income tax deprecation

7/30/2019 Income Tax Deprecation

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MEANING:

Fall or decrease in the book value of afixed 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 DEPRECIATION1. Assessee /Person must be the owner of the

assets: he can claim deduction to depreciation on assets onlywhen 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 andprofession: depreciation will be allowed when assets have beenused in the previous year.

3.Assets on which depreciation is allowed by theINCOME 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. If a person is operating any business or profession from abuilding taken on rent or lease then dep. is not allowed.

II. If he incurs any capital expenditure on renovation,

development or improvement then dep. is allowed.

6.Depreciation on foreign car: if any car is purchased after28.02.1975 but before 1.4.2001 then dep. Is allowed

I. Foreign car used as taxi

II. Foreign car used in other country in business and profession.

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7.Asset used for less than180 days : if asset is used inprevious year less than 180 days then 50% on normal rate depreciationis charged.

8. Additional depreciation on plant and machinery :(assessment year 2003-2004,purchased on or after 1.04.2002 as newmachinery)

i. 20% of actual cost is allowed.

ii. New machinery is used less than 180days then 10% additionaldepreciation.

Additional depreciation is not allowed on followingasset:

Ship and aeroplane

Office and equipment

Plant or machinery installed in office building , residential buildingor guest house

Plant and machinery on which deduction has been allowed for thewhole cost.

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9.Addtional depreciation for industrial undertaking

existing before 1.04.2002 :If 10% or more expansion in ayear 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 encouragingnew 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 assets3.Written down value of assets

4. Computation of depreciation

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Block of

assets

Group Assets include in the group Rate of

depreciation

1. building G.1 Building used for residence (excepthotel and boarding)

5%

G.2 Building used for residence (including

hotel and boarding house)

EG: Factory, Godown etc.

10%

G.3 Building acquired after 1.09.2002 and

in which plant and machinery have

been installed.

100%

2.Furniture

and Fittings

G.1 All type of furniture and fittings 10%

3.Machinery

and Plant

G.1 General rate

Rate for ships , Speedboats

15%

20%

G.2 Car purchased after 31.03.1990 and let

out on hire.

Foreign car purchases after 30.03.2001

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 before1.04.1999 commercial vehicle used in business

before 1.04.1999.

30%

40%

30%

40%

40%

G.4 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

50%

50%

50%

G.5 Computers(including software)

New commercial vehicle acquired after disposing

off 15 year old which offer 1.10.1998 but before

1.4.1999 and used in business before 1.4.1999.

60%

60%

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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.

60%

60%

G.6 Gas cylinder, flour mill, heat

pump cinematographic films,

pollution control instruments

etc.

80%

G.7 Machinery and plant acquired

and installed after 1.9,2002 forwater supply project.

Wooden parts of machinery

used in manufacturing artificial

silk.

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

100%

100%

100%

100%

100%

4.Intangible

assets

G.1 All types of intangible assets

acquired after 31.3.1998. forexample, technical know-how,

patents, trademark etc. 25%

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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% 1,00,000Acquired 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.

EXAMPLE:-

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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 acquiredto 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 assetsfrom 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 assesseereacquires any asset previously sold by him then actual cost ofsuch asset will be the lesser of the two:

(i) amount paid to reacquire such asset.

(ii)balance amount after deduction of total depreciation allowedon the original cost of the asset.

5. Building used in business: if any business is personalproperty of the assessee but is being used in business after28.02.1946 then actual cost of such building will be :

Purchase price of assetDepreciation allowed from the dateof purchase to previous year.

6. Mutual transfer of assets between holding and subsidiarycompanies: actual cost of such asset will be the cost thatwould have been for the transferring company and for whichthe 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 holdingcompany.

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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 excesspayment made will be added to the cost of asset.

9. Assets acquired on after 1.4.1994 :balanceremaining 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 4,00,000

less : dep. @ 15% 2009-10 60,000

WDV 1.4.2010 3,40,000

Less : dep. @ 15% 2010-11 51,000

WDV 1.4.2011 2,89,000

(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

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 uptoprevious 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


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EXAMPLE :-Written down value of a block of assets in which there are twomachines 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 forrs.3,50,000. calculate written down value on 31.3.2012.

Solution: Rs.

WDV as on 1.4.20116,00,000

Add: Machine N acquired3,00,000

9,00,000

Less: Machine N Sold3,50,000

WDV for claiming depreciation5,50,000

Less: Dep.@ 15%82 500 WDV24 May 2013 19


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COMPUTATION 0F DEPRECIATION :

Following steps should be taken to computedepreciation.

(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 theconcerned block.

(v) Ascertain written down value of blocks of assetson 31st march.

(vi) Charge depreciation at given rates on the writtendown values.

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EXAMPLE :


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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 days7,500

Imported car @ 20%24,000

Imported car for running on hire @ 30%90,000

depreciation allowed1 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 forRs.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 on1.04.1999 for Rs.15,00,000 was sold on 1.03.2012 for Rs.17,00,000. Depreciationon machines is charged @15%.Calculate depreciation for the assessment year 2012-13.

Solution:

Rs.Machine (15%) 18,50,000

Add: Machine S (used for more than 180 days) 2,50,000

Machine N (used less than 180 days) 4,50,000 7,00,000

25,50,000

Less: Sale consideration of Machine A 17,00,000WDV as on 31.03.2012 8,50,000

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Depreciation: Rs.

4,50,000 x 15%x 50% = 33,750

(8,50,000-4,50,000)x15% = 60,000

93,750

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income tax deprecation

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