SUBJECT: Taxation laws – i

Project topic:
Depreciation allowance

Submitted By
Akhil Pratap singh
Roll no. 1305.
4 Year , 7 Semester, B.A.LL.B(Hons.)
TH th

Submitted to
Dr. G. p. pandey
Faculty of taxation Laws- I

Chanakya national Law University, Patna

September, 2017
 Acknowledgement

I have taken efforts in this project. However, it would not have been possible without the kind
support and help of many individuals and therefore I would like to extend my sincere thanks
to all of them.

First of all I would like to express my special thanks of gratitude to my teacher Dr. G.P.
Pandey who gave me the golden opportunity to do this wonderful project on the topic
Depreciation Allowance, which also helped me in doing a lot of Research and I came to know
about so many new things I am really thankful to them.

I acknowledge my friends who gave their valuable and meticulous advice which was very
useful and could not be ignored in writing the project. I want to convey most sincere thanks
to my 5th year senior Mr. Utkarsh Shukla, for helping me throughout the project.

I would also like to express my gratitude towards my parents for their kind co-operation and
encouragement which always help me in becoming productive.

Thank You All!

Akhil Pratap Singh

R.No. 1305, Sem VII

B.A. LL.B. (H)

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 Contents

Acknowledgement ..................................................................................................................... 2

Research Methodology .............................................................................................................. 4

Chapter 1. What is Depreciation Allowance? ............................................................................ 6

Depreciation ........................................................................................................................... 6

Development Rebate .............................................................................................................. 8

Additional Depreciation Under Section 32(1)(iia)................................................................. 9

Carry forward of Unabsorbed Depreciation......................................................................... 11

Calculation of Depreciation ................................................................................................. 12

Chapter 2. Conditions .............................................................................................................. 15

Chapter 3. Case Laws............................................................................................................... 18

Additional Depreciation ....................................................................................................... 18

Carry Forward ...................................................................................................................... 19

Goodwill Issue ..................................................................................................................... 20

Other issues .......................................................................................................................... 22

Chapter 4. Conclusion.............................................................................................................. 24

Bibliography............................................................................................................................. 25

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 Research Methodology

Aims and Objectives:

The researcher intends to research on:

• The basic meaning of Depreciation Allowance with the help of legal provisions given
under Taxation Laws.
• Various conditions for claiming Depreciation Allowance

Hypothesis:
The researcher is of the view that whatever assets are used by any company or individual or
any entity liable for tax under Income Tax laws exclusively for the purposes of its business, if
they loose their value with time then they may claim depreciation allowance.

Methodology Adopted
The researcher has preferred doctrinal method of research. The topic “Depreciation
Allowance” will require me to access CNLU library and various authenticated websites on
internet.

Sources of Data
Primary Sources: Laws, Acts.

Secondary Sources: Books, Newspapers, Articles, Journals

Mode of Citation
The researcher has followed a uniform mode of citation throughout the course of this project.

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Chapterisation:
Chapter 1. What is Depreciation Allowance?

Chapter 2. Conditions for Depreciation Allowance.

Chapter 3. Caselaws

Chapter 4. Conclusion

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 Chapter 1. What is Depreciation Allowance?

Depreciation
As a building gets older and items within it wear out, they depreciate in value. Similarly in a
business, various assets depreciate in their value with passage of time. This depreciation in
value of assets can be claimed by any owner of an income-producing property as depreciation
allowance. Depreciation is an allowance on capital assets acquired and put to use and not on
expenditure unlike repairs to machinery, plant or furniture. It need not be incurred by the
assessee during the previous year. The depreciation allowance has to be calculated on the
assets of the assessee as per the methods and rates prescribed under the income tax law.
Depreciation is the allocation of the cost of an asset over its useful life. There are different
methods of computing depreciation. For income tax purposes, the method to be adopted by
all assessees is the written down value (WDV) method, unless it is an asset of an undertaking
engaged in generation or generation and distribution of power, in which case, the actual cost
method is used.

Depreciation allowance is one of the deductions allowed from business or professional

income chargeable under section 28 1 or other income chargeable under section 56(2)(ii) or
56(2)(iii) of the Income Tax Act, 1961.

