Depreciation and Investment Allowance

Table of Contents

Introduction

Depreciation and investment are financial concepts that are closely related, yet they represent Different aspects of business operations. Depreciation refers to the systematic allocation of the cost of a long-term asset over its useful life. It reflects the gradual decrease in the value of an asset due to factors such as wear and tear, obsolescence, or the passage of time. Depreciation is recorded on the income statement to allocate the cost of an asset to the periods in which it contributes to revenue generation. It helps in matching expenses with the revenue earned during a specific period.

Meaning of Depreciation

Depreciation as per Income Tax Act is defined as the decrease in the value of an asset due to its usage, wear and tear, the passage of time, or obsolescence. The Income Tax Act allows for the deduction of depreciation expenses while computing the taxable income of an entity. Depreciation is a non-cash expense, which means that it does not involve any outflow of cash from the entity. Instead, it represents the allocation of the cost of an asset over its useful life. This allocation helps in reducing the taxable income of the entity and results in lower tax liability.

Block of Assets

A Block of Assets is a group of assets that share similar characteristics and are subject to the same rate of depreciation. This group of assets can be comprised of tangible or intangible assets that have the same useful life, similar nature to the asset, and are used for the same purpose in a business. Examples of tangible assets that can be included in a Block of Assets are buildings, machinery, plants, and furnishings. Intangible assets such as patents, copyrights, trademarks, licenses, and franchises can also be included in a Block of Assets. The depreciation on a Block of Assets is calculated based on the Written Down Value (WDV) of the assets in the block.

Eligibility Criteria under Section 32

Depreciation is permissible as an expenditure under the IT Act based on the block of assets. Here, a block of assets denotes an asset group falling under an asset class for which the same depreciation rate is applicable. A deduction on depreciation is calculated using WDV (Written Down Value) method.

The following are the basics of depreciation under Section 32 of the Income Tax Act:

  • Land and goodwill do not qualify for depreciation.
  • A lessee isn’t a property’s owner, and thus depreciation will be applicable to a lessor. However, If a lessee constructs furniture or any portion, then the lessee will be eligible for depreciation.
  • If a taxpayer purchases a property through a hire purchase agreement, then the taxpayer can Claim depreciation.
  • If an asset Involves co-owners, then deduction on depreciation will be permissible in the proportion of their ownership.
  • In case a taxpayer does not claim the depreciation amount as a deduction, then the sum of Written Down Value brought forward to the succeeding year will be decreased by the amount of depreciation.
  • Depreciation under the Companies Act, 1956 differs from that of the IT Act. So, the IT Department specifies the depreciation rates, regardless of the depreciation chargeable under the books of accounts.
  • In case there are certain spare machines/parts that a taxpayer hasn’t utilised, then depreciationWill be applicable to them.
  • A taxpayer can claim depreciation at a lower rate. However, for the succeeding year, the tax Authority will consider the WDV as decreased by the depreciation percentage specified
  • Depreciation is not applicable to the GST (Goods and Services Tax) component in case a taxpayer wishes to avail of Input Tax Credit (ITC) of the GST payable.

Depreciation during the Year of Purchase

The provisions for depreciation during a year in which a taxpayer has purchased an asset are as follows:

  1. Depreciation is applicable if an asset has been in use during the year of its purchase
  2. The IT Department will not consider the degree of usage of those assets while estimating whether that asset has been in use or not. For instance, if a taxpayer has used it for a trial run, then Section 32 will consider it to be in use.
  3. In case an asset has been in use for below 180 days, a sum equivalent to 50% of the sum computed through normal rates of depreciation will be permissible as depreciation.
  4. This means that if an asset has been in use on or prior to October 3 of a year (October 4 for a leap year), 100% depreciation will be permissible, or else 50%

Depreciation during Successive Years

The provisions for depreciation during the succeeding years are as follows:

  1. In case an asset has not been in use during the year of its purchase or has been in use for below 180 days, 100% depreciation will be permissible during the successive years subject to the Fulfilment of the below-mentioned condition.
  2. Even when a taxpayer uses a single asset from a block of assets in a year, depreciation will be applicable to the entire block.

