Income Tax:

Business Income- Depreciation

Bought Machine for

business
Price at the shop: Rs. 19,000
Carriage: Rs 400
Installation cost: Rs. 600

Total Cost: Rs. 20,000

It cost Rs. 20,000 for the first

shirt to be tailored. Law
recognises it.
Cost of a capital asset includes all
expenditures made to finally put
the asset to business use.

Capital Asset
Depreciation is cost of the asset
over its useful time

A computer is useful for about three

years.
Depreciation would be 33% each year.

Capital Asset

Rate of depreciation: 33% (Our estimate)

Rate allowed by the Income Tax Act: 60% !

The Act effects the policy to

encourage the use of computers.
The Act has used depreciation rate as
a policy instrument for several
industries.

The Act provides different rate of depreciation

for different kinds ( block) of assets.
It requires all the capital assets
to be grouped under the respective block.

Example
All computers, laptops, printers
and software under the block of computers.
Rate: 60%

Example
All items of furniture under the head of
furniture.
Rate: 10%

It allows depreciation
for the block as a whole
by the Written Down Method.

The method for calculating the depreciation

allowance for a block is as follows:

Written Down Value is WDV

The Year refers to the Previous Year

On March 31 of the Previous year:

Take the opening WDV on April 1 for of the year.
Add: The cost of acquisition of all the assets in the
block during the year.
Subtract: Amount received from the sale of any asset
in the block during the year.
The value arrived is the WDV on March 31 before
depreciation.

Calculation of Depreciation allowance for the year

Calculate the rate of depreciation (percentage) of the

Written Down Value on March 31 with the qualification
that the assets acquired in the second half of the year,
which are still in the block on March 31, get only half
the depreciation.

An error free way of doing it is this:

Calculation of Depreciation allowance for the year

Look at the assets in the block on March 31. Is there any asset
which has been put to use in the second half. (Oct 1 onwards).
a.Answer: No.
Depreciation allowance = % rate of WDV on March 31.
b. Answer: Yes
Separate out the values of these assets from the WDV on
March 31 = W1 + W2 (W2 are the assets put to use after Oct 1)
Depreciation allowance = % rate of W1 + (1/2) % rate of
W2.

On March 31 of the previous year,

identify the assets which exist in the block
and were acquired during the year.

For the new assets:

Depreciate at full rate: Those put to use
from first half (Before October 1)
Depreciate at half rate: Those put to use
in the second half (October 1 onwards)

The block must have had a

Written down value on April 1.
Subtract from it,
the total value realised from
the sale of assets in the block.

Two Conceptual Points

on Depreciation.

Assets in the block on 31 March,

put to use after Oct 1
get only half the depreciation.
Why a six monthly basis?
Why not quarterly or monthly?

Every measure depends on the value measured

and utility of measurement.

A high value short useful life capital asset

may get measured in days.

At 30% income tax, a monthly unit of

depreciation will be 2.5%
of the value of the capital asset.

It will lead to unnecessary

account keeping for small gains.
Thus, a six monthly basis.

Selling a capital asset will

give rise to capital gains.
It should be taken to
the head of capital gains.

Why is the sale value being

subtracted from WDV?
The law has done this
mixing up for convenience.

Treating the assets in a block

reduces the inconvenience of depreciating
each capital asset individually
and working out capital gains on sale.

We will take it as a formula at this stage

and explore further while
doing capital gains.

That a sale is a capital gain,

the law does not bother whether
it got sold in the first half or the second.

Calculation of Depreciation
Opening WDV

Amount

+Addition 1

Amount

> 180 days

+Addition 2

Amount

< 180 days

-Deduction

Amount

WDV before
depreciation

Amount
Amount
+tive

Amount
Amount
-tive
TOTAL

Depreciate at
full Rate

Depreciate
at Half Rate

Total
Depreci
ation

Exercise page 21, 22, 23, 24 and 25

Identify the Block of Asset and Depreciation rate for the

Following assets held by a Textile Mill for its business
Asset
Office premises
Spinning machines
Motor cars
Furniture & fixtures
Computers

Block of Asset

Rate
10%
15%

Purchased IPR

Building
Plant & Machinery
Plant & Machinery
Furniture
Plant & Machinery
Intangible Assets

Factory building
Factory Land
Wind Mills

Building
Plant & Machinery

15%
10%
60%
25%
10%
80%

Block of Assets: Depreciation

Neogen is an engineering company. It bought a used
machining equipment on 2nd July, 2011 for Rs. 60
lakhs. As the equipment was not up to the
customers requirements, it purchased another used
advanced equipment for Rs. 89 lakhs on 4th May,
2012.
Calculate the WDV and Depreciation for the
Previous Year and the subsequent Previous Year.
Name of the Block of Assets
Rate of Depreciation