As per section 32 of the Income Tax Act, 1961, depreciation is allowed on tangible assets and
intangible assets owned, wholly or partly, by the assessee and used for the purposes of
business or profession.2

Bare Provision: Section 32 of Income Tax Act, 1961 (‘Act’) provides for depreciation.
Section 32(1)3 provides that depreciation in respect of

i. buildings, machinery, plant or furniture, being tangible assets;

ii. know-how, patents, copyrights, trademarks, licenses, franchises or any other business or
commercial rights of similar nature, being intangible assets acquired on or after the 1st day of

1 S. 28, Income Tax Act, 1961

2 Depreciation Allowance, accessed at http://www.incometaxindia.gov.in, last seen on 31/10/2017
3 S. 32(1), Income Tax Act, 1961

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April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the
business or profession, the following deductions shall be allowed

i. in the case of assets of an undertaking engaged in generation or generation and

distribution of power, such percentage on the actual cost thereof to the assessee as
may be prescribed;
ii. in the case of any block of assets, such percentage on the written down value thereof
as may be prescribed.

Explanations:

If there are some spare parts/machines and they are not actually used, depreciation is
allowable on them because they are used for purpose of business/profession.

Depreciation is allowable as expense in Income Tax Act, 1961 on basis of block of assets on
Written Down Value (WDV) method. Depreciation on Straight Line Method (SLM) is not
allowed.

Block of assets means group of assets falling within a class of assets for which same rate of
depreciation is prescribed. Block of asset has been defined under Section 2(11).4

As per section 2(11) of the Income Tax Act, 1961, “block of asset” means a group of assets
falling within a class of assets comprising –

a. Tangible assets, being buildings, machinery, plant or furniture,

b. Intangible assets, being know-how, patents, copyrights, trademarks, licences,

franchises, or any other business or commercial rights of similar nature, in respect of
which the same percentage of depreciation is prescribed.

For the purpose of classification of assets into blocks, the percentage of depreciation within
the class of assets needs to be considered. Each such class of asset with same percentage of
depreciation will be identified as a block of asset. 5

Similarly as per Explanation 3 of S.32(1)6 , For the purposes of this sub-section, the
expression “assets” shall mean—

4 S. 2(11), Income Tax Act, 1961

5 Supra at 2.
6 S. 32(1), Income Tax Act, 1961

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 a) tangible assets, being buildings, machinery, plant or furniture;
b) intangible assets, being know-how, patents, copyrights, trademarks, licences,
franchises or any other business or commercial rights of similar nature. 7

Explanation 4- For the purposes of this sub-section, the expression “know-how” means any
industrial information or technique likely to assist in the manufacture or processing of goods
or in the working of a mine, oil-well or other sources of mineral deposits (including searching
for discovery or testing of deposits for the winning of access thereto). 8

It's important to remember that depreciation is just an accounting mechanism to show the
expense of using an asset over time. It doesn't have anything to do with how you purchased
the item or its real physical condition.

Goodwill and Land is not eligible for depreciation.

Depreciation is allowable only to the owner of the asset.

• A lessee is not the owner of the property therefore depreciation is allowed only to
lessor. If furniture or any part is constructed by the lessee then depreciation on that is
allowed to lessee.
• If property purchased under hire purchase contract then depreciation is allowed to the
purchaser.
• In case of co-ownership, depreciation is allowable in ratio of their ownership.

Development Rebate 9
S.33(1)(a) provides for extention of concept of depreciation allowance. It deals with
development rebate. It says, in respect of a new ship or new machinery or plant (other than
office appliances or road transport vehicles) which is owned by the assessee and is wholly
used for the purposes of the business carried on by him, there shall, in accordance with and
subject to the provisions of this section and of section 34, be allowed a deduction, in respect
of the previous year in which the ship was acquired or the machinery or plant was installed
or, if the ship, machinery or plant is first put to use in the immediately succeeding previous

7 Supra at 2.
8 Ibid.
9 S.33, Income Tax Act,1961

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year, then, in respect of that previous year, a sum by way of development rebate as specified
in clause (b). Clause (b) lays down certain fixed amounts of deductions that are allowed in
specific cases.

Mandatory claim of depreciation

As per explanation 5 to section 32(1)10 , the depreciation deduction 32(1) in respect of both
tangible and intangible assets shall apply whether or not the assesse has claimed the
deduction in computing his total income.

