Section 32 DEPRECIATION IN CASE OF POWER GENERATING UNITS

Choice of WDV/ SLM

•                   Assessee engaged in the business of generation or generation and distribution of power shall have the option to claim depreciation as per:

❑          SLM method on each asset; or

❑          WDV method on block of assets

•                   Where the assessee has opted for °SLM method on each asset°, the following points also need to be taken care of:

❑          Depreciation shall be calculated at half rate if the asset is put to use for less than 180 days in the year of acquisition.

❑          Additional depreciation shall not be available (ie additional depreciation is available only where WDV method on block of assets is followed)

❑          Rates of depreciation shall be prescribed separately under the Income Tax Act.

Treatment in case of Asset

Where the assessee has opted for 'SLM method on each asset', tax treatment at the time of sale of asset shall be as follows:

•        If the sale price of the asset is less than its WDV:

The difference between the sale price and WDV shall be allowed to be debited to the P&L A/c (such difference is referred to as terminal depreciation).

•                   If the sale price of the asset is more than its WDV but sale price of the asset does not exceed the actual cost of the asset:

The difference between the sale price and WDV/ shall be taxable as income u/h PGBP as per Section 41(2) (such income is referred to as 'balancing charge).

•                   If the sale price of the asset is more than its WDV and sale price of the asset also exceeds the actual cost of the asset:

❑          The difference between the actual cost of the asset and its WDV shall be taxable as income u/h PGBP as per Section 41(2) (such income is called as 'balancing charge').

❑          The difference between the sale price of the asset and its actual cost shall be taxable as capital gains as per Section 50A.

Examples

Tata Power Ltd is a power generating unit and the company has purchased one P&M on 01.06.2015 for Rs 20 lakhs and the same was put to use on 01.12.2015.

The company has opted to follow SLM method and the rate of depreciation prescribed under the Income Tax Act is 8.4%. In this case, the depreciation amount shall be:

Ø  For PY 2015-16: 20,00,000 x 8.4% x 50% = Rs 84,000

Ø  For PY 2016-17: 20,00,000 x 8.4% = Rs 1,68,000

Ø  For PY 2017-18: 20,00,000 x 8.4% = Rs 1,68,000

Let's assume that this P&M has been sold on 01.11.2018. WDV of this P&M as on 01.04.2018 is Rs 15,80,000.

•                   Case 1: The plant has been sold for Rs 9,00,000:

The difference of Rs 6,80,000 [Rs 15,80,000 (-) Rs 9,00,0003 shall be debited to P& L A/c as terminal depreciation.

•                   Case 2: The plant has been sold for Rs 18,00,000:

In this case, the difference of Rs 2,20,000 (Rs 18,00,000 (-) Rs 15,80,000] shall be termed as balancing charge and would be deemed to be the PGBP income of the company u/s 41(2).

•                   Case 3: The plant has been sold for Rs 23,00,000:

In this case, Rs 4,20,000 shall be termed as balancing charge and would be deemed to be the PGBP income of the company u/s 41(2). Rs 3,00,000 (Rs 23L - Rs 20L) would be treated as STCG u/s 50A.

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