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MEANING:

Fall or decrease in the book value of a fixed assets is called DEPRECIATION. Decrease could be due to wear and tear . It is necessary to follow the rules of Income Tax Act for depreciation to be allowed.

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PROVISIONS OR RULES RELATED TO ALLOWING OF DEPRECIATION

1.

Assessee /Person must be the owner of the assets: he can claim deduction to depreciation on assets only
when he is the owner of such asset either wholly or partly. If assets is on lease or rent , then depreciation is not allowed.

2.Assets must be used by person for business and profession: depreciation will be allowed when assets have been
used in the previous year.

3.Assets on which depreciation is allowed by the INCOME TAX ACT : (dep. Is a revenue loss.)

Building and home/house Machinery Plant and Machinery Furniture and Fixture
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4. Asset on which depreciation is not allowed:

Land Guest house If any assets is sold, dismantled, cancelled etc. in the previous year. Foreign car purchased in 28th feb,1975 but before 1st apr,2001and neither used for taxi nor in profession.

5.Assets taken on lease:

I. II.

If a person is operating any business or profession from a building taken on rent or lease then dep. is not allowed. If he incurs any capital expenditure on renovation, development or improvement then dep. is allowed.
28.02.1975 but before 1.4.2001 then dep. Is allowed Foreign car used as taxi Foreign car used in other country in business and profession.
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6.Depreciation on foreign car: if any car is purchased after

I. II.

7.Asset used for less than180 days : if asset is used in

previous year less than 180 days then 50% on normal rate depreciation is charged.

8. Additional depreciation on plant and machinery :

i.
ii.

(assessment year 2003-2004,purchased on or after 1.04.2002 as new machinery) 20% of actual cost is allowed. New machinery is used less than 180days then 10% additional depreciation.

Additional depreciation is not allowed on following asset:

Ship and aeroplane Office and equipment Plant or machinery installed in office building , residential building or guest house Plant and machinery on which deduction has been allowed for the whole cost.

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9.Addtional depreciation for industrial undertaking existing before 1.04.2002 :If 10% or more expansion in a
year than additional depreciation @15%is allowed the same previous year.

10.Additional depreciation on plant and machinery established after 31.03.2005.: if purpose of encouraging
new industries in such case 20% dep. Is charged for which expansion is not applicable. If machinery or plant is used for less than 180 days then 10% additional rate is charged. NOTE: points 8,9 and 10 are allowed only when certificate of chartered accountant is certify the claims of assessee.

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BASIS OF DEPRECIATION :
There are two method : 1.Written down value method 2.Straight line method

Computation of depreciation: 1.Block of Assets 2.Actual cost of assets 3.Written down value of assets 4. Computation of depreciation
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Block of assets
1. building

Group
G.1 G.2

Assets include in the group

Building used for residence (except hotel and boarding) Building used for residence (including hotel and boarding house) EG: Factory, Godown etc. Building acquired after 1.09.2002 and in which plant and machinery have been installed.

Rate of depreciation
5% 10%

G.3

100%

2.Furniture and Fittings

G.1

All type of furniture and fittings

General rate Rate for ships , Speedboats

10%
15% 20%

3.Machinery G.1 and Plant

G.2

Car purchased after 31.03.1990 and let out on hire. Foreign car purchases after 30.03.2001
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15%
20%
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G.3

Vehicles which are let out on hire EG: bus, taxi etc. Aeroplane including engine Moulds used in rubber and plastic factories Medical equipment Vehicle acquired after 1.10.1998 but before 1.04.1999 commercial vehicle used in business before 1.04.1999. Utensils made of glass or plastic and used in refilling.(w.e.f.1997-98) Commercial vehicle acquired in 2002-02 and used in business before 1.4.2002 Machines used in weaving cloth or in garment sector purchased after 1.4.2001 but before 1.4.2004 and used in business before 1.4.2004

30% 40% 30% 40% 40% 50% 50%

G.4

50%

G.5

Computers(including software) 60% New commercial vehicle acquired after disposing 60% off 15 year old which offer 1.10.1998 but before 1.4.1999 and used in business before 1.4.1999.
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Commercial vehicle acquired after disposing off 15year old which offer 1.4.1999 but before 1.4.2000 and used in business before 1.4,2000. Books kept by professionals such as doctors, lawyers, chartered accountants etc, except annual publications and library book. G.6 Gas cylinder, flour mill, heat pump cinematographic films, pollution control instruments etc. Machinery and plant acquired and installed after 1.9,2002 for water supply project. Wooden parts of machinery used in manufacturing artificial silk.

