Depreciation

Depreciation shall be determined according to the provisions of section 32.

CONDITIONS FOR CLAIMING DEPRECIATION

– In order to avail depreciation, one should satisfy the following conditions:

Condition 1

Asset must be owned by the assessee.

Condition 2

It must be used for the purpose of business or profession.

Condition 3

It should be used during the relevant previous year.

Condition 4

Depreciation is available on tangible as well as intangible assets.

ASSET SHOULD BE OWNED BY THE ASSESSEE – The asset should be owned by the assessee or the assessee should be the co-owner of the asset.

ASSET MUST BE USED FOR THE PURPOSE OF BUSINESS OR PROFESSION

– The asset, in respect of which depreciation is claimed, must have been used for the purpose of business or profession.

USER OF THE ASSET IN THE PREVIOUS YEAR –

The asset, in respect of which depreciation is claimed, must have been used for the purpose of business. Normal depreciation ( i.e., full year’s depreciation) is available if an asset is put to use at least for sometime during the previous year. However, depreciation allowance is limited to 50 per cent of normal depreciation, if the following two conditions are satisfied—

a.where an asset is acquired during the previous year; and

b.it is put to use for the purpose of business or profession for less than 180 days during that year.

DEPRECIATION IS AVAILABLE ON TANGIBLE AS WELL AS INTANGIBLE ASSETS –

Under the Income-tax Act, one can claim depreciation in respect of the following assets—

Tangible assets Intangible assets acquired after March 31, 1998Building, machinery, plant or furniture Know-how, patents, copyrights, trade marks, licenses, franchises or any other business or commercial rights of similar nature

Building – “Building” means the superstructure only and does not include site.

Plant – “Plant” includes ships, vehicle, books (including technical know-how report), scientific apparatus and surgical equipments used for the purpose of business or profession. It does not include tea bushes or livestock or buildings or furniture and fittings.

CONSEQUENCES WHEN ABOVE CONDITIONS ARE SATISFIED –

If the above conditions are satisfied, depreciation is available. Depreciation is available whether or not the assessee has claimed the deduction for depreciation in computing his total income.

To understand method of computation of depreciation, one must know the meaning of the following terms:

Block of assets

Written down value

Actual cost

BLOCK OF ASSETS [SEC. 2(11)] The term “block of assets” means 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, trade marks, licenses,franchises or any other business or commercial rights of similar nature,in respect of which the same percentage of depreciation is prescribed.

 WRITTEN DOWN VALUE [SEC. 43(6)] – Written down value for the assessment year 2013-14 will be determined as under:

Step -1 Find out the depreciated value of the block on the April 1, 2013.
Step -2To this value, add “actual cost” of the asset (falling in the block) acquired during the previous year 2013-14.
Step -3From the resultant figure, deduct money received/receivable (together with scrap value) in respect of that asset (falling within the block of assets) which is sold,discarded, demolished or destroyed during the previous year 2013-14.
  • Other Points The following points should be noted — 

1. The resulting amount is the written down value of the block of assets on March 31, 2006 relevant for the assessment year 2006-07.

2. The amount of reduction under Step 3 cannot exceed the value of assets computed under Step 1 and Step 2.

3. One may determine written down value for other assessment years on similar basis.

4. In some cases, computation of written down value is based upon notional figures [see problem 91-P6].

5. Under Step 3, only actual money (received or receivable in cash or by cheque or draft) is deductible. In other words, any other things or benefit (which can be converted in terms of money) cannot be deducted under Step 3.

EXCEPTIONS TO THE RULE

In the cases given below, the above-mentioned rule is not applicable:

 

Exception
one
If written down value of the block of asset is reduced to zero, though the block is not empty
Exception
two
If the block of assets is empty or ceases to exist on the last day of the previous year (though the written down value is not zero)
Exception
three
If in the first year in which an asset is acquired, it is put to use for less than 180 days

When the written down value of a block of asset is reduced to zero – No depreciation is admissible where written down value has been reduced to zero, though the block of assets does not cease to exist on the last day of the previous year.

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