Additional Depreciation Under Section 32(1)(iia)11

Section 32 of Income Tax Act,1961 deals with the method of calculating depreciation for the
purpose of income tax. Section 32(1)(iia) was originally inserted by Finance Act, 1980 which
came into effect from 01.04.1981, for giving additional depreciation. The said section was
omitted by Taxation Laws (Amendment and Miscellaneous Provisions), Act, 1986 with effect
from 01.04.1988. Again the said section was inserted by Finance Act, 2002 with effect from
01.04.2003. Vide Finance Act, 2006, the said section was newly substituted with effect from
01.04.2006.

Bare Provision: The newly substituted section 32 (1)(iia) provides for additional depreciation
in the case of any new machinery and plant, other than ships and aircraft. Such machinery
and plant have to be acquired and installed after 31.03.2005 by the assessee engaged in the-

• business of manufacture; or

• production of any article or a thing or

• in the business of generation or generation and distribution of power (inserted

vide Finance Act, 2013 with effect from 01.04.2013)

to avail such depreciation. The depreciation is eligible for a further sum equal to 20% of the
actual cost of such machinery or plant. 12

10 S. 32(1), Income Tax Act, 1961

11 S. 32(1)(iia), Income Tax Act, 1961

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In other words, if an assessee is engaged in the business of manufacture or production of any
article or thing or in the business of generation or generation and distribution of power, an
additional depreciation of 20% of the actual cost of new machinery or plant (other than ships
and aircrafts) shall be allowed as deduction.

Additional depreciation shall be allowed if following conditions are fulfilled by the

assessee13 :

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.

Specific cases in which depreciation is not allowed14

• 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.

12 Supra at 2.
13 Additional Depreciation, accessed at
http://saiindia.gov.in/sites/default/files/audit_report_files/Union_Performance_Direct_Tax_Revenue_Dept_Allo
wance, last seen on 31/10/2017
14 Additional Depreciation, accessed at https://www.bmtqs.com.au/documents , last seen on 31/10/2017

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 • 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.

Carry forward of Unabsorbed Depreciation

Provisions under section 32(2)15 of the Act In case the depreciation claim for the current year
is in excess of the profits and gains of that year, the balance/excess can be carried forward to
the subsequent years for an indefinite period. The carried forward unabsorbed depreciation
can be set-off as per section 72(2) & 72(3)16 . The treatment of unabsorbed depreciation in
case of amalgamation or demerger is governed by section 72A.

Special Bench, Mumbai Tribunal in the case of Times Guaranty Ltd 17 held that the
unabsorbed depreciation relating to respective period can be set off in accordance with the
provisions of section 32(2) as applicable to that period and not in accordance to the
provisions applicable in year of set off.

BUT, at present, various Courts/Tribunals have held that the decision of Times Guaranty is
not good in law and the benefit of set off of unabsorbed depreciation should be allowed
indefinitely irrespective of the year of incurrence of depreciation after the amendment made
to the section by Finance Act 2001.18

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.

15 S. 32(2), Income Tax Act, 1961

16 S. 72(2), S.73(3), Income Tax Act, 1961
17 2002 (64) DRJ 517
18 Additional Depreciation, accessed at

http://saiindia.gov.in/sites/default/files/audit_report_files/Union_Performance_Direct_Tax_Revenue_De pt_Allo
wance, last seen on 31/10/2017

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Additional Points 19

1. The depreciation shall be carried forward even the business/pro fession 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 assessee 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.

Example:

Profit from business before depreciation = 4,00,000

Depreciation = 6,00,000, therefore, Unabsorbed depreciation = 2,00,000

Calculation of Depreciation
Written Down Value Method20

WDV Method- Allowed method under Income Tax Act,1961.

This method involves applying the depreciation rate on the Net Book Value (NBV) of asset.
In this method NBV will never be zero. In this method, depreciation of the asset is done at a
constant rate and depreciation charges reduce each successive period. This method should be
used in those assets, where high depreciation should be charged in initial years.

Formula is, Depreciation per year = (1/N) Previous year’s value, Where N= No. of years

19 Unabsorbed Depreciation, accessed at https://www.bmtqs.com.au/documents, last seen on 31/10/2017

20 Written Down Value, accessed at https://www.accountingtools.com/articles/written-down-value-depreciation,
last seen on 31/10/2017

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Example: Assume the price of a depreciable asset i.e. computer is Rs. 40,000 and its salvage
value after 10 years is 0. So in present example, the depreciation amount during the first year
is = [Rs. 40,000*1/10] =Rs. 4,000

NBV of computer after 1st year= Rs 40,000- 4,000 = Rs. 36,000

Depreciation for 2nd year is = [Rs. 36,000*1/10] =Rs. 3,600

In other terms the method of calculation can be summed up as follows:

