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Article Dated 01st December, 2023

Navigating the Depths of Depreciation in Income Tax

Depreciation is a crucial aspect of income tax regulations, allowing businesses to account for the wear and tear of assets over time. The Income Tax Act, 1961, provides detailed guidelines on the calculation and allowances for depreciation. In this article, we will delve into the specific provisions related to depreciation, covering tangible and intangible assets, as well as recent amendments.

Section 32: Depreciation

Applicability

This section provides for mandatory deduction on account of depreciation, whether the assessee had claimed the deduction in computing its total income or not. Depreciation is allowed on four classes of assets i.e., building, furniture and fixture, plant and machinery, and intangible assets. No depreciation on any other asset is allowed under this act.

According to section 43(3), "plant" includes ships, vehicles, books, scientific apparatus, and surgical equipment used for the purposes of the business or profession but does not include tea bushes or livestock or buildings, or furniture and fittings.

Intangible asset includes know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, [not being goodwill of a business or profession]

Depreciation shall be charged as per WDV method. However, assessee engaged in Business of Generation and Distribution of Power have the option of charging depreciation either on the basis of WDV method or SLM method. In case WDV method is applicable (any assessee), block of asset method shall be followed, and in case of SLM method, depreciation shall be charged on Individual assets. Block of assets means “Group of assets having same rate of Depreciation and falling into same class of assets.

Depreciation is allowed only if assets are used wholly or partially for business purposes and the assessee is the beneficial owner of such assets. However, if assets are partially used for business purposes, depreciation shall be allowed proportionately. Similarly, if the asset is partially owned by the assessee, depreciation shall be allowed to the extent owned by him.

An administrative circular of CBDT clarifies that where the asset is given on lease, whether financial or operating, depreciation will always be claimed by the lessor. However, if it is a hire purchase, where at the end of the last installment, ownership will be transferred to the assessee, then the assessee can claim depreciation from the beginning, assuming he is the owner from the beginning. In the case of Mysore Mineral vs CIT (1999) [1999] 80 TAXLOK.COM (IT) 003 (SC), the Hon’ble Supreme Court clarified that ownership extends to anyone in possession of property, exercising control that excludes others. The formal execution and registration of a deed were deemed irrelevant. The court`s liberal interpretation

diluted the traditional definition of ownership. Subsequently, the law was amended to address the condition for legal ownership of immovable property.

It is also to be noted that depreciation is allowed only if the asset is put to use and not when it is ready to use. However, in the case of stand-by machinery and emergency spares, depreciation shall be allowed even if it is not put to use.

Depreciation in case the asset is used for less than 180 days:

If an assessee acquires an asset during the previous year and uses it for business purposes for less than one hundred and eighty days in that year, the deduction allowed for that asset is restricted to fifty percent of the prescribed amount. The remaining fifty percent deduction is then allowed in the immediately succeeding previous year for the same asset. However, this restriction is applicable for the year of acquisition i.e., if an asset is acquired and not put to use in the year of acquisition, and then put to use in any subsequent year for less than 180 days, then also the full depreciation will be allowed on such asset.

Rate of depreciation applicable for F.Y. 2023-24

Building

 

Buildings which are used mainly for residential purposes except hotels and boarding houses

5

Buildings other than those used mainly for residential purposes

10

Purely temporary erections such as wooden structures

40

   

Furniture and fittings

 

Furniture and fittings including electrical fittings

10

 

 

Plant and Machinery

 

General Rate (if not specifically prescribed)

15

Motor Vehicle (used in business of running them on hire)

30

Other Motor Vehicle

15

Ships

20

Aircraft

40

Books

40

Computer/Laptop

40

Pollution control equipment

40

Windmills and its equipment

40

 

 

Intangible Assets

 

As mentioned above

25

Depreciation on Goodwill

Earlier, for the purpose of applicability of depreciation goodwill used to be part of an intangible asset, and depreciation was allowed on it at the rate of 25%. However, vide Finance Act 2021, goodwill was excluded from the purview of intangible assets for the purpose of depreciation.

Depreciation in case of Amalgamation/Demerger/ Succession

In instances of business succession, amalgamation, or demerger, the total permissible deduction for asset depreciation, applicable to both the predecessor and successor (in the context of succession), or the amalgamating and amalgamated entities (in the context of amalgamation), or the resulting entities (in the context of demerger), shall not exceed the deduction computed at the specified rates as if the mentioned business restructuring had not occurred. Subsequently, this deduction is distributed among the entities involved based on the proportion of days during which each entity utilized the assets in the respective preceding year.

Additional Depreciation

For plant or machinery (excluding ships and aircraft) acquired and installed after March 31, 2005, by a business engaged in manufacturing, production, or power generation, an additional deduction of twenty percent.

However, additional depreciation is not allowed for the following plant or machinery:

  • Previously used by someone else before installation by the assessee.

  • Installed in office premises, residential accommodation (including guest houses), office appliances

  • Road transport vehicles.

  • Whose entire cost has already been claimed as a deduction in a prior year under the "Profits and gains of business or profession" category.

If additional depreciation is allowed on any asset bought in previous for less than 180 days, in that case, half of, the additional depreciation is allowed in the year of acquisition and the remaining half in the succeeding year.

As per The Motor Vehicle Act, 1988, forklift trucks used in the factory are not treated as transport vehicle so it is eligible for additional depreciation.

It has been clarified vide circular no. 15/2016 of CBDT, that the business of printing and publishing amounts to the manufacture or production of an article or thing and is, therefore, eligible for additional depreciation.

Additional depreciation is allowed only if the assessee follows the WDV method of depreciation.

CA Pranay Jain is a young and aspiring Chartered Accountant. He qualified Chartered Accountancy Course in 2021 and has a well-established practice in various fields of taxation and auditing, with his core area of practice being in the field of litigation i.e., handling assessment and appeal-related matters and representing assesses before various tax departments.

He is also socially active on LinkedIn at linkedin.com/in/capranayjain

CA Pranay Jain
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