DEPRECIATION AND BLOCK OF ASSETS

DEPRECIATION [SECTION 32]

Depreciation is allowed as deduction under section 32 of the Act if the asset is owned (wholly or partly) by the assessee and such asset is put to use during the relevant previous year for the purpose of business or profession. Depreciation is charged from the day when the asset is put to use (and not the actual use) and not from the day of its acquisition. Use of the asset may be active or passive for claiming depreciation.

Therefore, even on standby equipments kept ready for replacement/use, depreciation will be allowed although these might not be used in the previous year. Depreciation under the Income-tax Act is allowed on the basis of block of assets as per written down value (WDV) method of calculating depreciation.

However, units engaged in the power sector can claim depreciation either on straight line method (individually on each asset) or on written down value method on block of asset. The option of charging depreciation either on straight line method or written down value method should be exercised before the due date of furnishing of return. However, once the option is exercised it shall be final and shall apply to all the subsequent assessment years.

Where an assessee incurs any expenditure for acquisition of depreciable asset in respect of which a payment ( or aggregate of payments made to a person in a day ) , otherwise than by an account payee cheque/draft or use of ECS through a bank account, exceeds Rs. 10,000, such payment shall not be eligible for normal/additional depreciation. Also such Payment will be ignored for the purpose of computation of Actual Cost of such asset under section 43(1). [Amendment vide Finance Act, 2017 w.e.f. AY 2018-19]

Block of Assets [Section 2(11)]

It means a group of assets falling within a class of assets in respect of which same rate of depreciation is prescribed. There are four classes of assets on which depreciation is allowed i.e. Building, Furniture or fittings, Plant & Machinery and Intangible assets. Separate rates of depreciation are prescribed for these asset classes. Therefore, example of a block of asset may be two buildings (same class) having depreciation rate of 10% (same rate) (this will constitute one block of asset for calculating depreciation) and another block could be three machines(same class) having depreciation rate of 15% (same rate).

Depreciation rates

Buildings: General rate of depreciation on building is 10%. However, residential building used by employees is allowed depreciation @ 5%. Further, building which are used as temporary structures are allowed depreciation @ 40%.  

Furniture or fittings including electrical fittings: There is only one rate in case of furniture and fittings, i.e. 10%.  

Plant and Machinery: General rate of depreciation on Plant and machinery is 15%.

 However, there are certain special rates as follows:

• Motor Cars : 15%;

• Computers including computer software : 40%;

• Books not being annual publication, and owned by professional : 40%;

• Books (being annual publication) owned by assessee carrying on a profession : 40%;

• Books owned by an assessee carrying on business in running lending libraries : 40%;

• Pollution control equipments : 40%; Ships : 20%;

• Aeroplanes or Aeroengines : 40%.

Plant: As per Section 43(5), plant includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purpose of the business or profession. It does not include tea bushes or livestock or buildings or furniture and fittings.  Intangible Assets (Know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired after 31.3.1999): Depreciation is allowed @ 25% on these assets.

Depreciation at Half rate: When the asset is purchased and put to use in the same previous year for less than 180 days then half rate of depreciation is applicable. Otherwise, depreciation at full rate is applicable.

ADDITIONAL DEPRECIATION

It is available to an assessee engaged in the business of manufacture or production of an article or thing as well as assessee engaged in the business of generation or generation and distribution of power. It is allowed on any new Plant and Machinery (not on second hand machinery whether used in India or outside India). However, it is not allowed on buildings and furniture, road transport vehicles, ships and aircraft, any office appliances, any machinery or plant installed in any office premises or any residential accommodation, or guest house. It is also not allowed on plant and machinery the full cost of which is allowed as deduction under any provision.

Additional depreciation is over and above normal depreciation and is allowed @ 20%. However, if the asset is acquired and put to use in the same previous year for less than 180 days then rate of additional depreciation is 10%. It is computed on the individual assets and is allowed only for first year of acquisition of the asset.

Reference:

ICSI

ICAI

Income Tax Law & Practice by Gaur & Narang