Section 32- Depreciation under Income Tax Act:
- Depreciation is the method of decreasing the value of an asset due to wear and tear. Depreciation claim by the people for the purpose of Accounting and Taxation.
- For claiming of depreciation the assets must be used for the purpose of Business or profession(Active or Passive). And Should be owner of such asset either wholly or partly.
- 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.
Example:
Suppose there are 10 Plant and Machinery 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.
Meaning of Block of Assets:
- Depreciation is calculated using the WDV of a Block of assets. Block of assets means ” Group of assets having same rate of depreciation withing same class of assets” .
- Block of Asset= Same Rate + Same Class
- Buildings, machinery, plants, and furnishings are examples of tangible assets.
- Intangible assets include know-how, patents, copyrights, trademarks, licenses, franchises, and any other comparable business or commercial rights.
- Individual assets lose their individuality under the Income Tax Act because depreciation is calculated on a group of assets rather than individual assets
Rates of Depreciation:
Rates of depreciation on assets-
| Particulars | Rate of Tax |
|---|---|
| Building | |
| Residential | 5% |
| General | 10% |
| Temporary Structure | 40% |
| Furniture & Fittings | 10% |
| Ships | 20% |
| Aircraft | 40% |
| Computer/Laptop | 40% |
| Books | |
| Owned by assessees carrying on a profession | 40% |
| Libraries Business | 40% |
| Pollution Control Equipments | 40% |
| Other Plant & Machinery | 15% |
| Oil Wells | 15% |
| Intangible assets | 25% |
Depreciation on Motor Vehicles
| Particulars | Rate of Depreciation |
|---|---|
| 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 Rate on the basis put to use of Number of Days:
- 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 half of rate.
For example , An asset was bought and put to use on 20th November 2022 then the depreciation rate will be 15/2=7.5%.
Computation of (WDV) Written Down Value of Block of Asset
| Particulars | Rupees |
|---|---|
| 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. | XXXX |
Relation Between Depreciation and GST
When an asset is purchased, GST is charged on that asset. Depreciation will claim in the following manner
- If ITC is claimed then depreciation will be calculated only on the cost of asset without GST.
- If ITC has not been claimed then depreciation can be charged on the entire amount including GST.
Meaning of Deferred Tax:
- To understand deferred tax, it shall be noted at the outset that as per the accounting standards followed by companies, there are two different financial reports which an organization prepares every fiscal year – an income statement and a tax statement.
- 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 whereas under Income tax Act the rate is 15%. There will be a difference in this case. Therefore Deferred tax provision will be created.
Example:
A machine purchased at cost 1,00,000, residual value 5,000 and useful life of asset 30 years. As per the companies Act rate of depreciation is 9.5% and as per income tax is 15%.is 15%.
Solution
| Particulars | Amount(Rs) |
|---|---|
| Depreciation under companies Act | 9,500 |
| Depreciation under companies Act | 15,000 |
| Difference | 5,500 |
| Deferred tax liabilty | 1,716 |
Additional depreciation:
If an assessee engaged in the business of manufacture of any article or generation transmission or distribution of power, then additional depreciation is applicable @20% allowed on Plant & Machinery.
The additional depreciation is not applicable for following items
- Second Hand Plant & Machinery
- Any plant and machinery installed in office premises or residential accommodation.
- Ships, aircraft and transport vehicles
- Plant and Machinery on which is 100% deduction allowed
Additional deprecation is allowed only in the first year in which it is put to use. If put to use for less than 180 days then 10% depreciation shall be allowed.
The remaining 10% shall be allowed in the next year.