60%

60%

80%

G.7

100%

100%

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Bulbs of film studio, machinery related to cinema. Wooden match frames. Machines used in mines. Books of professional including annual publications. Books of libraries, Water and air pollution control equipments 4.Intangible G.1 assets All types of intangible assets acquired after 31.3.1998. for example, technical know-how, patents, trademark etc.

100% 100% 100% 100% 100%

25%

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EXAMPLE:Mr. Sachin Gupta had following assets on 1.4.2011. Building A 5% 1,50,000 Building B and C 10% 2,00,000 Machine R 15% 1,80,000 Machine S 15% 1,50,000 Furniture X 10% 1,00,000 Acquired following assets in previous year 2011-12. Machine Q 15% 50,000 Car Y 15% 2,00,000 Trademark S 25% 60,000 Sold following assets in previous year 2011-12. Building B 1,80,000 Machine R 1,50,000 Calculate written down values of above assets.
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ACTUAL COST OF ASSETS:

Meaning: the total cost including its purchase price or

construction cost and related expenses such as interest payable on loan taken to purchase/acquire the assets expenses on fright, installation and bringing the assets into working condition.

Actual cost of an asset includes:

(i) purchase price/construction cost + interest payable on loan taken (ii) freight + installation expenses (iii) expenses incurred to bring the asset in working condition for the first time.

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Actual cost of acquiring asset in various conditions:

1.Assets used for scientific research : if an asset is acquired to be used in scientific research but after some time it is used in business then actual cost of such asset will be: Actual cost- Deductions allowed regarding scientific research. 2 .Assets acquired in gift or inheritance: actual cost in this case will be: Actual cost to the previous owner Depreciation allowed (from assessment year 1988-89) 3. Purchase of old assets: if an assessee purchases assets from any other business (old assets) then actual cost of such assets will be the cost deemed fit by the assessing officer.
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4. Assets previously sold by assessee reacquired: if an assessee reacquires any asset previously sold by him then actual cost of such asset will be the lesser of the two: (i) amount paid to reacquire such asset. (ii)balance amount after deduction of total depreciation allowed on the original cost of the asset. 5. Building used in business: if any business is personal property of the assessee but is being used in business after 28.02.1946 then actual cost of such building will be : Purchase price of asset Depreciation allowed from the date of purchase to previous year. 6. Mutual transfer of assets between holding and subsidiary companies: actual cost of such asset will be the cost that would have been for the transferring company and for which the following two conditions need to be fulfilled. (i) subsidiary company should be an Indian company. (ii)100% shares of the subsidiary company are with the holding company.
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7. Transfer of asset under scheme of amalgamation : actual cost of such asset to be amalgamated company will be the actual cost that would have been to the transferring company if the asset is being in business.

8. Foreign asset: if any asset is purchased from any other country and due to devaluation of rupee if the amount paid exceeds and the cost of asset then excess payment made will be added to the cost of asset.
9. Assets acquired on after 1.4.1994 : balance remaining after deducting custom duty excise tax from the cost of asset will be the actual cost of sheet.

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EXAMPLE :Mr. Omkar purchased a machine for rs.4,00,000 0n 1st july , 2009 for his business. He sold this machine on 1.10.2010 for rs. 2,00,000 and again repurchased it on 1.8.2011 for rs. 2,40,000. Rate of depreciation is 15%. For the previous year 2011-12 calculate cost of the machine.

