WDV depreciation under Income tax Act

Companies Act requires depreciation to be provided based on useful life of the Asset whereas Income Tax Act allows deduction based on WDV method

Following are main differences

  1. Income tax rates are higher than companies act rates.
  2. Income tax method of depreciation is WDV ( except power plant) but in companies act it is based on life of asset and straight line method
  3. There is no option to change rates of depreciation given by income tax act, but under companies act you can adopt different life and consequently different rates based on justification
  4. Income tax depreciation is 50% if asset used for less than 180 days otherwise depreciation for full year. Companiesur act depreciation is proportionate to the period of use.
  5. Under companies act , major components of machine are depreciated separately if they have different useful life but in income tax act no separate depreciation for components

Also Income Tax Act often allows accelerated depreciation as a special deduction to incentivise Business Expansion

Depreciation Rates as per Income Tax for FY 2019-20 (AY 2020-21): Depreciation is an allowance which is allowed as a deduction while computing the business income of an assessee. In the computation, the depreciation as per Income Tax Act, 1961 is allowed while the book depreciation is disallowed. This is because the Income Tax Act prescribes its own rate of depreciation. Chart of Depreciation as per Income Tax for AY 2020-21 is given at the end.

What is Depreciation as per Income Tax

 

When a business enterprise prepares its profit and loss account, it charges depreciation. Since depreciation is an estimated charge, the rate of depreciation is prescribed in the Companies Act and the Income Tax Act. Hence these two laws provide for rate of depreciation to be allowed as a charge against the profits of the enterprise.



In case of a company, the depreciation charge is as per Companies Act whereas in computing the income under the Income Tax Act the depreciation as per Income Tax Act is allowed. Normally, the depreciation as per Income Tax Act is higher than the Companies Act.



This article discusses the Depreciation as per Income Tax Act only.



What are the relevant provisions of the Income Tax Act related to Depreciation



The following provisions of the Income Tax Act, 1961 overall governs the allowance of ‘depreciation’ as per Income Tax:



(i) Section 2(11): which defines the ‘Block of assets’

(ii) Section 32: Which deals with depreciation allowance

(iii) Section 32(1)(iia): Which deals with additional depreciation is certain cases

(iv) Section 43(1): Defines the Actual Cost of an asset

(v) Section 43(6): Related to Computation of Written Down Value

(vi) Section 50: relates to the computation of deemed capital gains on transfer of depreciable assets

(vii) Rule 5 of Income Tax Rules, 1962 read with Appendix-1



How depreciation as per Income Tax is calculated



The Income Tax Act allows depreciation on the Written Down Value of the assets. The depreciation is computed on ‘Block of assets’ at the rates prescribed rates provided in Appendix-1 of the Income Tax Rules, 1962.

The Income Tax Act prescribes Written Down Value method of depreciation except for certain cases where depreciation can be claimed on the SLM (Straight Line Method).

Prior to 1998, depreciation as per Income Tax was allowed only on tangible assets viz., Building, Plant, Machinery, Furniture, etc. From FY 198-99, some intangible assets like goodwill, patents, copyright, etc. were included in the list of eligible assets for claiming depreciation allowance.

Depreciation as per Income Tax is based on ‘Block of Assets’ concept. The term ‘block of assets’ is defined in section 2(11) of the Act to mean “a group of assets falling within a class of assets comprising—

(a) tangible assets, being buildings, machinery, plant or furniture ;

(b) intangible assets, being know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature,

in respect of which the same percentage of depreciation is prescribed.

Thus any individual asset which falls within a block loses its identity and after it is absorbed in the block, it forms a part of that block of assets to which it belongs. The individual asset becomes an inseparable part of the block.

After the amendment in section 32 w.e.f. 1st April 1988, an individual asset loses its identity and for allowing depreciation the entire block has to be considered. Further,  there is no requirement that each and every item in the said block should actually be used so as to entitle the assessee to claim depreciation thereupon. So the block becomes a single unit on which depreciation is claimed under the Income Tax Act.


Decided cases:

1. India Medtronic (P.) Ltd. v. DCIT (ITA No.7555/Mum/2012) ITAT Mumbai Bench decided on 04.05.2018

2. Gulati Saree Centre vs ACIT ( 240 ITR 94) ITAT Chandigarh decided on 09.08.1999

3. M/s Swati Synthetics Ltd vs ITO (ITA No. 1165/M/2006) ITAT Mumbai Bench decided on 07.12.2009

4. Natco Exports vs DCIT (2003) 86 ITD 445 ITAT Hyderabad

5. CIT Vs. Bharat Aluminium Co. Ltd. (ITA Nos. 532, 1484, 1486, 1487, 1592, 1593, 1670 and 1671 of 2006) Delhi High Court decided on 15.10.2009

6. ACIT Vs M/s Krystal Colloids Pvt. Ltd. (ITA No. 3170/MUM/2016) ITAT Mumbai Bench decided on 31.07.2008

7. Ashok Pan Products (P) Ltd. vs ACIT (ITA No. 137/Lkw/11) ITAT Lucknow 

For computing the depreciation, the first step is to determine the actual cost of the capital asset. It comprises the purchase price of the asset, any direct expenses attributable to the acquisition of the asset, etc. as per accounting principles. Any subsidy or other monetary benefits received from the government etc. is reduced from the purchase cost to determine the ‘actual cost’ of the asset. 

According to section 43(1), actual cost” means  the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority.