Plant & Machinery

15%

Used Machine bought on July 2, 2011-Rs. 60 lakhs

Used Machine bought on May 4, 2012-Rs. 89 lakhs
PY

WDV WDV on
on
March 31
1 April before dep

Dep @
15%

WDV on
March 31
after dep

2011-12 0

15% *
No asset after Oct 1 60 = 9

51

2012-13 51

51 + 89 = 140 15%* 140

No asset after Oct 1 = 21

119

2013-14

119

0 + 60 = 60

119

17.85

101.15

Block of Assets: Depreciation

Neogen, an engineering company, bought a used
machining equipment on 2nd July, 2011 for Rs. 60
lakhs. It purchased another used advanced
equipment for Rs. 89 lakhs on 4th May, 2012. The
company sold off the first machine on January 25,
2013 for Rs. 40 lakhs.
Calculate the WDV and Depreciation for the
Previous Year and the subsequent Previous Year.
Name of the Block of Assets
Rate of Depreciation

Plant & Machinery

15%

Machine-1 bought on July 2, 2011- Rs. 60 lakhs

Machine-2 bought on May 4, 2012- Rs. 89 lakhs
Machine-1 sold off on Jan 25, 2013 Rs 40 lakhs
PY

WDV WDV on
on
March 31
1 April before dep

2011-12 0

Dep @
15%

WDV on
March 31
after dep

51

51 + 89 40
= 100

15

85

85

12.75

72.25

0 + 60 = 60
No asset after Oct 1

2012-13 51

No asset after Oct 1

2013-14 85

Block of Assets: Depreciation

Neogen, an engineering company, bought a used
machining equipment on 2nd July, 2011 for Rs. 60
lakhs, and on 4th May, 2012 for Rs. 89. It sold off the
first machine on January 25, 2013 for Rs. 40 lakhs.
On March 7, 2013, it purchased an old packing
machine for Rs. 20 lakhs.
Calculate the WDV and Depreciation for the
Previous Year and the subsequent Previous Year.
Name of the Block of Assets
Rate of Depreciation

Plant & Machinery

15%

M1 bought on 2/7/2011 for 60 L.

M2 bought on 4/5/2012 for 89 L
M3- in the block, got after
M1 sold off on 25/1/2013 for Rs. 40 Lakhs
M3 bought on 7/3/2013 for Rs. 20 LakhsOct 1

PY

WDV WDV on
on
March 31
1 April before dep

2011-12 0

0 + 60 = 60

No asset after
Oct 1

Dep @
15%
9

WDV on
March 31
after dep
51

51+89+20-40 100*15% + 103.5

= 120 =
20*()*15%
100+20
=16.5
2013-14 103.5
87.97
103.5
15.53
2012-13 51

Additional depreciation for upgrading

production.

The provision is intended to upgrade the

manufacturing facilities.
Addition 20% depreciation is allowed on new
machinery in the first year for an assessee
engaged in manufacture/ production of any
article or thing.

Key points
Addition 20% depreciation
New machinery
Only for the first year
Assessee engaged in manufacture/
production of any article or thing.

The allowance cannot be claimed for the

followings:
Ships or aircrafts
Used plant or machinery
Plant or machinery used in office or
residential accommodation
Office appliances or road transport vehicles

The additional depreciation of 20%

is added to the rate of depreciation
for the block for the first year.

As a result, if the asset is put to use

Oct 1 onwards,
it gets only half the allowance.

The other half lapses and

cannot be claimed the next year.

Additional Dep. on Plant &

Machinery
1. The assessee must be engaged in manufacture/
production of any article or thing
2. It should be eligible plant and machinery, that is, it
should not be one among the followings:
Ships or aircrafts
Used plant or machinery
Plant or machinery used in office or residential
accommodation
Office appliances or road transport vehicles
Whole of the cost is allowed as a deduction in
any previous year

Exercise page 26, 27 and 28

Eligibility for Additional Depreciation

New computer installed in chemical plant
Old lathe machine
New Power plant in a textile company
Cargo ship
Guest house Computer
Refurbished formulation plant machinery
New motor lorries in a mining company
Helicopter purchased by petroleum Co.
Air-conditioner plant in office building
New computer aided gear mfg. machine
Blow seal machine by a research company

