Depreciation is a way of measuring decline in the value of asset. The main causes of depreciation are the usage , wear and tear and obsolescence of the asset. Since assets are used in the business/profession therefore some amount of such asset can be logically debited to the Profit and Loss Account as a non cash expenditure and is an allowable expense. There are several methods of calculating depreciation but in this article we will understand how depreciation is recorded in the books of accounts as allowed under the Income tax Act.
Depreciation is calculated on the asset which is used for the purpose of business and/or profession.
For claiming depreciation assessee should be the owner of asset. If such asset is partially owned then proportionate amount of depreciation is allowed to the assessee on the basis of his share in the asset. Depreciation is allowed if the assessee is beneficial owner which can be seen in the case of Hire purchase, lease etc.
Depreciation is allowed when an asset is put to use. It is even allowed on the assets which are kept in the premises for emergency purposes. Suppose there are 10 machines in a factory but only 9 are used on daily basis and one is kept for emergency purpose or a reason alike then also assessee can claim depreciation on all 10.
Depreciation can be claimed on both tangible as well as intagible assets except on land.
Concept of days and its relation with depreciation rate– In a year if the asset is put to use for a period of more than 180 days then asset will be depreciated using the full rate. If an asset is used for a period of less than 180 days then the rate will be halved. No depreciation if asset is acquired but not put to use. For example , A machine was bought and put to use on 10th November 2019 then the depreciation rate will be 15/2=7.5%.
|Calculation of WDV (Written Down Value) of block of asset|
|WDV of block of asset as on 1st day of previous year||xxx|
|Add: Actual cost of asset bought during the PY of the respective block||xxx|
|Less: Money payable in respect of asset of the block which are sold, discarded, demolished or destroyed during PY.||(xxx)|
|WDV of the block at the end available for calculating depreciation for the PY.||xxx|
*WDV- written Down Value
*PY- Previous Year
1. While deriving at the actual cost of the asset add all the related expenses incurred on the asset to make it available for usage such as installation charges, transportation charges, taxes & duties(ineligible for ITC)etc reduced by the amount received on sale of product produced during trial run, subsidy etc
For example, Calculation of actual cost of a car-
|Ex showroom price||xxx|
|Add: Duties and taxes (non refundable)||xxx|
|Add: Essential kit||xxx|
|Actual cost of car||xxx|
Note: TCS shall be deducted from above for the purpose of calculating depreciation as the same can be claimed or it is adjusted against tax liability.
2. Depreciation shall not be allowable if payment(s) for the asset so bought made to a person in a day is otherwise than through an account payee cheque / account payee DD or use of electronic clearing system exceeds Rs.10000.
Depreciation on automobiles– The following change was made in the rate to boost the automobile industry as a drastic downfall was observed. Therefore to attract buyers an enhanced rate of depreciation was introduced. https://taxguru.in/income-tax/cbdt-notifies-additional-depreciation-motor-car-motor-vehicles.html
|2 (i).Motor cars, other than those used in a business of running them on hire, acquired or put to use on or after the 1st day of April, 1990 except those covered under entry (ii);||15%|
|(ii) Motor cars, other than those used in a business of running them on hire, acquired on or after the 23rd day of August, 2019 but before the 1st day of April, 2020 and is put to use before the 1st day of April, 2020.||30%|
|3(ii) (a) Motor buses, motor lorries and motor taxis used in a business of running them on hire other than those covered under entry (b).||30%|
|(b) Motor buses, motor lorries and motor taxis used in a business of running them on hire, acquired on or after the 23rd day of August, 2019 but before the 1st day of April, 2020 and is put to use before the 1st day of April, 2020.||45%|
Depreciation and GST– When an asset is purchased, some amount will be charged as GST. Assessee has two ways now:
1. If ITC has been/will be claimed of the GST paid then depreciation will be charged on the amount net off GST.
2. If ITC has not been claimed then depreciation can be charged on the entire amount including GST.
Second case can be observed in assets which fall under the category of blocked credits of GST. Foundation built for the plant and machinery is considered as a part of plant and machinery and hence does not fall under the category of blocked credits. This is to avoid assessee from taking dual benefit under both the Acts.
Method of depreciation is entirely the choice of the assessee. It is advisable to always refer the chart given under Income tax Act (Click Here >> Deprteciation Rate Chart under Income Tax Act, 1961) because ultimately the tax liability will be calculated according to this Act only so why to create confusion. Provisions for Deferred tax shall be created under the balance sheet approach. Let’s discuss it briefly.
Suppose a company has bought a Plant and machinery. It depreciates it’s asset using the rate := 1-POWER (Residual value/Opening WDV, 1/Remaining life) whereas under Income tax Act the rate is 15%. There will be a difference in this case. Therefore Deferred tax provision will be created.
For example, A machine costs 100000, residual value 5000 and life of 30 years. According to the company 9.5% is the rate and 15% in Income tax Act.
|Depreciation under companies Act||9500|
|Depreciation under Income tax Act||15000|
|Deferred tax liability||1716|
Depreciation and capital gain– There are two cases:-
1. Where entire block of asset ceases to exist- When all the assets falling under a particular block are sold then the loss or gain arising from such sale shall be considered as short term loss/gain. Block of asset can never be negative. Even if sale price is less than WDV of the block, the differential shall be short term loss and no depreciation can be claimed.
2. When some assets are still left in the block after some sale- When a part of the block is sold then two outcomes are possible
2(a)- When sale price is more than the WDV of the block then the excess amount shall be considered as short term capital gain as there is no WDV left in the books but assets still exists physically.
2(b)- When sale price is less than the WDV of the block then depreciation can be charged on the remaining amount.
Additional depreciation– As per section 32(1)(iia), assessee engaged in the business of manufacture or production of any article or thing as well as engaged in the business of generation, transmission or distribution of power a further sum of depreciation shall be allowed over and above the normal depreciation on the acquisition of new plant and machinery (other than ships and aircrafts) after 31/03/2005. The rate of additional depreciation is 20% of the actual cost if asset is acquired and put to use for 180 days or more. The rate shall be 10% if period is less than 180 days, but a sum of 10% is allowed in the immediate next previous year.
Where an assessee, sets up an undertaking or enterprise for manufacture or production of any article or thing, on or after 01/04/2015 in any backward notified area by CG in the states of Andhra Pradesh, Bihar, Telangana, West Bengal and acquires and installs any new plant or machinery (other than ships and aircrafts) in between 01/04/2015 and 01/04/2020, the rate shall be 35% instead of 20% and 17.5% instead of 10%.
No additional depreciation for the following:-
1. Plant and machinery already used by any other assesse in India or outside India.
2. Plant and machinery installed in office premises or any residential accommodation including guest house.
3. Any office appliances or road transport vehicle
4. Plant and machinery, the whole of the actual cost of which is allowed as deduction.
Unabsorbed depreciation– This can be carried forward for an indefinite period and can be set off against any head of income (except salary). Business losses are given priority over unabsorbed depreciation for the purpose of set off.
Common doubtful points-
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