Section 32 of the Income Tax Act: Additional Depreciation

Additional depreciation will be allowed in the following cases:

  1. It will be applicable to new plants or machinery, excluding aircraft and ships. A taxpayer should have bought and installed that asset post March 31 2005.
  2. A taxpayer must be involved in the business of distribution and generation of power.
  3. In case a taxpayer installs a plant or machinery in any residential property (including a guest house) or office premises.
  4. For a road transport vehicle or an office appliance.
  5. Second-hand machinery and plant which, prior to installation, was in use whether outside and inside India.
  6. Certain cases for which depreciation isn’t permissible.
  7. Depreciation at the rate of 20% of the cost of assets will be allowable as an additional depreciation
  8. A taxpayer must be involved in the business of production and manufacturing of anything or article.

Important points regarding Depreciation

1. Allocation of Cost: When a business acquires a long-term asset, such as machinery, equipment, or a building, the entire cost of that asset is not expensed in the year of purchase. Instead, the cost is spread out over the asset’s estimated useful life.

2. Useful Life: Useful life refers to the estimated period during which an asset is expected to contribute to the revenue-generating activities of a business. It is a subjective estimate based on factors such as wear and tear, technological advancements, and the asset’s economic viability.

3. Non-Cash Expense: Although depreciation is recorded as an expense on the income statement, it is a non-cash expense. This means that the business does not physically spend money when recognizing depreciation. Instead, it represents the reduction in the value of the asset over time

4. Tax Implications: Depreciation has tax implications, as it is often a deductible expense. Businesses can use depreciation to reduce their taxable income, providing a tax benefit. This, in turn, can free up cash for other purposes, such as investment or debt reduction.

5.Book Value: The book value of an asset is its original cost minus the accumulated depreciation. It represents the asset’s remaining value on the company’s balance sheet.

Assets eligible for depreciation

In India, the eligibility for depreciation on assets is outlined in the Income Tax Act, 1961. The Act specifies various categories of assets that are eligible for depreciation, along with the prescribed rates and methods for calculating depreciation. Below are common categories of assets eligible for depreciation in India:

1. Building

Commercial, industrial, or residential buildings used for business or professional purposes are eligible for depreciation.

2. Furniture and Fittings

Furniture, fixtures, and fittings used for business or professional activities are eligible for depreciation.

3. Plant and Machinery

Machinery, equipment, and plant used in manufacturing, production, or business operations qualify for depreciation.

4. Vehicles

Motor vehicles used for business purposes, such as cars, trucks, and buses, are eligible fordepreciation.

5. Ships and Aircraft

Ships and aircraft used for business or commercial purposes are eligible for depreciation.

6. Computer Software

The cost of acquiring or developing computer software for business use is eligible for depreciation.

7. Intangible Assets

Intangible assets like patents, copyrights, trademarks, and licenses are eligible for depreciation Or amortization.

8. Know-how, Patents, Copyrights, Trademarks, Licenses, Franchises, or Any Other Business or Commercial Rights of Similar Nature Certain intellectual property rights are eligible for depreciation

9. Leasehold Improvements

Improvements made to leased property, such as renovations or alterations, are eligible for depreciation.

10. Books

In the case of a profession, the cost of books used for professional purposes may be eligible for depreciation.

11. Renewable Energy Devices

The Income Tax Act provides specific benefits, including accelerated depreciation, for assets related to renewable energy, such as windmills and solar power systems

12. Rural Development Assets

Certain assets used for rural development, like tractors and agricultural implements, may be eligible for special depreciation benefits.

13. Special Depreciation for New Plant and Machinery in Certain Industries

For certain industries, the Income Tax Act allows for additional depreciation on new plant and machinery.

Important terms for Computation of Depreciation Allowance

The common terms related to the computation of depreciation allowance in India:

1. Block of Assets

Under the Income Tax Act, assets are categorized into different blocks based on their nature and use. Depreciation is calculated for each block as a whole, simplifying the computation process.

2. Asset

An asset, for depreciation purposes, refers to tangible and intangible property used for business or professional activities, such as buildings, machinery, vehicles, patents, copyrights, etc.

3. Block of Assets in Case of Intangible Assets

Intangible assets are classified into specific blocks based on their nature, and depreciation is computed for each block.

4. Written Down Value (WDV)

The depreciation is calculated on the reducing balance method, and the written down value is the original cost of the asset minus the accumulated depreciation.

