What Is Depreciation?

Depreciation under Income Tax Act is the decline in the real value of a tangible asset because of
consumption, wear and tear or obsolescence. The concept of depreciation is used for the purpose of
writing off the cost of an asset against profit over its life.

Depreciation under Income Tax Act is charged against income and there are different methods of
calculating it like straight line method or written down value method. The Income-tax Act recognizes
WDV method of depreciating asset except for undertaking engaged in generation or generation and
distribution of power.

Block Of Assets- Concept

Block of assets is a group of assets falling within a class of assets comprising –

 Tangible assets, being building, machinery, plant or furniture,

 Intangible assets, being know how, patents, copyrights, trade-marks, licenses, franchises or
any other business or commercial rights of similar nature

Conditions For Claiming Depreciation

1. The assets must be owned, wholly or partly, by the assessee.

2. The asset should be actually used for the purpose of business or profession of the assessee.
If the assets are not used exclusively for the business of the assessee but for other purposes
as well, depreciation allowable would be proportionate to the use of business purpose.

3. Co-owners are entitled to claim depreciation to the extent of the value of the asset owned
by each co-owner.

4. Depreciation is not allowable on the cost of land.

5. Depreciation is mandatory from A.Y. 2002-03 and shall be allowed or deemed to have been
allowed irrespective of a claim made in the profit & loss account or not.

6. Where the asset is not exclusively used for the purpose of business or profession, the
depreciation shall be allowed proportionately with regards to such usage of assets (section
38).

Where the above conditions are not fulfilled, depreciation shall not be allowed.

Section 32(1) of the Act provides that depreciation is to be computed at the prescribed percentage
on the written down value of the asset which in turn is calculated with reference to the actual cost
of the assets. In the context of computing depreciation, it is important to understand the meaning of
the term ‘WDV’ & ‘Actual Cost’.

Written Down Value- Meaning

WDV under the Income Tax Act means:

 1. Where the asset is acquired in the previous year the actual cost of the asset shall be treated
as WDV.

2. Where the asset is acquired in earlier year WDV shall be equal to the actual cost incurred
less depreciation actually allowed under the Act.

Depreciation Allowed

 For all assessees other than Power Sector — Depreciation is calculated on written down the
value of “Block of Assets”, except for Power Sector, at rates prescribed.

 For Power Sector Assessees — In case of an undertaking engaged in generation or

generation and distribution of power, the depreciation will be allowed on actual cost (i.e. on
straight-line method) at the rates prescribed. Such undertaking, however, has an option to
claim depreciation on Written Down Value method at the rates provided in New Appendix I
if the assessee exercises such option before the due date of filing the return.

Depreciation allowable to predecessor and successor company in case of amalgamation or demerger

shall not exceed the amount of depreciation that would have been allowed as if there was no such
succession and the depreciation so computed shall be divided between the amalgamating and
amalgamated company or demerged and resulting company on the basis of number of days the
assets were used by such companies.

Accounting standard on a lease issued by ICAI requires capitalization of the assets by the lessees in
the financial lease transaction. In such leases, the lessee can exercise the rights of the owner in his
own right and hence depreciation is available to the lessee.

Methods of Depreciation Calculation

Methods of Depreciation and useful life of depreciable assets may vary for assets of different types
and different industries and may vary for accounting and taxation purposes also. Most commonly
employed methods of depreciation are Straight Line Method and Written down Value Method. One
of the basic differences in income tax depreciation calculation and companies act depreciation other
than rates of depreciation is a method of calculation.

