Project Report

On

Depreciation, Section 32 of Income Tax Act, 1961

Submitted to:

Rana Navneet Roy

Faculty Member in Principles of Taxation Law

Submitted by:

Ishu Deshmukh

B.A.LL.B. (Hons.) Student

Semester-V, Section-B, Roll No.-81

Submitted on:

August 21st, 2017

Hidayatullah National Law University

Uparwara Post-Abhanpur, New Raipur-493661 (C.G.)
 Declaration

I, Ishu Deshmukh, hereby declare that the project work entitled “Depreciation, Section 32 of
Income Tax Act, 1961” submitted to the Hidayatullah National Law University Raipur is the
original work done by me under the guidance of Mr Rana , HNLU, Raipur and this project has
not performed the basis for the award of any Degree or diploma and similar project if any.

Signature of the Student

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 Acknowledgements

I, Ishu Deshmukh, feel myself elated, as it gives me immense pleasure to come with
the work on topic, “Depreciation, Section 32 of Income Tax Act, 1961”. Words fail to express
my deep sense of glee to my teacher, Ms. Varendyam J. Tiwari who enlightened me on my
every difficulty in completion of task. I acknowledge the blessings and support which my mother
and father gave in finishing of this task.

I would like to forward my hearty thanks to my University and Vice-Chancellor for

providing all the necessary requirements which aided me to achieve my goal. I also thanks
Librarian HNLU, Raipur, for assisting me and allowing me to use the library of the University.

I feel a deep sense of thankfulness to all my seniors, my friends who helped me in

achieving my target.

Ishu Deshmukh
SEMESTER- V
ROLL NO.-81

3
 Introduction
Depreciation can be used as an effective tool for tax planning. According to section 32 (1),
depreciation can be claimed in respect of building, machinery, plant or furniture and w.e.f.
assessment year 1999-2000 depreciation on intangible assets such as know-how, patent rights,
copyrights, trademarks, licenses, franchises, or any other business or commercial rights acquired
on or after 1.4.98 can also be claimed, which are owned by the assessee and used for the
purposes of business or profession.

It may be noted that for the purpose of depreciation “Building” includes roads, bridges, culverts,
wells and tube wells. Likewise, plant and machinery includes Typewriters, Photocopiers, Telex
& Fax Machines, Computers, Tools and Books (used by the professionals). Depreciation is
allowed at prescribed percentage, which varies between 5% to 100% for various blocks of assets
on the written down value. However, as per second proviso to section 32(1),depreciation shall be
restricted to 50% of the prescribed percentage in respect of such asset which is acquired by the
assessee during the previous year and put to use for the purpose of business or profession for a
period of less than 180 days in that previous year. Another important point is that the first
proviso to section 32(1) , which provided for full deduction of the actual cost of any machinery
or plant costing upto Rs.5,000,has been omitted by the Finance Act , 1995 with effect from
Assessment Year 1996 -97. However depreciation on professional books has been allowed at the
rate of 100% with effect from Assessment Year 1996-97.

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 CONTENTS

1. Introduction........................................................................................................04

2. Objectives of The Study.....................................................................................06

4. Methodology.......................................................................................................06

5. Bare Act for Section 32......................................................................................07

6. Additional Depreciation U/S 32(1)(Iia)….................................... .....................14

7. Conditions for Claiming Depreciation................................................................17

8. Claiming 100% Depreciation & Reducing Tax Liability....................................19

9. Concept of Block Of Assets ……………………………………………….......21

10. Recent Judicial Decisions In Respect Of Deprecation...........................’..........23

16. References..........................................................................................................28

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 Objectives of the Study
Following are the objectives of my study:

1. To understand the concept of term “depreciation” under section 32 of the Income tax act,
1961.

2. To understand the various conditions and circumstances in which depreciation can be charged.
Various case laws have also been discussed regarding the same.

Methodology of the Study

This project is based on Doctrinal Research, which included collection of materials from
library and nearby sources. It includes secondary data sources. This also includes web search.

