Depreciation under the income tax act, 1961 Section 32

Depreciation  as per income tax act shall be determined according to the provisions of section 32. Income tax act Section 32 provides for depreciation on -

Tangible assets: Building, Machinery, Plant and Furniture.

Intangible assets: Know how, Copyright, Trade Mark, Patent, Licence, Franchise, or any other business or commercial right of the similar nature acquired on or after 1/4/1998 However, it does not include goodwill.

Depreciation under income tax act, 1961 | Depression rates income tax act 

Conditions for claiming depreciation:

Depreciation is allowed give the following conditions are satisfied:

Condition one: Asset must be owned by the  assessee or taxpayer.

(1) Beneficial owner: Assessee need not be a registered owner, even a beneficial owner can claim depreciation.

(2) Co-owner: In case of joint ownership,  depreciation is allowed on proportionate basis.

(3) Property acquired on hire purchase: In case of hire purchase, the buyer can claim depreciation even though he does not get legal title of the asset till he pays the last instalment.

(4) Capital expenditure on a property by the lessee: Where an assessee being a lessee of a property incurs any capital expenditure by way of improvement, extension, super construction, etc. on a building being used for the purpose of his business or profession, he is entitled to depreciation in respect of such capital expenditure (assets).

(5)  Section 53A of Transfer of Property Act: Possessor of an immovable property under section 53A of Transfer of Property Act can claim depreciation even though he is not the registered owner of the property.

Condition two: Asset must be used for the purpose of business or profession during the previous year.

(1) Passive use -vs.- Active use: Use includes active use as well as passive use. Active use means actual use of the property or assets for the purpose of business or profession. Whereas passive use includes “ready to use”. It means, if a property was not actually used for business or profession but was ready to use in the previous year, in such case, assessee can claim depreciation on such assets.

(2) Partly used for business or profession: As per section 38, if an asset is partly used for business or profession and partly used for personal purpose, then proportionate depreciation (as ascertained by the Assessing Officer) shall be allowed.

(3) House property let out to tenant for smooth running of the business: If an assessee lets out a property to his employee and where such letting-out supports smooth flow of his business, then rent received from employee shall be chargeable under the head “Profits & gains of business or profession” and such property shall be eligible for depreciation under section 32. Similarly, where an assessee makes available his property to any Government agency for locating branch of a nationalized bank, police station, post office, tax office, railway staff quarters, etc. for the purpose of running the business of assessee more efficiently, then such letting out shall be deemed to be incidental to business and depreciation on such building shall be allowed under section 32.

Method of computing depreciation (other than power units) as per income tax act:

The method of computing depreciation as per Income tax Act is completely different from accountancy method. Income tax depreciation method and accountancy depreciation method not same. For Income tax purpose, depreciable assets are categorised into Block of Assets.

Block of Assets [Section 2(11)]

The meaning of Block of assets is a group of assets of same nature, in respect of which same rate of depreciation is charged. In other words, to fall in the same block, the according two important conditions are to be satisfied:

• Assets or property must be of same nature; Tangible assets being building, plant and machinery, machinery, plant or furniture, and Intangible assets, being know-how, copy-rights, trade marks, patents, licenses, franchises or any other business or commercial rights of equivalent nature acquired on or after 1-4-1998 (it does not include goodwill); 

• Rate of depreciation on such asset or property must be same.

Method of Depreciation:

Income tax act Depreciation shall be allowed on written down value (WDV) method at the rates prescribed. Calculation of depreciation (at a glance):

W.D.V (written down value) of the block at the beginning of the previous year ***

Add: Assets or property (falling within the block) acquired during the previous year ***

Less: Sale Proceeds of assets or property (falling within the block) sold during the previous year ***

Less: Depreciation ***

Opening WDV (written down value) for 1st day of next year ***

When depreciation is not charged:

Depreciation is not charged given the following two cases:

1) When Sale proceeds exceeds, the excess shall be treated as short term capital gain.

2) When Value of block before depreciation is positive but the block does not have any asset. In such case, such positive value (loss) shall be treated as short term capital loss.

Significance of date of purchase of assets (Effect of time on depreciation)

Where - 

a) an asset is acquired and obtained by the assessee during the previous year; and,

b) assets is put to use in the same previous year for less than 180 days, 

- the depreciation in respect of such asset is restricted to 50% of the normal depreciation. 

Except above, date of purchase has no relevance. 

Taxpoint: There is no significance of date of sale of assets for computation of depreciation.

Extract of depreciation-rate:

• Buildings 5%: Residential building other than hotels and boarding.
• Buildings 10%: Non residential building, godown, office, factory, etc. including hotels and boarding. 
• Buildings 40%: Temporary construction.
• Furniture 10%: Any furniture including electrical fittings.
• Plant/Machinery 20%: Ocean going ships, vessels, speed boats.
• Plant/Machinery 30% Motor car (including lorries and buses) used for hiring purposes.
• Plant/Machinery 30%: Motor car, other than used in a business of running them on hire, acquired and put to use between 23-08-2019 and 31-03-2020.
• Plant/Machinery 45%: Motor buses, motor lorries and motor taxis used in a business of running them on hire, acquired and put to use between 23-08-2019 and 31-03-2020.
• Plant/Machinery 40%: Computer including computer software Books owned by a professional.
• Plant/Machinery 40%: Air or water pollution control equipment.
• Plant/Machinery 15%: Oil Wells.
• Plant/Machinery 15%: In general (if nothing is mentioned regarding nature of plant & machinery and including motor car not used for hiring purpose).
• Intangible assets 25%: Acquired after 31/3/98

Notes:

1. Buildings include roads, bridges, culverts, wells (excluding oil wells) and tube wells.

2. Plant does not include tea bushes or live stocks or buildings or furniture & fittings.

3. Patent, Know-how, Copy-rights, Trade-mark, Licences, Franchises and other business or commercial right of similar nature (it does not include goodwill).