016-17 in the hands of Gamma Ltd.
| Particulars | Rs in crore | ||
| Total cost of plant and machinery | 120.00 | ||
| Less: Used for Scientific Research (Note 1) | 15.00 | ||
| 105.00 | |||
| Normal Depreciation at 15% on Rs 105 crore | 15.75 | ||
| Additional Depreciation: | |||
| Cost of plant and machinery | 120.00 | ||
| Less: Second hand plant and machinery (Note 2) | 20.00 | ||
| Plant and machinery used for scientific research, the whole of the actual cost of which is allowable as deduction under section 35(2)(ia) (Note 2) | 15.00 | 35.00 | |
| 85.00 | |||
| Additional Depreciation at 20% | 17.00 | ||
| Depreciation allowable for A.Y.2016-17 | 32.75 | ||
Notes:
1. As per section 35(2)(iv), no depreciation shall be allowed in respect of plant and machinery purchased for scientific research relating to assessee‘s business, since deduction is allowable under section 35 in respect of such capital expenditure.
2. As per section 32(1)(iia), additional depreciation is allowable in the case of any new machinery or plant acquired and installed after 31.3.2005 by an assessee engaged in, inter alia, the business of manufacture or production of any article or thing, at the rate of 20% of the actual cost of such machinery or plant.
However, additional depreciation shall not be allowed in respect of, inter alia, –
(i) any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person;
(ii) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profit and gains of business or profession” of any one previous year. In view of the above provisions, additional depreciation cannot be claimed in respect of –
(i) Second hand plant and machinery;
(ii) New plant and machinery purchased for scientific research relating to assessee‘s business in respect of which the whole of the capital expenditure can be claimed as deduction under section 35(1)(iv) read with section 35(2)(ia).
Illustration
Lights and Power Ltd. engaged in the business of generation of power, furnishes the following particulars pertaining to P.Y.2015-16. Compute the depreciation allowable under section 32 for A.Y.2016-17, while computing its income under the head “Profits and gains of business or profession”. The company has opted for the depreciation allowance on the basis of written down value.
| Particulars | Rs | |
| 1. | Opening Written down value of Plant and Machinery (15% block) as on 01.04.2015 (Purchase value Rs 8,00,000) | 5,78,000 |
| 2. | Purchase of second hand machinery (15% block) on 29.12.2015 for business purpose | 2,00,000 |
| 3. | Machinery Y (15% block) purchased and installed on 12.07.2015 for the purpose of power generation | 8,00,000 |
| 4. | Acquired and installed for use a new air pollution control equipment on 31.7.2015 | 2,50,000 |
| 5. | New air conditioner purchased and installed in office premises on 8.9.2015 | 3,00,000 |
| 6. | New machinery Z (15% block) acquired and installed on 23.11.2015 for the purpose of generation of power | 3,25,000 |
| 7. | Sale value of an old machinery X, sold during the year (Purchase value Rs 4,80,000, WDV as on 01.04.2015 Rs 3,46,800) | 3,10,000 |
Solution
Computation of depreciation allowance under section 32 for the A.Y. 2016-17
| Particulars |
Rs |
Plant and Machinery (15%) (Rs) | Plant and Machinery (100%) (Rs) |
| Opening WDV as on 01.04.2015 | 5,78,000 | – | |
| Add: Plant and Machinery acquired during the year | |||
| – Second hand machinery | 2,00,000 | ||
| – Machinery Y | 8,00,000 | ||
| – Air conditioner for office | 3,00,000 | ||
| – Machinery Z | 3,25,000 | 16,25,000 | |
| – Air pollution control equipment | – | 2,50,000 | |
| 22,03,000 | 2,50,000 | ||
| Less: Asset sold during the year | 3,10,000 | Nil | |
| Written down value before charging depreciation | 18,93,000 | 2,50,000 | |
| Normal depreciation | |||
| 100% on air pollution control equipment | – | 2,50,000 | |
| Depreciation on plant and machinery put to use for less than 180 days@ 7.5% (i.e., 50% of 15%) | |||
| – Second hand machinery (Rs 2,00,000 × 7.5%) | 15,000 | ||
| – Machinery Z (Rs 3,25,000 × 7.5%) | 24,375 | 39,375 | |
| 15% on the balance WDV being put to use for more than 180 days (Rs 13,68,000 × 15%) | 2,05,200 | ||
| Additional depreciation | |||
| – Machinery Y (Rs 8,00,000 × 20%) | 1,60,000 | ||
| – Machinery Z (Rs 3,25,000 × 10%) | 32,500 | 1,92,500 | Nil |
| Total depreciation | 4,37,075 | 2,50,000 |
Notes:
(1) Power generation equipments qualify for claiming additional depreciation in respect of new plant and machinery.
(2) Additional depreciation is not allowed in respect of second hand machinery.
(3) No additional depreciation is allowed in respect of office appliances. Hence, no depreciation is allowed in respect of air conditioner installed in office premises.
(4) Additional depreciation is not allowed in respect of an asset whose actual cost is allowed as deduction in computing the income chargeable under the head “Profit and Gains of business or profession”. It is presumed that the new air pollution control equipment installed is eligible for 100% depreciation. Therefore, no additional depreciation is allowed in respect of the same.
(11) Building, machinery, plant and furniture not exclusively used for business purpose [Section 38(2)] – Where any building, plant and machinery, furniture is not exclusively used for the purposes of business or profession, the deduction on account of expenses on account of current repairs to the premises, insurance premium of the premises, current repairs and insurance premium of machinery, plant and furniture and depreciation in respect of these assets shall be restricted to a fair proportionate part thereof, which the Assessing Officer may determine having regard to the user of such asset for the purposes of the business or profession.
(12) Balancing Charge – Section 41(2) provides for the manner of calculation of the amount which shall be chargeable to income-tax as income of the business of the previous year in which the monies payable for the building, machinery, plant or furniture on which depreciation has been claimed under section 32(1)(i), i.e. in the case of power undertakings, is sold, discarded, demolished or destroyed. The balancing charge will be the amount by which the moneys payable in respect of such building, machinery, plant or furniture, together with the amount of scrap value, if any, exceeds the written down value. However, the amount of balancing charge should not exceed the difference between the actual cost and the WDV. The tax shall be levied in the year in which the moneys payable become due.
The Explanation below section 41(2) makes it clear that where the moneys payable in respect of the building, machinery, plant or furniture referred to in section 41(2) become due in a previous year in which the business, for the purpose of which the building, machinery, plant or furniture was being used, is no longer in existence, these provisions will apply as if the business is in existence in that previous year.