Solution: Actual cost 1.7.2009 less : dep. @ 15% 2009-10 WDV 1.4.2010 Less : dep. @ 15% 2010-11 WDV 1.4.2011 (i)WDV as on 1.4.2011 2,89,000 (ii) Cost of acquisition 2,40,000 actual cost will be Rs.2,40,000
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4,00,000 60,000 3,40,000 51,000 2,89,000

Which ever is less

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WRITTEN DOWN VALUE OF ASSETS :

(1) Actual cost of asset if acquired in previous year. (2) Balance amount after deduction of depreciation upto previous year from the original cost (when asset is purchased before previous year). (3)WRITTEN DOWN VALUE OF BLOCK OF ASSETS:
(i) Balance amount after deduction depreciation from the written down value of the block of assets in the previous year. (ii) The actual cost of assets acquired in the previous year are added to this amount. (iii) From the total of points (i) and (ii) the cost of asset in the previous year is deducted. (iv) After allowing depreciation the balance remaining is the written down value.

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EXAMPLE :Written down value of a block of assets in which there are two machines p and q is rs.6,00,000 on 1.4.2011. one machine was purchased on 31.10.2011 for rs.3,00,000.This machine was put to use on the same day Machine was sold on 1.2.2012 for rs.3,50,000. calculate written down value on 31.3.2012. Solution: Rs. WDV as on 1.4.2011 6,00,000 Add: Machine N acquired 3,00,000 9,00,000 Less: Machine N Sold 3,50,000 WDV for claiming depreciation 5,50,000 Less: Dep.@ 15% 24 May 2013 82,500

WDV

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COMPUTATION 0F DEPRECIATION :
Following steps should be taken to compute depreciation. (i) Putting the assets into various blocks. (ii) Calculate the value of each block separately. (iii) Add the cost of asset purchased or acquired to the concerned block. (iv) Deduct the asset sold or destroyed from the concerned block. (v) Ascertain written down value of blocks of assets on 31st march. (vi) Charge depreciation at given rates on the written down values.
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EXAMPLE :
Calculate depreciation on the assets of Mr. Prakash for the assessment year 2012-13. Rs. Written down value of motor taxi on 1.4.2011 80,000 Written down value of car on 1.4.2011 (purchased 0n 1.4.1990) 2,00,000 Purchased car manufactured in India in november , 2011 (used in business) 1,00,000 Purchased foreign car in the previous year (used in business in India) 1,20,000 Purchased foreign car in august 2011 which was let on hire. 3,00,000

solution :
Rs. WDV of motor taxi @ 30% 24,000 WDV of car purchased on 1.4.1990@ 15% 30,000 Car purchase in nov.2011 @ 15% (50% of normal rates ) used for less then 180 days 7,500 Imported car @ 20% 24,000 Imported car for running on hire @ 30% 90,000 depreciation allowed 24 May 2013 1,75,500

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ASSET USED FOR LESS THAN 180 DAYS:

When an asset is used in less than 180 days in the previous year then 50% depreciation is charged on normal rate but for that following should be followed: 1) Asset should have been purchased or acquired in the previous year. 2) Asset should have been used in the business previous year. 3) Asset should have been used for less than 180 days in the previous year. 4) Asset should exist in business on the 31st Mar.

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Example:
Written down value of a block of assets consisting of machine A,B and C is Rs. 18,50,000 on 1.04.2011.Machine S was purchased on 1.09.2011 for Rs.2,50,000.This machine was brought into use on 15.09.2011.Cost of machine N purchased on 20.12.2011 was Rs. 4,50,000.Machine A which was purchased on 1.04.1999 for Rs.15,00,000 was sold on 1.03.2012 for Rs.17,00,000. Depreciation on machines is charged @15%.Calculate depreciation for the assessment year 201213.
Solution: Machine (15%) Add: Machine S (used for more than 180 days) Machine N (used less than 180 days) Less: Sale consideration of Machine A WDV as on 31.03.2012 Rs. 18,50,000

2,50,000 4,50,000

7,00,000 25,50,000 17,00,000 8,50,000

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Depreciation: 4,50,000 x 15%x 50% = (8,50,000-4,50,000)x15% =

Rs. 33,750 60,000 93,750

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