Depreciation

1
 What is Depreciation?

Depreciation usually means loss or

decline in value which occurs
gradually over useful life of a material
thing, due to physical wear, tear and
decay and is generally limited to
losses or decline in value which cannot
be restored by current repairs and
maintenance.

2
 Conditions for Claiming
Depreciation
 assets should be owned by the
assessee;
 it must be used for the purpose of
business or profession; and
 it should be used during the relevant
accounting year.

3
 Assets must be Owned by the
Assessee
 Registered Owner vs. Beneficial Owner:
– Registered ownership is not necessary.(
Mysore Minerals Ltd. Vs CIT (1999))

– Transferee is the owner of the asset even if

no sale deed is executed and is entitled to
depreciation.
Some Cases decided on basis of sec 53A:
•CIT vs. U. P. State Agro Industrial Corp Ltd.
(1981).
•Mysore Minerals ltd. Vs. CIT (1999)
•CIT vs. Poddar Cements (P) Ltd. (1997)

4
 Assets must be Owned by the
Assessee
Contd.

 The lessor is entitled to depreciation in

respect of Capital expenditure on
construction of any structure on
building taken on lease, aft 31st Mar
1970.
 Property of Partnership firm ( CIT vs.
Amber Corp 1994)
 Property take on hire-purchase.
 Depreciation on fractional ownership:
– amendment in sec 32(1) by Finance
act 1996 5
Asset must be used for business
or Profession
 Asset must have been used for
purpose of business or profession.
 The assessee can claim depreciation if
(s)he can establish bona fide use of
machinery for purpose of business.
(CIT vs. Union Carbide (I) Ltd. 2002)
 Passive vs. Active user.
– Whittle Anderson Ltd. vs. CIT (1971)
– Capital Bus Service (P) Ltd. vs. CIT
(1980)
– CIT vs. Pepsu Road Transport Corp. 6
(2002)
Asset must be used for business
or Profession Contd.
 Assets used partly for business purposes: u/s
32(2) where any business, machinery, plant ,
or furniture is not exclusively used for
business or profession, the deduction shall be
restricted to a fair proportionate part thereof.

 Other business activity: Waterfall Estates Ltd.

Vs. CIT (1981)

 Residential Quarters: CIT vs. Delhi Cloth and

General Mills Co. Ltd. (1966)

 Trial Run:
– CIT vs. Ashima Syntax Ltd. (2001)
– CIT vs. Union carbide (I) Ltd. (2002) 7
Assets must be used during the
Relevant Accounting Year
 Depreciation allowed only if the asset
is used for the purpose of business or
profession for atleast sometime in the
PY.
 The degree of use is immaterial.
 But from AY 92-93, assets used for
less than 180 days during the PY, then
depreciation allowed at rate of 50% of
the rate prescribed in respect of block
of asset.
8
 BUILDINGS

 Driveway,Compound,Walls,Fences,Roa
ds,bridges,culverts,wells and tube
wells, temples and canteen.
 All subject to the condition that they
are usable for business purposes and
are within factory premises.
 Indore municipal corp.
Earlier roads were not considered to be
bldg.- if not connected with bldg.

9
 Contd………….

 Geetha Hotel:
Hotel is considered to be bldg.-toilet
fittings are considered as plant.
 Building does not include land or site
on which the superstructure
stands.(CIT vs. London Hotel)
 Building constructed on lease land
admissible for depreciation. (CIT vs.
Y.V Srinivasmurthy)

10
 MACHINERY

Machinery need not be :

 Self contained and may not be
capable of being put to use by itself –
it may be a part of bigger machinery.
 Some examples of machinery as per
judicial pronouncements are –
Coal bridge used in handling coal,
Conveyor,
Elevators, Heating boilers , Diesel
engines , cold storage rooms etc.
11
 PLANTS

 Def:43(3)- tests
1.any item used as the means to carry
out business and profession.
2.with a degree of durability.
(may not last long or may not even
contain working parts or plays only
passive role.)
 Plant includes any
ship,vehicles,books,vehicles,surgical
equipment,scientific equipments.
 Excludes-tea bushes,
livestock,furniture & fixtures and 12
bldgs.
 Contd…………

Important Judgments:
 Scientific Engg. House:
Earlier Nursing homes-Doctors,Theaters
for cinema owners, Hotel Bldg. For
restaurant owner were considered as
plant.
After the judgment bldgs. Cannot be
considered as plants.
 Karnataka power corp. (tailor made
bldgs.)
Exceptional case in which bldg. is
considered as plant. E.g. bldg. Of 13
transmission house used by power
 FURNITURE

 All articles of decoration or

convenience used for the purpose of
furnishing an office or the place of
trade or manufacturing would be
covered under its definition.
 All residual items are also considered
as furniture.