Methods of depreciation as per Companies Act, 1956 (Based on Specified Rates):

 Straight Line Method

 Written Down Value Method

Methods of depreciation as per Companies Act, 2013 (Based on Useful Life of assets):

1. Straight Line Method

2. Written Down Value Method

3. Unit of Production Method

Methods of depreciation as per Income Tax Act, 1961 (Based on Specified Rates):
 1. Written Down Value Method (Block wise)

2. Straight Line Method for Power Generating Units

ADDITIONAL DEPRECIATION UNDER SECTION 32(1)(IIA)

Additional depreciation shall be allowed if following condition are fulfilled by the assessee:

1. Additional deprecation is allowed only on new machinery or plant excluding ships and
aircraft which has been purchased and installed after 31-03-2005

2. The assessee shall be engaged in the business of manufacturing and production of any
article or thing (computers used for data processing in industrial premises are eligible for
additional depreciation). From financial year 2016-17 additional depreciation is also allowed
to assessees engaged in business of generation and distribution of power.
Printing and Publishing is also considered as manufacturing.

3. Depreciation @ 20% of actual cost of assets is allowed as additional depreciation.

4. If assesse is engaged in production or manufacturer of any article or thing on or after 1st

Apr, 2015 in any notified backward area of Andhra Pradesh, Bihar, Telangana, West Bengal
and acquires and installs any new machinery or plant during 1st April, 2015 to 31st March
2020 then additional depreciation is allowed at the rate of 35%.

5. However if the asset is put to use for less than 180 days then additional deprecation will be
allowed at half of actual rate i.e 10% or 17.5% as the case may be.
From financial year 2015-16, if additional depreciation is allowed in year of put to use at half
of the rate then remaining half depreciation is allowed in the succeeding year.

6. Specific cases in which depreciation is not allowed

 Second hand plant and machinery – Plant and machinery which, before installation by
assessee, was used whether inside and outside India by any person.

 Any office appliance or road transport vehicle.

 Any machinery or plant installed in any office premises or any residential accommodation,
including accommodation in the nature of guest house

 Any plant and machinery, the whole of the actual cost of which is allowed as a deduction
(whether by way of depreciation or otherwise) in computing income chargeable under the
head “Profits and gains of business or profession” of any on previous year.

UNABSORBED DEPRECIATION

If there is a loss under business and profession and the reason for such loss is depreciation, then it is
called unabsorbed deprecation and it shall be allowed to be carried forward.

Additional Points
 1. The depreciation shall be carried forward even the business/profession to which is relate
even of the business/profession not in existence.

2. Return of loss is not required to be submitted for carry forward of unabsorbed depreciation

3. The assesse should set off brought forward losses in the following manner: –

1. First of all current year depreciation will be adjusted.

2. Then brought forward business losses will be set off (speculative or non-speculative)

3. Then unabsorbed depreciation will be set-off against business income.

4. Unabsorbed depreciation can be carried forward for indefinite number of years.

5. Unabsorbed depreciation can be set off from any head of income other than Salary and
Capital Gain in any year.

Analysis of AS-22 with reference to

Depreciation-
Deferred Tax is the tax effects of Timing Difference. The whole concept of deferred
tax is depending on timing difference.
Accounting income (loss) is the net profit or loss for a period, as reported in the
statement of profit and loss, before deducting income tax expense or adding income
tax saving.
Taxable income (tax loss) is the amount of the income (loss) for a period, determined
in accordance with the tax laws, based upon which income tax payable (recoverable)
is determined.
As per AS-22 Timing differences are the differences between taxable income and
accounting income for a period that originate in one period and are capable of
reversal in one or more subsequent periods.
Example: – An asset is purchased of Rs.1,00,000 having a useful life of 5 years and
allowed 100% depreciation under Income Tax Act. Profit before depreciation is
Rs.2,00000.
Rs. 20,000 (100,000/5) is allowed as depreciation while computing the accounting
income and Rs.1,00,000 is allowed as full depreciation in the year of purchase while
computing the taxable income.
Hence,
Accounting Income is Rs.1,80,000 (2,00,000-20,000)
Taxable Income is Rs.1,00,000 (2,00,000-1,00,000)
Hence, the difference between Accounting Income and Taxable Income is created in
this year and shall be created in a subsequent year (by the balance depreciation of
Rs. 80,000=1,00,000-20,000) because in subsequent years, while computing the
accounting income the entity shall deduct the depreciation of Rs. 20,000 but nil
depreciation shall be allowed while computing the taxable income. This is called
timing difference.