• WDV of an asset = Actual cost to the assesse – All depreciation actually allowed to
him (included unabsorbed depreciation, if any)

• WDV of Block of Assets

a. Aggregate of WDV of all the assets falling within that block at the beginning
of the year

b. Add: Actual cost of any assets falling within block acquired during the
previous year

c. Less: Money received or receivable in respect of any asset in the block which
is sold, discarded, demolished or destroyed during the previous year

d. WDV at the end of the

e. Less: Depreciation at block rate (if WDV at the end of year is positive)

f. Closing value of the block of the asset at the end of the year

If the amount of WDV comes at a negative amount then no depreciation is allowed and the
amount will be considered as capital gain and the closing WDV will be zero.

If such amount is positive and no asset exists in the block then such amount will be treated as
short term capital loss and no depreciation is allowed.

Straight Line Method (SLM) 21

This is the simple method of depreciation. But is NOT allowed under Indian Income Tax Act,
1961.Except in the case of assets of an undertaking engaged in generation or generation and
distribution of power.

21 StraightLine Method, accessed at https://www.accountingtools.com/articles/straight-line-depreciation, last

seen on 31/10/2017

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 It charges equal amount of depreciation each year over useful life of asset. It first add up all
the costs incurred to bring the asset in use and then it divides that by the useful life of asset in
years to calculate the depreciation expense.

E.g.: Say a Computer costs Rs. 30,000 and Rs. 11,000 (as additional set up /installation/
maintenance expenses) = Rs 41,000 and it is anticipated that its scrap value will be Rs. 1,000
at the end of its useful life, of say, 5 yrs.

Total Cost = Cost of Computer + Installation Exp. + Other Direct Costs

• 30,000 +11,000 =41,000 (Total cost)

Depreciable Amount over No. of years = Total Cost – Salvage Value (At end of useful life)

• 41,000 – 1,000 = 40,000 as the Depreciable Amount

Depreciable Amount = Rs. 40,000, Spread out over 5 years = Rs. 40,000/5(Yrs) = Rs. 8000/-
depreciation per annum.

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 Chapter 2. Conditions

Ownership22 : Owned wholly or partly by the assesse. Even fractional ownership is

recognised for the claim of depreciation. Depreciation is allowable only to the owner of the
asset.

• A lessee is not the owner of the property therefore depreciation is allowed only to
lessor. If furniture or any part is constructed by the lessee then depreciation on that is
allowed to lessee.

• If property purchased under hire purchase contract then depreciation is allowed to the
purchaser.

• In case of co-ownership, depreciation is allowable in ratio of their ownership.

Goodwill and Land are not eligible for depreciation.

Usage 23 :

• Asset must be used for the purpose of business or profession Depreciation is allowed
so long as the block is in use or available.
• Usage includes ‘passive use’ or ‘potential use’ and not necessarily ‘actual use’ Used
during the relevant year. Only exception is where the whole factory or unit is closed
for the whole year.
• If there are some spare parts/machines and they are not actually used, depreciation is
allowable on them because they are used for purpose of business/profession.

Nature of Asset24 :

• Asset must fall under the eligible class of asset.- Tangible assets – building,
machinery, plant or furniture • Intangible assets – know-how, patents, copyrights,
licenses, franchises or any other similar business or commercial rights .

22 DepreciationAllowance, Conditions for claiming Allowance, accessed at https://www.ird.govt.in/, last seen

on 01/10/2017
23 Ibid.
24 Depreciation Allowance, Conditions for claiming Allowance, accessed at http://www.nipfp.org.in , last seen

on 01/10/2017

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 • Depreciation can be claimed only on a block of asset and not on individual assets.
• If a new addition is made in a existing asset then it is consider as an asset if it increase
the capacity of the existing asset or reduce per unit cost otherwise it should be treated
as an expense.
• Where the business or profession of the assessee is carried on in a building not owned
by him but in respect of which the assessee holds a lease or other right of occupancy
and any capital expenditure is incurred by the assessee for the purposes of the
business or profession on the construction of any structure or doing of any work in or
in relation to, and by way of renovation or extension of, or improvement to, the
building, then, the provisions of this clause shall apply as if the said structure or work
is a building owned by the assessee.