14
 DISSALLOWANCE OF
DEPRICIATION
 Cars not used in hiring of tourists-
a. Acquired between 1/4/1967 – 28/2/1975
Depri. Not allowed in excess of actual cost
over 25000.
b. Acquired between 28/2/1975-1/4/2001
depri. disallowed if car is foreign made.
Depreciation allowed in case of foreign cars:
1.Running it on hire for tourists.
2.Acquired > 31/03/2001 used for B/P.
3. Car used outside India for B/P.
 When actual cost allowed as deduction in
one or more year under agreement –
15
Central govt.u/s 42.
Written Down Value – Sec. 43(6)

 Steps for determining WDV:

– Step 1: Depreciated value of block
of assets at the beginning of the
year.
– Step 2: Add actual costs of the
assets acquired.
– Step 3: Deduct moneys received /
receivable.
 Meaning of “money payable”

16
 Value of Scrap

 Arises for consideration only when the

assets are discarded or demolished.
 Immaterial whether the assessee has
decided to convert the asset has
chosen to convert the value into cash.
 When assessee decides to just give
away assets having scrap value.

17
Computation of WDV on notional
basis – Sec 43(6)
 Succession in business and profession.
 Transfer between holding and
subsidiary co.
 Transfer in the scheme of
amalgamation.
 WDV when assets are transferred in
the case of demerger.
 WDV in the hands of a resulting
company.

18
Block of Assets

19
 Computation of Normal
Depreciation Allowance
One should find out the following:
 WDV of a block of assets.
 Rate of depreciation applicable.

Result = Normal Depreciation

Exceptions to the Rule:
 WDV of a block of assets is reduced to zero.
 Block of assets ceases to exist.
 In the case of imported cars.
 In the case of succession, amalgamation and
business reorganization.
 In the first year where the asset is put to use
for less than 180 days. 20
ADDITIONAL DEPRECIATION SEC.32
AMENDED
 CONDITION TO CLAIM A.D
 Manufacture / production of any
article./thing. Not eligible:-
– cooking food in a hotel
– construction of dam, building or
contract for civil engg.
– cutting and polishing raw
diamonds.
– hatching of eggs
– Pressure piling for building

– Mining of stones
21
 Additional Depreciation
Contd…

New plant & machinery installed and

acquired after march 31,2002
 Not available in respect of building or furniture
 Not available in respect old plant and machinery
Reconditioned can be treated as new after
- entirely different /substantially new
- nature and cost of improvement
- date on which machine was manufactured
- period it was previously used
-latest technical improvements available
If acquired before 31 mar.02 and installed after 31
mar.02,then no A.D

22
 Eligible plant and machinery

 Following assets are not eligible for

A.D.
– Ships and aircrafts used either within
/outside India by any other person.
– any office premises or any residential
accommodation.
– any office appliances or road transport.
– actual cost allowed as deduction.
Mobile crane

23
 Eligible plant and machinery
Contd…

 Certificate from a chartered

accountant
 Rate of depreciation:-
– A.D. @15% if used greater than 180
days
– A.D. @7.5% if used less than 180
days
 Year in which A.D. is available
– in case of new industrial undertaking
– in case of industrial undertaking before
April 1,2002 24
Installed capacity expansion by
 UNABSORBED DEPRECIATION

 Set off against any income

– not necessary that the same business
should continue.
– no time limit is fixed.
 Order of priority Is followed in
subsequent year
– Current depreciation
– brought forward business loss
– unabsorbed depreciation

25
 Actual Cost S-43(1)

 Actual cost to the assessee as reduced

by the proportion of the cost thereof if
any met by any other person or
authority.
 Cost of Asset:
All Expenses directly relatable to the
asset
– Exp to bring asset to site & install it
– Exp to facilitate use of asset
– Exp on insurance, power and fuel prior to
commencement
26

Different Situtations
1. Business is newely setup
Incase of a newly started concern
2. Any existing concerne acquiring
asset for expanding the same business
3.An existing concern acquiring asset to
setup a new undertaking relating to theCommercial
business
Interest
Stages Tax Treatment
Upto the time of Commencement Interestofliability up to the stage of
Commercial Production Commencement of production should
be capitalized.
After the asset is first put to Ituse
cannot be capitalised. It may be
claimed as deduction under section 36
Upto the asset is put to use It can be capitalised. It cannot be claimed
as deduction as revenue expenditure U/s
After the asset is first put to Ituse
cannot be capitalised. It may be
claimed as deduction under section 36
Upto the time of Commencement It can beof capitalised. It cannot be claimed
existing Production as deduction as revenue expenditure U/s
After the asset is first put to Ituse
will be allowed as deduction u/s. 36

4.An existing concern acquiring asset to

Upto the time of Commencement It shouldof be capitalized
setup a new undertaking not relating toCommercial
the Production
existing business
After the asset is first put to Ituse
will be allowed as deduction u/s. 36

27
 House Tax, Ground Rent etc.

 Kapur Sons & Co.

– Assessee capitalised house tax and
ground rent
– Held they cannot capitalize as these
are in relation to the plot and they
would have to be paid even if cinema
hall not constructed on it.
 Hindustan Times Ltd.
– Extra ground rent paid can be
capitalised

28
 Salaries, Guest House Exp &
Staff Training Expenses
 Hindustan Polymers Ltd.
 Rane (Madras) Ltd.
– Fees to technical staff
– Salaries
– Vehicle Exp
– Guest house exp
Incurred at the time of setting up a plant
will be part of the cost.