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Bare Act for Section 32
(1) In respect of depreciation of—

(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, owned, wholly or partly, by the assessee and used for the purposes of the business
or profession, the following deductions shall be allowed—
(i) in the case of assets of an undertaking engaged in generation or generation and distribution
of power, such percentage on the actual cost thereof to the assessee as may be prescribed
(ii) in the case of any block of assets, such percentage on the written down value thereof as may
be prescribed
Provided that no deduction shall be allowed under this clause in respect of—
(a) any motor car manufactured outside India, where such motor car is acquired by the assessee
after the 28th day of February, 1975 but before the 1st day of April, 2001, unless it is used—
(i) in a business of running it on hire for tourists ; or
(ii) outside India in his business or profession in another country ; and
(b) any machinery or plant if the 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 :
Provided further that where an asset referred to in clause (i) or clause (ii) or clause (iia) [or the
first proviso to clause (iia)], as the case may be, is acquired by the assessee during the previous
year and is put to use for the purposes of business or profession for a period of less than one
hundred and eighty days in that previous year, the deduction under this sub-section in respect of
such asset shall be restricted to fifty per cent of the amount calculated at the percentage
prescribed for an asset under clause (i) or clause (ii) or clause (iia), as the case may be :
Following third proviso shall be inserted after the second proviso to clause (ii) of sub-
section (1) of section 32 by the Finance Act, 2015, w.e.f. 1-4-2016 :
Provided also that where an asset referred to in clause (iia) or the first proviso to clause (iia), as
the case may be, is acquired by the assessee during the previous year and is put to use for the
purposes of business for a period of less than one hundred and eighty days in that previous year,
and the deduction under this sub-section in respect of such asset is restricted to fifty per cent of

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the amount calculated at the percentage prescribed for an asset under clause (iia) for that
previous year, then, the deduction for the balance fifty per cent of the amount calculated at the
percentage prescribed for such asset under clause (iia) shall be allowed under this sub-section in
the immediately succeeding previous year in respect of such asset:
Provided also that where an asset being commercial vehicle is acquired by the assessee on or
after the 1st day of October, 1998 but before the 1st day of April, 1999 and is put to use before
the 1st day of April, 1999 for the purposes of business or profession, the deduction in respect of
such asset shall be allowed on such percentage on the written down value thereof as may be
prescribed.
Explanation.—For the purposes of this proviso,—
(a) the expression “commercial vehicle” means “heavy goods vehicle”, “heavy passenger motor
vehicle”, “light motor vehicle”, “medium goods vehicle” and “medium passenger motor vehicle”
but does not include “maxi-cab”, “motor-cab”, “tractor” and “road-roller”;
(b) the expressions “heavy goods vehicle”, “heavy passenger motor vehicle”, “light motor
vehicle”, “medium goods vehicle”, “medium passenger motor vehicle”, “maxi-cab”, “motor-
cab”, “tractor” and “road roller” shall have the meanings respectively as assigned to them in
section 2 of the Motor Vehicles Act, 1988 (59 of 1988):
Provided also that, in respect of the previous year relevant to the assessment year commencing
on the 1st day of April, 1991, the deduction in relation to any block of assets under this clause
shall, in the case of a company, be restricted to seventy-five per cent of the amount calculated at
the percentage, on the written down value of such assets, prescribed under this Act immediately
before the commencement of the Taxation Laws (Amendment) Act, 1991:
Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery,
plant or furniture, being tangible assets or know-how, patents, copyrights, trademarks, licences,
franchises or any other business or commercial rights of similar nature, being intangible assets
allowable to the predecessor and the successor in the case of succession referred to in clause
(xiii), clause (xiiib) and clause (xiv) of section 47 orsection 170 or to the amalgamating company
and the amalgamated company in the case of amalgamation, or to the demerged company and the
resulting company in the case of demerger, as the case may be, shall not exceed in any previous
year the deduction calculated at the prescribed rates as if the succession or the amalgamation or
the demerger, as the case may be, had not taken place, and such deduction shall be apportioned