Calculation:

• Depreciation is calculated from the date the asset being put to use and not the from the
date of acquisition or ready to use;
• Depreciation shall be calculated only on WDV basis. − Provided, in case of
undertaking engaged in generation and distribution of power, SLM method may be
adopted.
• In case where an asset acquired during the previous year, is put to use for a period of
less than 180 days during that previous year, depreciation on such asset shall be
restricted to 50% of the amount calculated at the percentage prescribed.

Mandatory Allowance: Depreciation is a mandatory allowance for all persons engaged in

business/ profession. If the assesse doesn’t claim the amount of depreciation as deduction,
even then the amount of WDV carried forward to next year is reduced by the depreciation
amount.

No deduction25 shall be allowed under this clause in respect of—

(a) any motor car manufactured outside India, where such motor car is acquired by the
assessee after the 28th day of February, 1975 but before the 1st day of April, 2001, unless it
is used- (i) in a business of running it on hire for tourists ; or

(ii) outside India in his business or profession in another country ; and

25 Supra at 2.

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(b) Prospecting Business: No depreciation allowance under section 32 in the case of business
for prospecting etc. for mineral oil on machinery or plant: Section 42 No deduction under
section 32 shall be allowed in respect of any machinery or plant if actual cost thereof is
allowed as a deduction in one or more years under an agreement entered into by the Central
Government under section 42.

Other exceptions:

• Capital expenditure on leased premises

• Beneficial ownership
• Leasing transactions Used for the purpose of business

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 Chapter 3. Case Laws
Additional Depreciation
‘Deputy Commissioner of Income Tax V. J.K. Cement’26

The assessee installed and put to use power generating units at two places which were captive
use and power so generated was mainly in manufacturing of units at these two places. Since
the power units were for captive use and power so generated was used in manufacturing of
cement the assessee claimed additional depreciation under Section 32(1)(iia) of the Act and
the same was allowed by the Assessing Officer. The assessment year in this case is 2008 –
09.

Subsequently the assessee received a notice from the Department under Section 154 in which
the assessee was required to show cause as to why additional depreciation allowed earlier
under Section 32(1)(iia) of the Act attributable to the power generating units not be
withdrawn on the ground that since the electricity being not an item which has to be termed
as manufacturing of production of any article or thing additional depreciation granted on
plant and machinery used for generation or distribution of power is not allowable. Further
the Revenue indicated that the expression ‘in the business of generation or generation and
distribution of power’ has been inserted by the Finance Act, 2012 only with effect from April
1, 2013.

The assessee filed a reply contending that the additional depreciation on power units was
rightly allowed and it did not call for any interference under Section 154 of the Act. The
Assessing Officer did not accept the same and disallowed the additional depreciation of ₹
31.53 crores.

The assessee filed an appeal before the Commissioner (Appeals). Before the Commissioner
(Appeals) the assessee contended that generation of electricity is akin to manufacturing of a
product. The electricity is intangible and its effect can be seen and felt, transferred,
delivered, stored, processed etc., The Commissioner (Appeals) held that the assessee is
entitled for additional depreciation and deleted the addition.

26 2016 (1) TMI 351

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Carry Forward
‘Brakes India Limited V. Deputy Commissioner of Income Tax’27

The assessee had claimed additional depreciation to the tune of ₹ 6.08 crores under Section
32(1)(iia) of the Act @ 10% (50% of 20%) in respect of second half addition made to plant
and machinery during the preceding assessment year 2007 – 08. The assessee has claimed
the balance 10% of additional depreciation in the next assessment year. The Assessing
Officer observed that there is no provision in the Act permitting the balance depreciation to
be allowed in the succeeding year.

The assessee preferred appeal against the order before the Commissioner (Appeals). The
Commissioner (Appeals) analyzed the provisions of Section 32(1)(iia). First requirement for
being eligible for such a claim is that it should be on a new machinery or plant. Once it is
used, it is no longer new machinery. In this case the machinery, on which carried forward
depreciation has been claimed, was already used in the preceding financial year though for a
period of less than 180 days. Therefore for the impugned assessment year, it is no more a
new machinery or plant. Once it is not a new machinery or plant, allowance under Section
32(1)(iia) cannot be allowed to it. Hence carry forward of any deficit additional depreciation
is not allowed. The intention of the Legislature was to give such additional depreciation for
the year in which the assets were put to use and not for any succeeding year. There is nothing
in the statute which allows carry forward of such depreciation. The Tribunal dismissed the
appeal of the assessee. The appellant filed appeal before High Court which also dismissed
the appeal upholding the order of the Tribunal.