29
Pre-production & Exp on test run

 Lucas T.V.S. Ltd.

– Pre production exp of a new industry
can be allocated to cost of various
assets
 Karnal Co-op Sugar Mills
– Assessee opened L.C. and made F.D.s
– Int on such F.D. shall reduce the cost of
the asset acquired.

30
 Actual Cost taken at Notional
Figures
 Scientific Research
Asset
Asset acquired by way of Gift or Inheritance

Second Hand Assets

Asset that it previously not used for Business

Transfer in case of corporatisation of
Stock Exchange.

31
 Sale and Lease Back of Assets

Sale
Mr S.- Mr F. Buys
Claims and then
depri u/s Lease
32
Lease
Back
 Cost in hand of F = W.D.V. for S at

time of transfer

32
 Scientific Research Asset

Purchase of asset for 1997 80,000

scientific use
Deduction allowed U/s 80,000
35
Transferred to business 2004 Nil
use

33
 Gift or Inheritance

 Cost to assessee = Cost to previous

owner.
 Less: depri actually allowed w.r.t. that
asset in respect of the A.Ys up to
1988.
 Less: depri that would have been
allowed from A.Y. 1988-89 as if that
asset was the only asset in the
relevant block of assets.

34
 Second Hand Assets

 Ashwin Vanaspati Industries:

– If A.O. satisfied that the transfer is to
avoid tax liability
– Material that enhanced cost is incurred
with the main purpose of claiming
higher depri by inflating costs.
– Acutal Cost = Amt determined by the
A.O. (prior permission of J.C. required)

35
 Previously not used for B/P

 Actual cost = actual cost to assessee –

depri @ applicable as if used for B/P.
from date of acquisition.

Transfer in case of corporatisation

of Stock Exchange.

•Cost of asset deemed as if no

corporaisation was effected.
36
 DEPRECIATION IN CASE OF
POWER UNITS
 From the assessment year 1998-99,
an undertaking engaged in generation
or generation and distribution of
power can claim depreciation in
respect of assts acquired after march
31,1997 , in the case of tangible
assets according to any one of the
following methods-
 Straight –line method: At the
percentage specified in Appendix 1A
to the income tax Rules.(depreciation
is calculated as a percentage of actual
cost of an individual asset). 37
 Written down basis:alternately, such
undertaking can claim depreciation at
its option according to written down
value method like any other assessee
on the basis of block of assets.

38
The following points should be noted--
 To claim depreciation on written down
basis under the block system, an option
has to be exercised before the due date of
furnishing the return of income u/s 139(1).
 The above option once exercised shall be
final and shall apply to all subsequent
years.
 Additional depreciation is available.
 Aggregate amount of depreciation cannot
exceed actual cost.
 Intangible asset are qualified for 39
The following points should be noted-
 If the asset is put to use for less than 180
days in the first year in which it is acquired
then depreciation will be –50% of normal
depreciation.
 For asset acquired before 1/4/97-a power
generating unit does not have any option
but to claim depreciation on the basis of
written down basis under block of assets
system.
 If an asset (in respect of which
depreciation is claimed on the basis of
straight line method) is sold , discarded 40
 TERMINAL DEPRICIATION
 When an asset of a power unit on which
depreciation has been claimed under section
32(1) is sold , discarded, demolished or
destroyed in the previous year terminal
depreciation can be claimed.
 The terminal depreciation amount will be the
amount by which the money payable in respect
of such building ,machinery , plant of furniture
together with the amount of scrap value,if
any,fall short of the written of the written down
value thereof .
 The following points should be noted-
 When the asset is sold, discarded,etc,in the
previous year in which it is first put to use any
loss arising there from will not be allowed as
terminal depreciation but will be treated as short
term capital loss. 41
 Balancing charge
 The money payable in respect of such
building ,plant , machinery or furniture
as the case may be,together with the
amount of scrap value, if any , exceeds
the written down value ,so much of the
excess as does not exceed the
difference between the actual cost and
the written value shall be chargeable to
income tax.
 Capital gains-section 50A makes
provision for the computation of cost in
the case of depreciable assets referred
to in section 32(1)(i).
 In case of compulsory acquisition it is
taxable in the year of receipt of
42
compensation.
 Illustration
X LTD. Is a power generating unit. On December 20,
2000it purchases a plant for 20 lakhs which is eligible
for depreciation @12.77 on SLM. The plant is sold for (a)
rs.30,000 (b)rs. 18,72,300 (c)rs.19,00,000 (d)rs
21,500,00 on may 20 2001.
Actual cost 20,00,00
Less depreciation 1,27,700
Written down value on Apr1 2002 -----18,72,300

sale proceeds –written down wdv= surplus

Surplus = RS.(a) (-) 18,42,300 (b) NIL ( c) 27,700

43
 Solution A Solution B Solution C Solution D

Terminal Depr,. 1842300 Nil

Balancing Charge Nil Nil 27700 127700

Capital Gains
Sale Proceeds 30000 1872300 1900000 2150000
less: Cost of Aquiz. 30000 1872300 1900000 2000000

Short Term CG Nil Nil Nil 150000

44