5. Depreciation Rate

The percentage rate prescribed by the Income Tax Act for calculating depreciation on different categories of assets.

6. Composite Depreciation Rate

In some cases, a composite depreciation rate is applied when different assets within a block have different rates of depreciation

7. Additional Depreciation

Additional depreciation is allowed on new plant and machinery acquired and installed after a specified date. This is an incentive to promote capital investment.

8. Capital Expenditure on Scientific Research

Certain capital expenditures on scientific research related to the business may be eligible for additional depreciation.

9. Rural Development Assets

Special rates of depreciation may be applicable to assets used for rural development, such as Tractors and agricultural implements.

10.Date on Acquisition

Date the on which an asset is acquired or put to use is it essential for determining the period for which depreciation is allowed

11. Date of Installation

For assets that need to be installed, the date of installation is relevant for the commencement of depreciation.

12. Residual Value

The estimated value of an asset at the end of its useful life. It is subtracted from the actual cost of The asset to determine the depreciable amount

13. Scrap Value

The anticipated value of an asset at the end of its useful life, often used interchangeably with residually value.

14.Cost Inflation Index Index (CII)

The Cost Inflation is used to adjust the actual cost of an asset for inflation when calculating the indexed cost for determining capital gains

15. Change in the Method of Depreciation

The Income Tax Act provides guidelines for changing the method of depreciation, and such changes require prior approval from tax authorities.

16. Applicability of New Rates

New depreciation rates or methods introduced by the government may apply to assets acquired or installed after a specified date.

17. Depreciation Recapture

When a depreciable asset is sold, the gain on the sale may be treated as ordinary income, leading to depreciation recapture.

18. Adjustment in Case of Transfer

When an asset is transferred or sold, adjustments may be required in the written down value for the purpose of computing depreciation.

19. Conversion of Block of Assets

When assets undergo a change in use or are transferred to a different block, adjustments are necessary in the calculation of depreciation.

20. Tax Planning for Depreciation

Businesses often engage in tax planning strategies to maximize depreciation benefits, such as timing the purchase of assets to optimize depreciation deductions.

21. Composite or Lump-Sum Depreciation Rate

A single rate applied to a pool of assets within a block when individual rates are not specified

22. Asset Categories

Different categories of assets have distinct depreciation rates and rules. For example, machinery may have different rates than buildings or vehicles

23. Block of Assets in Case of Companies Engaged in Generation or Generation and Distribution of Power

Special provisions and rates may apply to companies involved in the generation or distribution of power.

24. Terminal Depreciation

in certain cases, additional depreciation may be allowed in the year of the sale or disposal of an asset.

Claiming Depreciation as Per Income Tax Act

In order to claim depreciation, certain conditions should be met:

1. The asset must be owned, either wholly or partly, by the assessee

2. The asset must be used for the purpose of business or profession. If the asset is used for other purposes as well, depreciation allowable will be proportionate to the amount of time the asset is used for business.

3. Co-owners of an asset can claim depreciation to the extent of the value of the asset owned by each co-owner.

4.An assessee is not eligible to claim depreciation on depreciable assets that have been sold, removed, or damaged in the same financial year in which they were acquired.

Depreciation Sec. 32

Depreciation refers to a gradual, permanent, continuous fall in the book value of the fixed asset due to constant use of the asset. Depreciation can be claimed as an expenditure, only if the following conditions are satisfied –

a) Assets should be owned by the assessee.

b) Assets should be used for business or profession.

c) Assets should be used in the previous year.

Only WDV method of depreciation is allowed for the computation of business or professional

income.

The format is as follows:

Particulars
WDV of the block of assets at the beginning of the previous yearXXX
Add: Purchase of asset during the yearXXX
Less: Sale of asset during the yearXXX
Total Depreciable value of the blockXXX
Less: Depreciation [at prescribed rate]XXX
WDV of the block at the end of the previous yearXXX

Note:

1. Block of assets means a group of assets falling within a class of assets in respect of which the same percentage of depreciation is prescribed.

2. Any asset (including new plant and machinery) acquired during the P.Y. and put into use for less than 180 days during the previous year, then only 1/2 of the depreciation will be allowed at the prescribed rate.

3.If an asset is acquired during FY preceding the PY but used for less than 180 days during the PY, aforesaid restriction would not apply.