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between the predecessor and the successor, or the amalgamating company and the amalgamated
company, or the demerged company and the resulting company, as the case may be, in the ratio
of the number of days for which the assets were used by them.
Explanation 1.—Where the business or profession of the assessee is carried on in a building not
owned by him but in respect of which the assessee holds a lease or other right of occupancy and
any capital expenditure is incurred by the assessee for the purposes of the business or profession
on the construction of any structure or doing of any work in or in relation to, and by way of
renovation or extension of, or improvement to, the building, then, the provisions of this clause
shall apply as if the said structure or work is a building owned by the assessee.
Explanation 2.—For the purposes of this sub-section “written down value of the block of assets”
shall have the same meaning as in clause* (c) of sub-section† (6) of section 43.
Explanation 3.—For the purposes of this sub-section, the expression “assets” shall mean—
(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.
Explanation 4.—For the purposes of this sub-section, the expression “know-how” means any
industrial information or technique likely to assist in the manufacture or processing of goods or
in the working of a mine, oil-well or other sources of mineral deposits (including searching for
discovery or testing of deposits for the winning of access thereto).
Explanation 5.—For the removal of doubts, it is hereby declared that the provisions of this sub-
section shall apply whether or not the assessee has claimed the deduction in respect of
depreciation in computing his total income;
(iia) in the case of any new machinery or plant (other than ships and aircraft), which has been
acquired and installed after the 31st day of March, 2005, by an assessee 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, a further sum equal to twenty per cent of the actual cost of such
machinery or plant shall be allowed as deduction under clause (ii) :
Following proviso shall be inserted before the existing proviso to clause (iia) of sub-section
(1) of section 32 by the Finance Act, 2015, w.e.f. 1-4-2016 :
Provided that where an assessee, sets up an undertaking or enterprise for manufacture or
production of any article or thing, on or after the 1st day of April, 2015 in any backward area

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notified by the Central Government in this behalf, in the State of Andhra Pradesh or in the State
of Bihar or in the State of Telangana or in the State of West Bengal, and acquires and installs any
new machinery or plant (other than ships and aircraft) for the purposes of the said undertaking or
enterprise during the period beginning on the 1st day of April, 2015 and ending before the 1st
day of April, 2020 in the said backward area, then, the provisions of clause (iia) shall have effect,
as if for the words “twenty per cent”, the words “thirty-five per cent” had been substituted :
Provided 13[further] that no deduction shall be allowed in respect of—
(A) any machinery or plant which, before its installation by the assessee, was used either within
or outside India by any other person; or
(B) any machinery or plant installed in any office premises or any residential accommodation,
including accommodation in the nature of a guest-house; or
(C) any office appliances or road transport vehicles; or
(D) any machinery or plant, the whole of the actual cost of which 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;
(iii) in the case of any building, machinery, plant or furniture in respect of which depreciation is
claimed and allowed under clause (i) and which is sold, discarded, demolished or destroyed in
the previous year (other than the previous year in which it is first brought into use), the amount
by which the moneys payable in respect of such building, machinery, plant or furniture, together
with the amount of scrap value, if any, fall short of the written down value thereof :
Provided that such deficiency is actually written off in the books of the assessee.
Explanation.—For the purposes of this clause,—
(1) “moneys payable” in respect of any building, machinery, plant or furniture 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,
so, however, that where the actual cost of a motor car is, in accordance with the proviso to clause
(1) of section 43, taken to be twenty-five thousand rupees, the moneys payable in respect of such
motor car shall be taken to be a sum which bears to the amount for which the motor car is sold
or, as the case may be, the amount of any insurance, salvage or compensation moneys payable in
respect thereof (including the amount of scrap value, if any) the same proportion as the amount

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 of twenty-five thousand rupees bears to the actual cost of the motor car to the assessee as it
would have been computed before applying the said proviso;
(2) “sold” includes a transfer by way of exchange or a compulsory acquisition under any law for
the time being in force but does not include a transfer, in a scheme of amalgamation, of any asset
by the amalgamating company to the amalgamated company where the amalgamated company is
an Indian company or in a scheme of amalgamation of a banking company, as referred to in
clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949) with a banking
institution as referred to in sub-section (15) of section 45 of the said Act, sanctioned and brought
into force by the Central Government under sub-section (7) of section 45 of that Act, of any asset
by the banking company to the banking institution.
(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.1

Basics of Depreciation
 Depreciation is allowable as expense in Income Tax Act, 1961 on basis of block of assets on
Written Down Value (WDV) method.