Yes
No
Yes
No
No
No
No
No
No
Yes
No

Block of Assets: Depreciation

Ocean Pearl Limited is a watch manufacturing
company. The WDV of the block of assets
comprising of plant and machinery was 200 lakhs on
April 1, 2012. The company bought a new machine
for making components of the watch in May, 2012 for
Rs. 100 lakhs. Calculate the WDV and Depreciation
for the Previous Year and the subsequent Previous
Year.
Name of the Block of Assets
Rate of Depreciation

Plant & Machinery

15% (Additional 20%
for new machine)

WDV on April 1, 2012 - 200 Lakhs

New machine for manufacturing bought in May 2012
for Rs. 100 lakhs
PY

2012-13

2013-14

WDV WDV on
Dep @
on
March 31
1 April before dep

WDV on
March 31
after dep

200

200+100
=
300

200x15% +
(20%
+15%)100=
30+35 = 65

235

235

235

235x 15%
= 35.25

199.75

Block of Assets: Depreciation

Axel Limited is a glass manufacturing company. The
WDV of the block of assets comprising of plant and
machinery was 400 lakhs on April 1, 2012. The
company bought a new machine for shaping glass
in Nov, 2012 for Rs. 200 lakhs. Calculate the WDV
and Depreciation for the Previous Year and the
subsequent Previous Year.

Name of the Block of Assets

Rate of Depreciation

Plant & Machinery

15% (Additional 20%
for new machine)

WDV on April 1, 2012 - 400 Lakhs

New machine for manufacturing bought in Nov, 2012
for Rs. 200 lakhs
PY

2012-13

WDV WDV on
Dep @
on
March 31
1 April before dep
400

2013-14 505

WDV on
March 31
after dep

400+200
=
600

400x15% +
(1/2)(20%+
15%)200=
60+35 = 95

505

505

505x 15%
=75.75

429.25

Anagram Consulting Solutions

The details of Anagram Consulting Solutions
Private Limited, a company engaged in financial
consultancy for the previous year 2013-14:
WDV on April 1, 2013 (computers): 4 lakhs
WDV on April 1, 2013 (Furniture): 1 lakhs
Two new computers are purchased and put to use
on June 15, 2013 for Rs. 1 lakh.
Income from consultancy: Rs. 40 lakhs
Total revenue expenses : Rs. 20 lakhs
Calculate the taxable income for 2013-14

Anagram Consulting Solutions

Balance of income and revenue expenditure: Rs.
40 lakhs Rs. 20 Lakhs = Rs. 20 Lakhs
Income after depreciation = Rs. 20 lakhs Total
depreciation from the two block of assets

Block of Assets- Computers

WDV on April 1, 2013- Rs. 4 Lakhs
Two new Computers purchased for Rs. 1 lakh on
June 15, 2013
PY

WDV WDV on
on
March 31
1 April before dep

2013-14 4

4+1=5

Dep @
60%

WDV on
March 31
after dep

Block of Assets- Furniture

WDV on April 1, 2013- Rs. 1 Lakhs

PY

2013-14

WDV WDV on
on
March 31
1 April before dep
1

Dep @
10%

WDV on
March 31
after dep

0.1

0.9

Anagram Consulting Solutions

Income after depreciation =
Rs. 20 lakhs Rs. (3+0.1)Lakhs
= Rs. 16.90 Lakhs

Scientific Research (Sec.35)

Section 43(4)(i) defines scientific research to mean
any activities for the extension of knowledge in the
fields of natural or applied science including
agriculture, animal husbandry or fisheries.

Expenditure on in-house research and

development facility. Sec.35(2AB)
If the following conditions are fulfilled the sum equal to 200%
or 2 times of the expenditure so incurred shall be allowed as
deduction.
The taxpayer is company.
The company should be engaged in business of
manufacture or production of any article or thing except
those specified in the ELEVENTH Schedule.
It incurs an expenditure on scientific research and such
expenditure is of Capital or Revenue nature (not being cost
of Land and Building).

Revenue or capital expenditure incurred on

in-house research related to own business
Sec.35(1)/(2)
If the following conditions are fulfilled the sum equal to 100% or
1 time of the expenditure so incurred shall be allowed as
deduction.
The assessee himself carries scientific research.
Scientific research should be related to assessees business.
Expenditure is not for acquisition of Land.

In house research exp.

(Revenue or Capital)

ON
100% or 1 time
of the Exp.
Will be allowed
(Except cost of
Land acquired)

Is Co. engaged in the

business of Bio-Tech. or in
Business of manufacture or
production of any article or
things?
Yes

Yes

Article or
thing
specified in
the list of the No
Eleventh
Schedule?