Additional Depreciation (General) (Existing Tax Regime)

  1. If new plant and machinery is acquired and installed after 31st March 2005, additional depreciation shall be available @ 20% of the actual cost of new plant and machinery.
  2. If the new plant and machinery is put to use for less than 180 days in the year in which it is acquired, the rate of additional depreciation will be 10%.
  3. If new plant and machinery is acquired for setting up enterprise in a notified backward area of above mention state and installed after 1st April 2015, additional depreciation shall be available @ 35% of the actual cost of new plant and machinery.
  4. If the Plant and Machinery is put to use for less than 180 days in the year in which it is acquired, the rate of additional depreciation will be 17.5%.

Alternative Tax Regime: Under Alternative Tax Regime, Additional Depreciation is Blocked.

Rates of Depreciation for Assessment Year 2023-24

AssetsRate
A) Buildings: 
a) Residential Buildings except hotels and boarding house5%
b) Non-residential buildings like office, factory or godown Building10%
c) Buildings acquired for installing machinery and plant forming part of water supply project 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 u/s 80IA(4)(i)40%
d) Purely temporary erections such as wooden structures40%
B) Furniture: Neon sign Board10%
Any Furniture and Fittings including electric installation10%
C)Plant and Machinery 
1. General Machinery & Plant15%
2. Motor Car other than those used in business of running them on hire15%
3. a) Aeroplane-Aeroengine40%
b) Motor Buses, Motor Lorries and Motor taxies used in business of running them on hire30%
c) Ships and vessals20%
d) Plant and Machinery used in semi-conductor industry30%
e) Air pollution control equipment’s; water pollution control equipment’s; solid waste control equipment’s, recycling and resource recovery systems, etc.40%
D) Computers (including computer software)40%
E) Books 
a) Books owned by assesses carrying on a profession: 
(i)Annual publication40%
(ii) Other Books40%
b) Books owned by assesses carrying on lending business40%
F) Intangible Assets 
Patents, Technical know-how, Copyrights, Trademarks, Licenses25%
Type Writer15%
Surgical Equipment’s, X-ray machines15%

Note: No depreciation is admissible, if the written down value has been reduced to zero, though the block of assets does not cease to exist on the last day of the previous year.

Illustration -1

On April 1, 2022, depreciated value of the block of assets (rate of depreciation: 25%) is ₹80,000. It consists of assets A and B. The tax payer Mr. Rama purchases asset C (rate of depreciation: 25 %) during the previous year 2022-23 for ₹ 30,000 and sells asset A on May 3, 2022 for ₹ 1,80,000. Determine the amount of depreciation. (Ignore Alternative Tax Regime under Section 1 15BAC)

Solution:

Computation of Depreciation

Particulars
Depreciated value of the block consisting of assets A and B80,000
Add: Actual cost of asset C30,000
Total1,10,000
Less: Sale consideration of asset A [though the assets are sold for ₹1,80,000, the amount of deduction cannotexceed₹1,10,000)1,10,000
Depreciated value of the block consisting of assets B and CNil

Note: No depreciation is admissible, if the WDV of the has been reduced to zero, though the block of assets does not cease to exist on the last of the PY.

Illustration -2

Shashi owns two buildings A and B on April 1, 2022 (rate of Depreciation: 10%, depreciated value, ₹14,15,700). He purchases on December 1, 2022 building C for ₹ 3, 10,000 (rate of depreciation: 10%) and sells building A during the previous year 2022-23 (on 1-10-2022) for ₹ 8,70,000. Determine the amount of depreciation. (Ignore Alternative Tax Regime under Section 115BAC)

Solution:

Computation of Depreciation

Particulars
Depreciated value of the block (i.e. buildings A and B) on 1-4-202214,15,700
Add: Cost of building C Purchased on 1-10-20223,10,000
Total17,25,700
Less: Sale proceeds of building A8,70,000
Written down value of the block8,55,700
Depreciation [as building C is purchased in the year 2022-23 
and it is put to use for less than 180 days, depreciation 
Will be 50 percent of 10 percentof₹3,10,000andon 
the remaining amount depreciation will be 10 percent 
Of (8,55,700-3,10,000)1=5,45,70070,070
Depreciated value of the block on 31-3-20237,85,630