 Block of assets means group of assets falling within a class of assets for which same rate of
depreciation is prescribed.

 GOODWILL & LAND is not eligible for depreciation.

 Depreciation is allowable only to the owner of the asset.

 A lessee is not the owner of the property therefore depreciation is allowed only to
lessor. If furniture or any part is constructed by the lessee then depreciation on that is
allowed to lessee.

1
http://taxadda.com/income-tax/business-or-profession/depreciation-sec-32/#basics-of-depreciation

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  If property purchased under hire purchase contract then depreciation is allowed to the
purchaser.
 In case of co-ownership, depreciation is allowable in ratio of their ownership.

 Asset must be used for the purpose of business or profession.

 If the assesse doesn’t claim the amount of depreciation as deduction, even then the amount of
WDV carried forward to next year is reduced by the depreciation amount.

 If profit is calculated on presumptive basis u/s 44AD or 44AE then such reported profit is
considering after all the expenses and depreciation allowable under section 32.

 Depreciation under Income Tax Act is different from that of Companies Act, 1956. Therefore
dedpreciation rates prescribed under income tax is only allowable whatever the depreciation is
charged in books of accounts.

 If a new addition is made in a existing asset then it is consider as an asset if it increase the
capacity of the existing asset or reduce per unit cost otherwise it should be treated as an
expense.

 If there are some spare parts/machines and they are not actually used, depreciation is allowable
on them because they are used for purpose of business/profession.

 Lower Depreciation – Depreciation can be claimed at lower rate as per income tax act. But for
the next year your wdv will be considered as reduced by the percentage of depreciation
prescribed. For e.g. if an asset is of Rs. 1 lakh and 80% depreciation is prescribed for the asset
and you charge only Rs. 30,000 as depreciation, in this case next year wdv will be considered
as Rs. 20,000 only not Rs. 70,000.

Depreciation In The Year In Which The Asset Is Purchase

 Deprecation is allowed only if the asset is put to use in the year of purchase.

 Degree of utilisation of assets will not be considered while determining whether the asset is
put to use or not. For example if the asset is used for trial run then it is considered the asset is
put to use.

 If asset is put to use for less than 180 days then amount equal to 50% of the amount calculated
using normal depreciating rates is allowed as depreciation.

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 Deprecation will be allowed on the basis of block of asset method.

Depreciation In Subsequent Years

 If asset is not put to use in the year of purchase or put to use for less than 180 days even then
full depreciation is allowed in the subsequent years if the below condition satisfies.

 Depreciation is allowed on whole block of asset even if only a single asset in that block is used
during the year at any point of time.

CALCULATION OF DEPRECIATION

 WDV of an asset = Actual cost to the assesse – All depreciation actually allowed to him
(included unabsorbed depreciation, if any)

 WDV of Block of Assets

Aggregate of WDV of all the assets falling within

that block at the beginning of the year XXX
Add: Actual cost of any assets falling within block
acquired during the previous year XXX
Less: Money received or receivable in respect of any
asset in the block which is sold, discarded, demolished
or destroyed during the previous year XXX
WDV at the end of the year XXX

Less: Depreciation at block rate (if WDV at the end of year is positive) XXX

Closing value of the block of the asset at the end of the year XXX

If the amount of WDV comes at a negative amount then no depreciation is allowed and the
amount will be considered as capital gain and the closing WDV will be zero.

If such amount is positive and no asset exists in the block then such amount will be treated as
short term capital loss and no depreciation is alllowed.

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 Calculation Of Capital Gain On Sale Of Depreciable Asset

The capital gain/loss from depreciable assets is always treated as short term irrespective of the
fact that asset is held for more than 3 years or not.