The above case law is against to carry forward the balance depreciation to the subsequent
years. But the following two cases laws are in favor of carry forward the depreciation to the
subsequent financial years.

‘Commissioner of Income Tax and another V. Rittal India Private Limited’ 28 - Karnataka
High Court

The assessee was an existing industrial undertaking when it had acquired and installed new
plant and machinery in the financial year 2006-07 and claimed 50% of addition 20%
depreciation under Section 32(1)(iia) of the Act in the corresponding assessment year 2007 –

27 2016 (8) TMI 745

28 2016 (1) TMI 81

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08. This was so claimed because the new machinery was acquired after 01.10.2006 and
before 31.03.2007 thereby it was put to use for the purpose of business for a period of less
than 180 days.

The Assessing Officer, as well as the Appellate Commissioner, disallowed the claim of the
assessee, whereas the Tribunal has allowed the appeal of the assessee. The Revenue was on
the move to the High Court. The dispute in the present appeal is with regard to the
allowance of the balance 10% depreciation in the next assessment year so that the benefit of
the total 20% allowable depreciation under Section 32(1)(iia) of the Act was given.

The High Court held that the language used in clause (iia) of the said section clearly provides
that a further sum equal to 20% of the actual cost of such machinery or plant shall be allowed
as deduction under clause (ii). The word ‘shall’ used in the said clause is very significant.
The benefit which is to be granted is 20% additional depreciation. By virtue of the proviso,
only 10% can be claimed in one year, if plant and machinery is put to use for less than 180
days in the said financial year. Therefore the balance 10% additional depreciation can be
availed in the succeeding financial year. The High Court held that additional depreciation
allowed under Section 32(1)(iia) of the Act is a onetime benefit to encourage industrialization
and the provisions related to it have to be construed reasonably, liberally and purposively to
make the provision meaningful while granting the additional allowance. The High Court
dismissed the appeal of the revenue.

Goodwill Issue
Supreme Court in the case of Smifs Securities 29 has held that `Goodwill' is an asset under
Explanation 3(b) to Section 32(1) of the Act and is eligible for depreciation.

Facts: Pursuant to a scheme of Amalgamation, assets and liabilities of YSN Shares &
Securities (P) Ltd were transferred to and vested in the assessee company. The excess
consideration paid by the assessee company over the value of net assets acquired was termed
as ‘goodwill’. The extra consideration was paid towards the reputation of amalgamating
Company in order to retain its existing clientele.

29 342 ITR 302 (SC)

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Held: Goodwill would fall under the expression `any other business or commercial right of a
similar nature'. The principle of ejusdem generis would strictly apply while interpreting the
aforesaid expression which finds place in Explanation 3(b)

Various Tribunals and Courts by following the decision of Supreme Court in the case of Smif
Securities has held that depreciation is allowable on goodwill.

CIT v. Hindustan Coca Cola Beverages Pvt. Ltd., Income Tax 30

Facts: 1. Hindustan Coca Cola Beverages Pvt. Ltd. (the Taxpayer) was engaged in the
business of manufacturing and trading of non-alcoholic beverages. The taxpayer acquired a
business for a slump price on a going concern basis and allocated a part of the price towards
goodwill in its books of account. The price was paid for marketing and trading reputation,
trading style and name, territory know-how, customer database, distribution network,
contracts and other commercial rights.

2. The taxpayer claimed depreciation on the understanding that the consideration was paid to
acquire certain commercial rights which are in the nature of intangible capital assets. Such
intangible assets were termed as goodwill by the taxpayer in its books of account. The
Assessing Officer (the AO) accepted the depreciation claim of the taxpayer.

3. However, the Commissioner (appellate authority) directed the AO to revise the assessment
on the basis that goodwill generated in a business cannot be described as an asset entitled to
depreciation under the Income Tax Act, 1961 (the Act). Further, the appellate authority was
of the view that the depreciation provision in the Act did not include goodwill as an
intangible asset. Aggrieved by this order, the Taxpayer preferred an appeal before the Delhi
Income Tax Appellate Tribunal (the Tribunal), which held in favour of the Taxpayer. Being
dissatisfied with the Tribunals order, the Commissioner filed an appeal before the DHC.

