Depreciation allowance under section 32 of the Income Tax Act, 1961

Depreciation is an allowance on capital assets acquired and put to use and not expenditure unlike repairs to machinery, plant or furniture. It need not be incurred by the assessee during the previous year. The depreciation allowance has to be calculated on the assets of the assesee as per the methods and rates prescribed under the income tax law.

Depreciation allowance is one of the deductions allowed from business or professional income chargeable under section 28 or other income chargeable under section 56(2)(ii) or 56(2)(iii) of the Income Tax Act, 1961.

As per section 32 of the Income Tax Act, 1961, depreciation is allowed on tangible assets and intangible assets owned, wholly or partly, by the assessee and used for the purposes of business or profession.

As per section 57(ii) depreciation deduction is available from the income from hire of machinery, plant or furniture [Section 56(ii)] or income from buildings (in case of the building is inseparable from the letting of the said machinery, plant or furniture) [Section 56(iii)].

On new plant or machinery, apart from depreciation allowance under section 32(1) and Section 32(2), investment allowance is also available additionally as per the provisions of sections 32AC and 32AD.

Depreciation under the Income Tax Act, 1961 is allowed as deduction, as a percentage on the written down value (WDV) of the block of assets as per the rates prescribed in New Appendix I to the Income Tax Rules, 1962.

In case of assets of an undertaking engaged in generation or generation and distribution of power, the depreciation is allowed as deduction on the actual cost i.e. straight line method (SLM) individually on each asset at depreciation rates prescribed in Appendix IAto the Income Tax Rules, 1962 or on WDV of the block of assets as per the rates prescribed in New Appendix I to the Income Tax Rules, 1962.

These categories of undertakings shall opt for charging depreciation either on SLM or WDV method. As per Rule 5(1A) of the Income Tax Rules, 1962, the option shall be exercised before the due date for furnishing the return of income under section 139(1) of the Income Tax Act, 1961.As per the proviso to Rule 5(1A), the option once exercised shall be final and shall apply to all the subsequent assessment years.

Block of asset: Section 2(11)

As per section 2(11) of the Income Tax Act, 1961, “block of asset” means 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, trademarks, licences, franchises, or any other business or commercial rights of similar nature,

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

For the purpose of classification of assets into blocks, the percentage of depreciation within the class of assets needs to be considered. Each such class of asset with same percentage of depreciation will be identified as a block of asset.

For examplebuildings are classified into four sub-classes and their rates of depreciation are provided below:

Class of building	Rate of depreciation
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 infrastructure facilities under clause (i) of sub-section (4) of section 80-IA.	100
4.       Purely temporary erections such as wooden structures	100

Within the buildings class, each building needs to be classified under the above four sub-classes and to be grouped into individual block of assets based on the percentage of depreciation.

Though the rate of depreciation is same for other buildings and furniture i.e. 10% on WDV, they cannot be grouped together in one block of asset.

No depreciation allowance under section 32 in the case of business for prospecting etc. of mineral oil on machinery or plant: Section 42

No deduction under section 32 shall be allowed in respect of any machinery or plant if actual cost thereof is allowed as a deduction in one or more years under an agreement entered into by the Central Government under section 42.

Additional Depreciation: section 32(1)(iia)

If an assesseeis engaged in the business of manufacture or production of any article or thing or in the business of generation or generation and distribution of power, an additional depreciation of 20% of the actual cost of new machinery or plant (other than ships and aircrafts) shall be allowed as deduction.

Note:

1.       No additional depreciation is available if an assessee engaged in the business of generation or generation and distribution of power and following SLM depreciation as per section 32(1)(i);

2.       Additional depreciation of 35% is available for the undertaking / enterprise sets up by the assesse on or after 1-4-2015, on new machinery or plant (other than ships and aircrafts) in the backward area notified by the Central Government in this behalf in the states of

a.       Andhra Pradesh

b.      Bihar

c.       Telangana

d.      West Bengal

3.       This additional depreciation is over and above normal depreciation;

4.       No additional depreciation is allowed on any

a.       machinery or plant

                                                               i.      which, before its installation by the assesse, was used either within or outside India by any other person; or

                                                             ii.      installed in any office premises or any residential accommodation including accommodation in the nature of a guest house; or

                                                            iii.      the whole of the actual cost is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “profits and gains of business or profession” of any one previous year;

b.      office appliances or road transport vehicles.

An asset put to use for a period less than 180 days

In case of an asset acquired during the previous year and is put to usefor the purpose of business or profession for a period less than 180 days in that previous year,the deduction as depreciation allowance shall be restricted to 50% of the amount of such depreciation in case of:

i)                    SLM depreciation on assets of an undertaking engaged in generation or generation and distribution of power;

ii)                   WDV method of depreciation on the block of assets on both tangible and intangible assets;

iii)                 Additional depreciation.

Notes:

1.       In case of additional depreciation allowance, the balance 50% (out of 20% or 35% as the case may be on actual cost) shall be allowed in the immediately succeeding previous year;

2.       The restriction of 50% of normal depreciation is not applicable for the assets acquiredprior to previous year and put to use in the previous year for a period less than 180 days;

Example: Machinery purchased on 1-3-2015 and put to use on 1-11-2015 for the purpose of business or profession, the depreciation would be allowed 100% of the prescribed rate and not 50% of it during the previous year 2015-16.

Depreciation deduction in case of amalgamation or demerger

In case of amalgamation or demerger, the total depreciation for the year is to be divided proportionately between the

-          Amalgamating company and the amalgamated company in the case of amalgamation; or

-          Demerged company and the resulting company in the case of demerger

as the case may be, basing on the number of days of usage of assets by them [fifth proviso to section 32(1)].

Depreciation on capital expenditure incurred on building not owned by assesse: Explanation 1 to section 32(1)

In case the assessee is carrying business or profession in a building not owned by him and holds a lease or other right of occupancy and incurs any capital expenditure by way renovation, or extension of, or improvement to the building, then he is eligible for depreciation on such capital expenditure under section 32(1)(ii) as if the said building owned by the assessee.

Mandatory claim of depreciation

As per explanation 4 to section 32(1), the depreciation deduction 32(1) in respect of both tangible and intangible assets shall apply whether or not the assesse has claimed the deduction in computing his total income.

Deduction in respect of any building, machinery, plant or furniture sold, discarded, demolished or destroyed [Section 32(1)(iii)]

In the case of any building, machinery, plant or furniture on which depreciation is claimed and allowed under section 32(1)(i) [i.e. assets of an undertaking engaged in generation or generation and distribution of power claiming SLM depreciation] is sold, discarded, demolished or destroyed in the previous year other than the previous year in which first brought to use and the moneys payable fall short of the WDV, such shortfall will be allowed as deduction provided that such shortfall / deficiency is actually written off in the books of the assesse.

Note: This provision is applicable for the assets of an undertaking engaged in generation or generation and distribution of power and claiming SLM depreciation.

Unabsorbed depreciation: Section 32(2)

If the profits and gains from business or profession is less than the depreciation allowance computed under section 32(1), then such shortfall or unabsorbed depreciation allowance shall be added to the depreciation allowance for the following previous year or years and so on infinitely and deemed to be part of that allowance.

Only depreciation deduction under section 32(1) and section 32(2) is covered in this article. Actual cost of the asset to the assessee under section 43 in different instances and short term capital gain or loss on sale of depreciable assets going to be covered in the forthcoming articles.

 
CA Melam Ram Pavan Kumar