Calculation of Capital Gain/Loss

Aggregate of WDV of all the assets falling within
that block at the beginning of the year XXX
Add: Actual cost of any assets falling within block
acquired during the previous year XXX
Less: Money received or receivable in respect of any
asset in the block which is sold, discarded, demolished
or destroyed during the previous year XXX
WDV at the end of the year XXX
If the above calculations results in a negative WDV then such amount will be considered as short
term capital gains. If such amount is positive and no asset exists in the block then such amount
will be treated as short term capital loss.

ADDITIONAL DEPRECIATION U/S 32(1)(iiA)

Additional depreciation shall be allowed if following condition are fulfilled by the assessee:

1. Additional deprecation is allowed only on new machinery or plant excluding ships and aircraft
which has been purchased and installed after 31-03-2005

2. The assessee shall be engaged in the business of manufacturing and production of any article
or thing (computers used for data processing in industrial premises are eligible for additional
depreciation). From financial year 2016-17 additional depreciation is also allowed to assessees
engaged in business of generation and distribution of power.
Printing and Publishing is also considered as manufacturing.
3. Depreciation @ 20% of actual cost of assets is allowed as additional depreciation.

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4. If assesse is engaged in production or manufacturer of any article or thing on or after 1st Apr,
2015 in any notified backward area of Andhra Pradesh, Bihar, Telangana, West Bengal and
acquires and installs any new machinery or plant during 1st April, 2015 to 31st March 2020
then additional depreciation is allowed at the rate of 35%.

5. However if the asset is put to use for less than 180 days then additional deprecation will be
allowed at half of actual rate i.e 10% or 17.5% as the case may be.
From financial year 2015-16, if additional depreciation is allowed in year of put to use at half
of the rate then remaining half depreciation is allowed in the succeeding year.
6. Specific cases in which depreciation is not allowed

 Second hand plant and machinery – Plant and machinery which, before installation by
assessee, was used whether inside and outside India by any person.

 Any office appliance or road transport vehicle.

 Any machinery or plant installed in any office premises or any residential accommodation,
including accommodation in the nature of guest house

 Any plant and machinery, the whole of the actual cost of which is allowed as a deduction
(whether by way of depreciation or otherwise) in computing income chargeable under the head
“Profits and gains of business or profession” of any on previous year.

UNABSORBED DEPRECIATION
If there is a loss under business and profession and the reason for such loss is depreciation, then it
is called unabsorbed deprecation and it shall be allowed to be carried forward.

Additional Points
1. The depreciation shall be carried forward even the business/profession to which is relate even
of the business/profession not in existence.

2. Return of loss is not required to be submitted for carry forward of unabsorbed depreciation

3. The assesse should set off brought forward losses in the following manner: –

1. First of all current year depreciation will be adjusted.

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 2. Then brought forward business losses will be set off (speculative or non-speculative)

3. Then unabsorbed depreciation will be set-off against business income.

Unabsorbed depreciation can be carried forward for indefinite number of years.

Unabsorbed depreciation can be set off from any head of income other than Salary and Capital
Gain in any year.

Examples for calculation of unabsorbed depreciation

 Example 1

Profit from business before depreciation 4,00,000

Depreciation 6,00,000

Unabsorbed depreciation 2,00,000

 Example 2

Profit from business before depreciation 4,00,000

Depreciation 6,00,000

Income from house property 1,00,000

Unabsorbed depreciation 1,00,000

 Example 3

Loss from business before depreciation 4,00,000

Depreciation 6,00,000

Income from house property 1,00,000

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 Unabsorbed depreciation 6,00,000

Carried forward business loss 3,00,000

11) WDV IN CASE OF SLUM SALE

WDV of Block of assets XXX

Less: Deduction on account of slump sale XXX

WDV of block of assets eligible for depreciation XXX

Deduction on account of slump sale

Actual cost of assets falling in the block, which is transferred by slump sale XXX

Less: Depreciation that would have been allowed if that asset was the only
One in the block XXX
Deprecation on account of slump sale XXX

Apportionment In Case Of Succession/Amalgamation/Demerger Of Business

Depreciation shall be allowed as per the following provision in case of succession of firm or
proprietary concern by a company or in case of amalgamation or demerger of a company :-

1. The total amount of depreciation allowed to both the company shall not exceed the amount if
there were no such succession or conversion

2. Depreciation will be apportioned between the predecessor and the successor in the ratio of
number of days for which the assets were used by them.