Illustration -3

Mr. Vijay purchased a Motor Car on 31-12-2022 for 5,20,000. Other expenses in relation to the acquisition are ₹ 70,000. Calculate the amount of depreciation for the assessment year 2023-24. Rate of depreciation is 15%. (Ignore Alternative Tax Regime under Section 115BAC)

Solution:

Particulars
Actual cost of the car5,20,000
Add: Acquisition expenses70,000
Cost of acquisition5,90,000
Less: Depreciation @ 15% (5,90,000×15%) 
88,500 x 1/2(Not used for more than 180 days)44,250
WDV (on 31-03-2023)5,45,750

Illustration -4

The particulars of depreciable assets of Mr. Suresh for the previous year 2022-23 are given below:

AssetsW.D.V. on 01-04-2022Addition ₹DateRate of Depreciation
Plant and Machinery using in manufacturing activity30,00,00015,00,000(1-06-20)15%
Furniture3,00,0002,00,000(31-08-20)10%
Motor Cars6,00,0003,00,000(31-12-20)15%

During the year 2022-23, The entire stock of furniture was sold for ₹ 4,00,000 and out of six motor cars, two were sold for ₹ 4,00,000. The machinery was sold for ₹ 25,00,000 during the P.Y.2022-23. Calculate depreciation and STCL for the assessment year 2023-24, (under Existing Tax Regime and Alternative Tax Regime).

Solution:

Calculation of Depreciation

ParticularsExisting Tax RegimeAlt. Tax Regime
A. Plant and Machinery  
WDV as on 1-4-202230,00,00030,00,000
Add: Additions during the year15,00,00015,00,000
 45,00,00045,00,000
Less: Transfer consideration received25,00,00025,00,000
WDV of the block20,00,00020,00,000
Less: Depreciation @ 15% (20,00,000 x 15%)3,00,0003,00,000
Additional depreciation 20% (15,00,000x 20%)3,00,000Blocked
WDV on 31-03-202314,00,00017,00,000
B. Furniture  
Gross sale consideration4,00,0004,00,000
Less: Selling expenses
 4,00,0004,00,000
Less: WDV                                                          3,00,000  
Less: Additions during the PY                            2,00,0005,00,0005,00,000
Short Term Capital Loss(1,00,000)(1,00,000)
Note:  
No depreciation is allowed, as the entire block is transferrednilnil
C. Motor Cars  
WDV on 1-4-20226,00,0006,00,000
Add: Addition during the year3,00,0003,00,000
 9,00,0009,00,000
Less: Transfer Consideration4,00,0004,00,000
WDV of the block5,00,0005,00,000
Less: Depreciation on additions  
3,00,000@ 15%= (45,000x 1/2) 22,500  
On the balanceof2,00,000@ 15% 30,00052,50052,500
WDV on 31-03-20234,47,500 
Total Depreciation (A + B +C)6,52,5003,52,500

Illustration-5

A block of asset consists of 5 machines. The WDV of machinery _- as on 01-04-2022 01_04_-2022 is ₹ ₹ 1,80,000 Rate of depreciation is 15%. A new machine costing ₹ 1,60,000 was acquired in May 2022 but actually put to use only on 10-10-2022.Two old machines are also sold for ₹ 3,20,000 in December 2022.

Determine amount of depreciation for the A.Y. 2023-24.

Solution:

Computation of Amount of Depreciation

ParticularsExisting Tax RegimeAlt. Tax Regime
WDV of Machinery 01-04-20221,80,0001,80,000
Add: New Machinery purchase1,60,0001,60,000
 3,40,0003,40,000
Less: Sale proceeds of two old Machines3,20,0003,20,000
 20,00020,000
Less: Normal Depreciation (20,000 x 15% x 1/2)1,5001,500
 18,50018,500
Less: Additional Depreciation (1,60,000 x 20% x 1/2)16000Blocked
WDV as on 31-03-20232,50018,500

Illustration-6

Veeresh and Co. had a block of plant and machinery having WDV of ₹ 50,00,000 as on 1-4-2022. During the year an additional machinery costing₹20,00,000 was purchased on 5-9-2022. On 2-11-2022 fire had broken in the premises of the company destroying a considerable part of the old plant and machinery. Insurance company paid the damages of ₹25,00,000. The rate of depreciation applicable is 10%. Calculate the amount of depreciation chargeable to P&L A/c for the year ended 31-03-2023.