Held: The DHC held that goodwill in the Taxpayer’s case was in substance similar to tangible
assets. It included industrial information like database of the territory relating to customer
preferences, distribution networks, etc. Hence, in effect it was know-how. The nomenclature
given to the entries in the books of accounts was not relevant for ascertaining the real nature
of the transaction. The accounting treatment of a payment per se could not govern its
treatment in income tax proceedings. The DHC held that non-monetary assets could not be

30 Appeal No.1391/2010

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seen or touched or physically measured, but were created. Goodwill, when understood in this
sense, did convey a positive reputation built by a person over a period of time. Depreciation
should not be denied merely on the ground that the assets were classified as goodwill in the
books of account.

But contrary to these decisions, ITAT has ruled that Goodwills cannot be considered for
depreciation in the case of United Breweries Ltd. V ACIT31

Facts: The company merged with three of its subsidiaries and had accounted Goodwill being
the difference between consideration paid and the fair value of net assets taken over. The
Assessing Officer disallowed the depreciation on Goodwill on the ground that there is no
Goodwill if proper valuation is assigned to the tangible asset and land. CIT(A) upheld the
decision of Assessing Officer.

Held: As per fifth proviso to Section 32(1)(ii) of the Act, the depreciation allowable to
amalgamated and amalgamating company shall by the deduction calculated at prescribed
rates as if the amalgamation had not taken place. Reference drawn to explanation 3 of section
43(1) of the Act, where-in the Assessing Officer, if not satisfied with the valuation of assets
transferred, can determine the value of such assets. The ITAT held that depreciation could not
be allowed on Goodwill recorded pursuant to amalgamation of subsidiary into the company,
but restricted the depreciation on Goodwill to the extent the same was available to the
amalgamating company.

Bottomline: Though many decisions in favour of Goodwill have come, still the decision of
ITAT has not been overruled by Supreme Court, that means the supreme court is trying to
keep the basic rule theoretically whereas changing its application.

Other issues
Sri Chamundeshwari Sugar Ltd32

Defective machineries found during trial run – Whether depreciation is allowable on

machineries which were brought for business purpose and found to be defective after the trial
installation.

31 ITA No. 722/Bang/2014

32 223 CTR 423

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Held, Yes. The defective machineries cannot be said that they were not for business purposes.
Hence, the claim is allowable.

Mahendra Mills Case 33

It was held that the assessee has an option to claim depreciation. In other words, if the
assessee does not wish to avail of the benefit of depreciation for some reason, it cannot be
forced upon him. To remedy this situation, the Act was amended and Explanation 5 to
Section 32(1) was inserted by the Finance Act 2001 w.e.f. 1 April 2002, which lays down that
depreciation shall be granted whether or not the assessee claims the same i.e: the assessee
does not have an option to claim depreciation.

33 243 ITR 56 (SC)

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 Chapter 4. Conclusion

Thus it can be concluded that, depreciation is the process by which a company allocates an
asset's cost over the duration of its useful life. Each time a company prepares its financial
statements, it records a depreciation expense to allocate a portion of the cost of the buildings,
machines or equipment it has purchased to the current fiscal year. The purpose of recording
depreciation as an expense is to spread the initial price of the asset over its useful life.
For intangible assets - such as brands and intellectual property - this process of allocating
costs over time is called amortization. For natural resources - such as minerals, timber and oil
reserves - it's called depletion.

Provisions for additional depreciation have been given under s.32(1)(iia), if an assessee is
engaged in the business of manufacture or production of any article or thing or in the business
of generation or generation and distribution of power, an additional depreciation of 20% of
the actual cost of new machinery or plant (other than ships and aircrafts) shall be allowed as
deduction.

Under s. 32(2), unabsorbed depreciation has been discussed. In case the depreciation claim
for the current year is in excess of the profits and gains of that year, the balance/excess can be
carried forward to the subsequent years for an indefinite period.

There are different methods of computing depreciation. For income tax purposes, the method
to be adopted by all assessees is the written down value (WDV) method, unless it is an asset
of an undertaking engaged in generation or generation and distribution of power, in which
case, the actual cost method is used.

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 Bibliography

Bare Act:

Income Tax Act, 1961

Books:

1. Ramesh Sharma, Supreme Court on Direct Taxes, (1998)

2. Sampat Iyengar, Law of Income Tax, (1998)

3. Kanga and Palkiwala, The Law and Practice of Income Tax

Websites:

http://www.incometaxindia.gov.in

https://www.bmtqs.com.au/documents

http://www.nipfp.org.in

http://saiindia.gov.in

https://www.accountingtools.com/

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