CONDITIONS FOR CLAIMING DEPRECIATION

1. Asset must be owned by tax payer .
2. It must be used for the purpose of business or profession.
3. It should be during the relevant previous year.

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4. Depreciation is available on tangible as intangible assets.
5. The taxpayer should own the asset or the taxpayer should be the co-owner of asset. The
following point should be noted-

 It is not necessary that the taxpayer should be the registered owner of the asset. If
a person acquires a building by satisfying conditions of section 53A of Transfer of
property Act [i.e., under a Power of Attorney Transaction], depreciations
available even if he is not the registered of the building.
 Where an taxpayer carries on a business or profession in a building not owned by
him but in respect of which he holds a lease or right of occupancy, he is entitled to
depreciation of capital expenditure incurred by him on construction of any
structure or any work in relation to the building byway of improvement,
renovation or extension.

6. If a taxpayer acquires an asset under financial lease, he can claim depreciation.

7. Generally, in the case of a hire purchase agreement, the hire has an uninterrupted right
over the asset for all practical purposes if he discharges his obligation (and not seller) can
claim depreciation from the year in which the asset is taken on hire.
8. Asset Must Be Used For The Purpose Of Business Or Profession- The asset, in
respect of which depreciation is claimed, must have been used for the purpose of business
or profession. Even if an asset is put to use for trial production depreciation can be
claimed .the user of the asset should be understood in a wide sense so as to embrace
passive as well as active user .if a machine is kept ready for at any moment in a particular
factory, the machinery can be said to be used “for the purpose of the business and
depreciation is available .Any forced idleness of the machinery cannot disentitle the
taxpayer form getting the benefit of depreciation allowance. If an asset is used partly for
business purpose and partly for other purposes, proportionate depreciation is available.
9. User Of The Asset In The Previous Year-The asset, in respect of which depreciation is
claimed, must have been used for the purpose of business during the relevant previous
year. Even if an asset is used for a few days (or even for a few hours) during the previous
year, depreciation for the entire year is available.However.in the first year, in which an
asset is acquired, the asset should be used at least for 180 days to claim fully year’s

18
 depreciation (if it is used for less than 180 days, half year’s depreciation in the first year
in which the asset is acquired).2

CLAIMING 100% DEPRECIATION & REDUCING TAX

LIABILITY
Wind mills and other special devices including electric generators and pumps running on wind
energy, bio-gas plant, bio-gas engines, agricultural and municipal waste conversion devices
producing energy and electrically operated vehicles including battery powered or fuel-cell
powered vehicles, solar power generating systems etc., are some of the items included in
machinery and plant which are eligible for 100% depreciation. An existing industry having
considerable taxable profits may plan diversification in the industries and can claim 100%
depreciation in respect of the new plant and machinery. In the recent past many companies have
successfully done such tax planning, which is absolutely within the legal frame work and in
accordance with the Govt. policy to promote investments in certain sectors.

NON-CLAIMING OF DEPRECIATION:
Non-claiming of depreciation may at times be more beneficial rather than claiming it.
Accordingly one may plan not to claim depreciation in a particular year and to claim the same in
a subsequent year, in which depreciation can be claimed at a higher written down value due to
non-claiming of depreciation in the earlier year. In this process the benefit of depreciation is not
lost but it is deferred only.

In the following situations it is advisable not to claim the depreciation-

i) In case where certain deductions and allowances like brought forward investment allowance
may lapse for insufficiency of profits, in a particular year, if the depreciation is claimed.

ii) In case of non-corporate assessees expecting higher profit in the subsequent year or years, if
their present income is falling in lower tax bracket, as claim of depreciation in the subsequent

2
http://blog.makemyreturns.com/post/efiling-of-income-tax/section-32-claiming-depreciation.aspx

19
years will help them reducing the taxable profits and thereby saving tax, which would have been
payable at a higher rate considering the slab rates.

