Manner of Calculating Depreciation under Income Tax Act



Manner of Calculating Depreciation under Income Tax Act

•                                 Depreciation would be allowable to the owner even in respect of assets which are actually worked or utilized by another person (such as lessee or licensee).

•                                 Under the Income Tax Act, depreciation is allowed only on WDV basis. Straight line method of depreciation is not allowed except in case of power generating companies.

•                                 Depreciation is not calculated on the basis of value of individual assets; rather it is allowed on the basis of 'block of assets' concept. Block of assets refers to a group of assets which belong to the similar class of assets and carry the same rate of depreciation.

•                                 Depreciation at full rate in some cases and at half rate in other cases:

Case I: If the asset has been put to use during the year of acquisition
(a)	The asset has been put to use for 180 days or more during the relevant previous year	Depreciation shall be calculated at full rate
(b)	The asset has been put to use for less than 180 days during the relevant previous year	Depreciation shall be calculated at half rate
Example: ABC Ltd has purchased one P&M for Rs 10,00,000 on 01.04.2018 but it was put to use on 01.07.2018. In this case, depreciation for PY 2018-19 shall be computed at the full rate of 15% and the depreciation amount would be Rs 1,50,000. Example: If in the above example the asset was put to use on 01.12.2018, depreciation for PY 2018-19 shall be computed at 7.5% since the asset has been put to use for less than 180 days and therefore the depreciation amount would come out to Rs 75,000.

 

Case II : If the Asset has been acquired during one previous year and has been subsequently put to:-use during a different year

Depreciation shall be calculated at the full rate in the year in which the asset has been put to use. The number of days for which the asset has been put to use during such year is irrelevant.

Example: ABC Ltd has purchased one P&M for Rs 10,00,000 on 01.04.2018 but it was put to use on 31.03.2020. In this case, no depreciation shall be allowed during PY 18-19. However, depreciation for PY 2019-20 shall be computed at the full rate of 15% even though the asset has been used for less than 180 days and the depreciation amount for PY 2019-20 would come out to Rs 1,50,000.

 

•      Meaning of 'PUT TO USE':

'Put to use' means making an asset ready for use (ie installing an asset so that it is ready to be used). Actual use of the asset is not necessary.

•               Amount on which depreciation is to be calculated {Section 43(6)}:

Opening WbV as on 1" April of the relevant PY	XXXX
Add:        Actual cost of assets purchased during the year (Meaning of 'actual cost' is given u/s 43(1)	XXXX
Less:        Sale value of assets sold/ Insurance claim in case of assets destroyed/ Scrap value in case of assets discarded	(XXXX)
Value of block of assets for the purpose of charging depreciation	XXXX
Less:         Depreciation for the relevant PY	(XXXX)
Opening WDV as on 1St April of the next PY	XXXX

 

•                                 Special point in respect of asset used for less than 180 days:

❑             If any asset in the block has been put to use for less than 180 days during the relevant PY, the actual cost of such asset shall be separated from the 'value of block of assets for the purpose of charging depreciation'. Depreciation on the actual cost so separated shall be charged at half rate. On the balance amount, depreciation shall be charged at the full rate.

❑             If the 'value of block of assets for the purpose of charging depreciation' is less than the actual cost of the asset used for less than 180 days, depreciation shall be charged at half rate on the entire 'value of block of assets for the purpose of depreciation'.

•                                 Special Cases:

❑             If    all  assets  in  the  block  have  been  sold/destroyed/discarded   and  there still remains some balance in the block, such balance would be treated as short term capital loss as per Section 50 and no depreciation shall be allowed on such balance. Further, such block would cease to exist with effect from next previous year. 

                      ❑           If there is negative balance in the block, such negative balance would be treated as short term capital gains as per Section 50. The opening WDV of block of    assets for the next previous year shall be taken to be 'NIL'.

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