Will it make any difference if the entire block of plant and machinery is destroyed by fire? (under Existing Tax Regime and Alterative Tax Regime).

Solution:

Computation of Amount of Depreciation

ParticularsExisting Tax Regime New Tax Regime
WDV of Machinery 01-04-202250,00,00050,00,000
Add: New Machinery purchased20,00,00020,00,000
 70,00,00070,00,000
Less: Damages received from Insurance company25,00,00025,00,000
 45,00, 00045,00, 000
Less: Normal Depreciation (45,00,000 x 10%)4,50,0004,50,000
Less: Additional Depreciation (20,00,000 x 20%)4,00,000Blocked
WDV as on 31-03-202336,50,00040,50,000

Note: No depreciation is admissible as the block of assets ceases to exist on the last day of the previous year.

Illustration-7

Shaila owns two assets – asset I and asset II -on April 1, 2022. Rate of depreciation 25 percent, depreciated value on 1April 2022, ₹ 2,37,000. She purchases asset III on 31th May 2022 for ₹ 20,000 and sells asset I on 12th December 2022, asset II on 12 th December 2022 and asset III on 1st March 2023 for ₹ 10,000, ₹ 15,000 and ₹ 24,000 respectively. Determine the amount of depreciation. (Ignore Alternative Tax Regime under Section 115BAC)

Solution:

Computation of Depreciation

Particulars
Depreciation value of the block consisting of assets I and II2,37,000
Add: Cost of assets III20,000
Total2,57,000
Less: Sale proceeds of asset I, II and III49,000
Written down value of the block (which is empty)2,08,000

Illustration -8

The depreciated value of a block of assets (consisting of asset A and B) (rate of depreciation 10%) is₹1,17,000 on 1-4-2022. The following information is available

AssetRate of depreciation (percent)Date of purchasewhen it is put to useActual Cost
Assets C10%10-03-202210-04-202220,000
Assets D10%01-03-202203-02-202330,000
Assets E10%06-05-202206-05-202240,000
Assets F10%15-05-202202-01-202360,000
Assets G10%06-06-202206-04-202380,000

Plant A is sold on 16-8-2022 for ₹ 86,000. Determine the amount of depreciation. (IgnoreAlternative Tax Regime under Section 115BAC)

Computation of Depreciation

Particulars
Depreciated value of the block (i.e., assets A and B) on 1-4-20221,17,000
Add: Cost of assets C and D acquired during 2022-23 but put to use for the first time during 2023-24. [These assets will be use for the first time during 2023-24. [These assets will be qualified for usual depreciation even if asset D is put to use for less than 180 days, as these are not acquired during 2023-24]50,000
Add: Cost of asset E acquired during the year 2023-24 and put to use for more than 180 days40,000
Add: Cost of asset F Which is acquired during 2023-24 and put to use for less than 180 days60,000
Total2,67,000
Less: Sale proceeds of asset A-86,000
Written down value of the block consisting of assets B, C, D, E, and F1,81,000
Amount of depreciation [i.e., 5% of ₹ 60,000 + 10% of₹ 1,21,000]15,100
Written down value of the block assets on 31-03-20231,65,900

Illustration-9

A block of assets consists of 3 machines, whose WDV on 1-4-2021 was₹ 2,00,000. On 10-8-2021 a new machine of the same block was purchased for ₹ 50,000. Another machine was purchased on 3-2-2022 but put to use on 25-4-2022, cost being ₹40,000. The first 3 machines were sold on 15-12-2022 for ₹1,50,000. The rate of depreciation for all the above machines were 15% p.a. Find the value of WDV of the block of machine on 1-4-2023, as the case may be. (under Existing Tax Regime and Alternative Tax Regime).