Important points to be kept in mind for Actual Cost

1. Interest paid or payable on money borrowed for acquiring a capital asset shall be required to be added to the actual cost till the asset is put to use. After the asset is put to use, such interest can be claimed as revenue expenditure. [Section 36(1)(iii)]

2. When an asset is purchased on instalment, the interest payable on the instalments after the asset is put to use cannot be included in the actual cost of the asset. [CIT vs Anang Polyfil Pvt. Ltd. (267 ITR 266) Gujarat High Court decided on 12.02.2004]

3. Any income earned on money deposited to open a letter of credit for the purchase of the machinery is incidental to the acquisition of assets and hence the same will reduce the actual cost of the asset. [CIT vs Karnal Co-Operative Sugar Mills Ltd. (2000) 243 ITR 2 (SC) decided on 23.04.1999]

Meaning of Written Down Value (WDV)

According to section 32(1)(ii), depreciation shall be allowed in the case of any block of assets, at the prescribed rate of depreciation on the written down value thereof.


According to section 43(6), "written down value" means—

(a) in the case of assets acquired in the previous year, the actual cost to the assessee;

(b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under the Income Tax Act, 1961.

Where any asset from any block of assets is sold or discarded or demolished or destroyed during a previous year, then any amount of money payable including scrap value shall be reduced from the block of assets.

If the sales consideration so received or receivable is less than the block of assets then the resultant figure shall be the written down value of that block of assets for the purpose of charging current year depreciation. [Section 43(6)(c)(B)]

If the sum so received or receivable exceeds the block of assets, then the surplus results in gain which is chargeable to tax as short term capital gain under section  50.

The term ‘money payable’, as per the Explanation below section 41(4), includes-

(a) any insurance, salvage or compensation moneys payable in respect thereof;

(b) where the building, machinery, plant or furniture is sold, the price for which it is sold.

 

The term "sold" includes a transfer by way of exchange.

To sum up, the following table illustrates the computation of the Written Down Value of a block of assets-

Particulars

Amount

(in Rs.)

(a)Opening WDV as on 01.04.20xx

xxxx

(b) Add: Additions during the Year

At Actual Cost of the asset

xxxx

(c) Gross Block [(a)+(b)]

xxxx

(d) Less: Money Payable including scrap value on assets sold or transferred during the year

(-)xxxx

(e) Net Block or Written Down Value (WDV) as on 31.03.20xx [(c)-(d)]

xxxx

If (e) results in negative, then WDV shall become Nil and the resultant surplus is chargeable as “Short Term Capital Gains” u/s 50

What are the conditions to be satisfied for claiming depreciation under Income Tax Act



The following conditions must be satisfied to claim depreciation under the Income Tax-

1. The asset must be owned by the assessee. The asset may be owned wholly or partially


If the assessee is not the owner of the asset, he is not entitled for the depreciation. [Golcha Properties (Pvt.) Ltd. vs. CIT  (1994) 209 ITR 80 (Raj. HC)]

It is not important to have the legal title to claim the ownership of the asset. If money is paid and the asset is used by the assessee in his business, then only because the asset or property is not registered in the name of the assessee does not deprive him from depreciation claim. [Mysore Minerals v. CIT (1999) 239 ITR 775 (SC)

2. The asset must be used for the purpose of business or profession of the assessee.

3. The asset must be put to use for the purpose of business or profession of the assessee.

One important point to note here is that if the asset is put to use for less than 180 days during the previous year, then depreciation claim shall be restricted to 50 per cent of the normal depreciation. Full depreciation as per the prescribed rate is allowed if the asset is put to use for 180 days or more during the previous year. This restriction applies for the first year of acquisition and not in the subsequent years.

4. The depreciation is allowed only for the following specified tangible and intangible assets-

(i) buildings, machinery, plant or furniture, being tangible assets;

(ii) 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.

Provisions regarding Carry forward and set off of unabsorbed depreciation

According to section 32(2), Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73, the allowance or the part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years.



If in any previous year there is no profit or profits are not sufficient to give full effect of current year depreciation, then the depreciation which cannot be set-off against current year’s profit (unabsorbed depreciation) is carried forward to the following year and is added to the depreciation allowance for the next year. Hence, the unabsorbed depreciation of preceding year becomes the depreciation allowance of the current year.


In respect of carry forward and set-off of unabsorbed depreciation, the following provisions are noteworthy-

1. Unabsorbed depreciation can be carried forward for an indefinite period. There is no limit on the number of years for which it can be carried forward and set-off.

2. Brought forward Unabsorbed depreciation can be set-off with any heads of income except Income from Salaries.

3. The order of set-off is given below-

(1) Current Year Depreciation

(2) Brought-forward business loss

(3) Unabsorbed Depreciation



Rates of Depreciation as Per Income Tax Act,1961 for FY 2019-20 (AY 2020-21)

Rule 5 of Income Tax Rules, 1962 read with Appendix-1

Rates of depreciation for Income Tax

as applicable for the assessment year 2020-21

Block of assets

Depreciation allowance as a percentage of written down value

PART A

TANGIBLE ASSETS

I. BUILDING [See Notes 1 to 4 below the Table]

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

5

(2)  Buildings other than those used mainly for residential purposes and not covered by sub-items (1) above and (3) below

10

(3)  Buildings acquired on or after the 1st day of September, 2002 for installing machinery and plant forming part of water supply project or water treatment system and which is put to use for the purpose of business of providing infra- structure facilities under clause (i) of sub-section (4) of section 80-IA

40

(4)  Purely temporary erections such as wooden structures

40

II. FURNITURE AND FITTINGS

Furniture and fittings including electrical fittings [See Note 5 below the Table]

10

III. MACHINERY AND PLANT

(1)   Machinery and plant other than those covered by sub-items (2), (3) and (8) below : [See Note 5A below the Table]

15

(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