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.
•
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'.
|
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.
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#MannerofCalculatingDepreciationunderIncomeTaxAct
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