Solution:

Calculation of Capital Gain/WDV

ParticularsExisting Tax RegimeAlt.Tax Regime
WDVof3machineson 1-4-20212,00,0002,00,000
Add: New machine purchased on 10-8-202150,00050,000
 2,50,0002,50,000
Less: Depreciation @ 15% on 2,50,00037,50037,500
Additional depreciation on new machine @ 20% on 50,00010,00010,000
WDV of4 machines on 1-4-20222,02,5002,02,500
Add: New machine purchased on 3-2-202240,00040,000
but put use on 25-4-20212,42,5002,42,500
Less: 3 Machines sold on 15-12-20221,50,0001,50,000
Balance92,50092,500
Less: Depreciation for 2022-23 @ 15% on 92,50013,87513,875
Additional depreciation @ 20% on 40,0008,000Blocked
WDV on 31-03-202270,62578,625

Illustration-10

Archita had a Plant and Machinery having a WDV of ₹ 25 lakhs on 1-4-2022. During the year, an additional machinery costing ₹ 10,00,000 was purchased on 31-8-2022. On 31-10-2022, fire had broken in the premises of the assessee destroying a considerable part of the plant and machinery. Insurance company paid damages ₹12,50,000. Calculate the amount of depreciation chargeable to Profit & Loss A/c for the year ended 31st March 2023. Will it make any difference if the entire block of plant destroyed? Plant and Machinery is used in manufacturing industry. Rate of depreciation 15%.

(under Existing Tax Regime and Alternative Tax Regime).

Solution:

Calculation of Depreciation on Plant and Machinery

ParticularsExisting Tax RegimeAlt. Tax Regime
a) When a considerable part of the block is destroyed  
W.D.V.as on 1-4-202225,00,00025,00,000
Add: Additions made during the year10,00,00010,00,000
 35,00,00035,00,000
Less: Transfer consideration received12,50,00012,50,000
W.D.V. of the block22,50,00022,50,000
Less: (i) Depreciation @ 15% on P&M₹ 22,50,0003,37,5003,37,500
(ii) Additional depreciation on newly Purchased machinery at 20% of 10,00,0002,00,000Blocked
W.D.V. on 31-03-202317,12,50019,12,500

(b) When the entire plant and machinery is destroyed If the entire block of plant is destroyed, assessee cannot claim depreciation for the PY 2022-23

Illustration-11

Gowri Shankara is in manufacture of a component submits the following information:

Name of AssetPlant and Machinery 
Block of assetsIIIIII
Rate of depreciation15%25%10%
WDV of P& Mon1.4.20218,50,000 
A 12,50,000 
B 5,60,000
C  
Additions of plants during 2022-23  
P22,50,000 
Q 8,00,000 
R  10,00,000

Plant P and Q are purchased and put to use by the assesse during June 2021, whereas Plant R was purchased and put to use during January 2022. During the 2022-23 old plants namely, plant A is sold for ₹ 6,50,000, plant B for ₹ 9,50,000 and plant C for ₹ 4,00,000. Compute the permissible amount of normal and additional depreciation for the Assessment Year 2023-24. (Ignore Alternative Tax Regime under Section 115BAC)

Solution:

Calculation of block of assets of Plant and Machinery

Block of AssetsIIIIII
Rate of depreciation15%25%10%
WDV of P&M on 1.4.2021   
A8,50,000  
B 12,50,000 
C  5,60,000
Total8,50,00012,50,0005,60,000
Additions during the year 2022-23   
P22,50,000  
Q 8,00,000 
R  10,00,000
Total of WDV and addition31,00,00020,50,00015,60,000
Less: Sale consideration   
A6,50,000  
B 9,50,000 
C  4,00,000
Cost of block24,50,00011,00,00011,60,000

Calculation of Depreciation

ParticularsNormal DepreciationAdditional DepreciationTotal
Block13,67,5004,50,0008,17,500
Block22,75,0001,60,0004,35,000
Block 3 (16,000+ 50,000)66,0001,00,0001,66,000
Total7,08,5007,10,00014,18,500

Short Type Questions

  1. Give the Meaning of Depreciation.
  2. What is Block of Assets?
  3. Give the meaning of Book Value.
  4. Give the meaning of Intangible Assets.
  5. What are Leasehold Improvements?
  6. What is Additional Depreciation?

Long Type Questions

  1. Write note on Eligibility Criteria under Section 32.
  2. Explain the Important points regarding Depreciation.
  3. What are the Conditions for allowance of Depreciation?
  4. Mention the name of Assets eligible for depreciation
  5. Mention the Important terms for computation of Depreciation Allowance.
  6. How to Claiming Depreciation as Per Income Tax Act?

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