200% or 2 times of
the Exp. Will be
allowed .
(Except cost of:-Land acquired 0%
-Building Acq.
100% or 1 time)

Innovision Ltd. is a company engaged in

manufacturing of computer chips. It incurs
expenditures on scientific research.
No deduction for land
100% for building
(Out of schedule)- 200% for all other
capital and revenue expenditure.

Contribution made to Outsiders Sec.35(1)(ii)/(iii)

To Whom Contribution can be given

Weighted deduction

If the contribution is given to approved

institutions to undertake Scientific
Research

175% or 1.75 times

of actual expenditure

If the contribution is given to approved 125% or 1.25 times

institutions for the use of research in
of actual expenditure
Social science or statistical research
Contribution to a company for scientific
research

125% or 1.25 times

of actual expenditure

Contribution to outside agencies engaged in:-

Social Science
or Statistical
Research

Scientific
Research

To
Approved
Institution

To a
Company

175% or
1.75 times
of Exp.

125% or
1.25 times
of Exp.

To National
Laboratory or
IIT or University
(for Approved
programme )

200% or
2 times of
Exp.

125% or
1.25 times
of Exp.

Sec.35-Scientific Research
Innovision Ltd. is a company engaged in manufacturing
of computer chips. It incurs following expenditure in
lakhs towards research during the P.Y. 2013-14.
Calculate the allowed deductions:

Nature of Expenditure
Purchase of Research
equipment

Exp. weight deduction

100 2
200

Salary to Research scientists

Purchase of Land for
research center

20
150

40

Research center building

construction

60

60

 continued
Innovision Ltd. is a company engaged in
manufacturing of computer chips. It incurs following
expenditure in lakhs towards research during the
P.Y.2013-14. Calculate the allowed deductions:

Nature of Expenditure
Admin. exp. for research
center

Exp. weight deduction

20
2
40

Consultancy fees to outside

scientists

10

Trial run expense at research

center

12

24

Sec.35-Scientific Research
Blue Ocean Ltd. is a company engaged in
manufacturing of cosmetics. It incurs following
expenditure in lakhs towards research during the
P.Y.2013-14. Calculate the allowed deductions:

Nature of Expenditure
Purchase of Research
equipment

Exp. weight deduction

100 1
100

Salary to Research scientists

Purchase of Land for
research center

20
150

20

Research center building

construction

60

60

 continued

Nature of Expenditure
Admin. exp. for research
center

Exp. weight deduction

20
1
20

Consultancy fees to outside

scientists

Trial run expense at research

center

12

1
1

5
12

Amortisation

In preparation of starting the business,

Jeet had made several other expenditures.

Attending a three month course in tailoring.

Renting out a shop.
Hiring an assistant.

When Jeet started receiving

revenue receipts, he factored these
in estimating his profits.

This is amortisation of expenditure

before the start of Business.

The Act recognises it but

only to a limited extent.

Business starts only when

the revenues start coming in.

The revenue expenditure till then

are not business expenses as
there is no business.

The Act provides for amortisation

of these expenditures.
It limits it through three means.

One:
Only certain listed kinds of expenditure
are eligible for amortisation.

These are:
Company formation
Feasibility Reports
Public subscriptions

Two:
Only up to 5% of the size of business
can be amortised.

Three:
Spread over five years
in equal measure from the year of
start of business.

Amortisation of Preliminary Exp

Section 35D provides for deductions of certain
expenses incurred before the commencement of
business. Only certain expenses are eligible for
deduction. There is a limit on the deduction as a
proportion of the total cost of project.
Imperial Enterprise is setting up a new business
with Rs. 2,500 lakhs cost of project. The expenses
incurred are mentioned in lakhs. Calculate the
deduction available under Section 35D.

 Continued
Nature of Exp.

Exp Eligble Amt

Company formation exp.

IPO expenses
Project feasibility & mkt. study
Legal fees for drafting of project
& JV documents

10
90
40
20

Yes
Yes
Yes

10
90
40

Yes

20

Commission for first comm.sale

10

No

Total 170
Aggregate Deduction restricted
to ___%
5 of Cost of Project(2500)
1/5th deduction each year, for five years, starting
from the year the business commences= 25

160
125

Interest on borrowed capital

Hi-fi Rhythms Ltd. has taken the following two loans from a bank.
Calculate the eligible deduction of the interest paid to the bank.
(Amount in Lakhs)

Loan
Corporate
loan
Loan for
new editing
machine

Interest
period

Interest Eligible deduction

Regular
business
activity

50

Before
machine is
put to use

20

50

Treated as capital
expenditure.
Eligible for
depreciation

THANK YOU