Non-claiming of depreciation may be used for avoiding the provisions of section 50. It may be
noted that profit on sale of depreciable asset is treated as Short Term Capital Gain under section
50. Therefore, if any person desires to hold an asset for the purpose of re-sale at a future date,
particularly in cases where such asset is retained for such period which may entitle him to claim
it as a long term asset, then it is advisable not to claim depreciation on the same. In such a
process, the profit on sale of the asset will be beyond the mischief of sec. 50 and shall be treated
as Long Term Capital Gain (LTCG). As a result such assessee will be entitled to the benefit of
cost inflation index as well as the concessional rate of tax on LTCG.

Further w.e.f. assessment year 1997-98 depreciation can be carried forward for 8 assessment
years only, as such it has become more important to claim it only in the year in which taxable
profit arises.

Claim of Depreciation only when an Asset is used for Business :

One of the stipulation for claiming depreciation under section 32(1) is that the assessee had used
the asset for the purpose of business or profession. When an asset will be considered to have
been used, has been a matter of controversy. Some important Judicial views are as under:

Punjab National Bank Ltd. v. CIT3– That depreciation had to be allowed in full on the lifts and
the air-conditioning plant since they were being used by the assessee for the purpose of its
business, the fact that they might also be utilised by the tenant of one of the floors or customers
or visitors did not make any difference. Plant or machinery could be said to be used by
somebody else if such other person has control over the same. It is the control which determines
who is using it. “User” means not only getting benefit, but also controlling, running, stopping,
repairing, replacing, etc.

Whittle Anderson Ltd. v. CIT4- The word “used” should be understood in a wide sense so as to
embrace passive as well as active user ; when machinery is kept ready for use at any moment in a
particular factory under an express agreement from which taxable profits are earned, the

3
141 ITR 886 (Del.)
4
79 ITR 613 (Bom.)

20
machinery can be said to be “used” for the purposes of the business which earned the profits
although it was not actually worked.

CWT v. Ramaraju Surgical Cotton Mills Ltd.5- A unit cannot be said to have been set up
unless it is ready to discharge the function for which it is being set up. It is only when the unit
has been put into such a shape that it can start functioning as a business or a manufacturing
organisation that it can be said that the unit has been set up. In Grasim Industries Ltd. v.
CIT 6 , it was held that a company need not have actually commenced production to claim
depreciation. It was enough if it was merely ready to produce. The bench ruled that the plant was
“ready for” business in fiscal 1992-93, and hence eligible for claiming depreciation.

CONCEPT OF BLOCK OF ASSETS

As per the provisions of section 43(6) of the Income Tax Act, the WDV of block of assets as at
start of the year has to be adjusted as follows so as to arrive at closing WDV:

– It has to be increased by actual cost [as per section 43(1)] of any asset falling within in the
block acquired during the previous year.

–Thereafter, It shall be reduced by ‘moneys payable’ in respect of

asset sold/discarded/demolished or destroyed during the previous year.

It has been held in Ashok Betelnut Case that moneys payable represents gross sale consideration
where as the contrary has been held in the case of Essar Shipping Limited case.

No deletion is permitted from the value of the block except when the asset is sold, discarded,
demolished or destroyed. e.g., in case of theft of an asset, no deletion is permitted from the block
of asset since the asset is neither sold nor demolished nor destroyed nor discarded.

– Further, scrap value, if any of any asset has to be reduced.

The question of deduction of scrap value from the block arises only when the asset is not sold.
For the purposes of Income Tax Act, a previous year is a distinct unit. In case an asset is
discarded by the business but not sold, section 43(6) permits the scrap value of the asset to be
reduced from the block in the previous year in which such asset is discarded. The assessee is

5
63 ITR 478 (SC)
6
32 TTJ 329 (Bom-Trib.)

21
entitled to claim depreciation on the residual value of such discarded asset [ie., Opening WDV of
such asset less scrap value] even though such discarded asset is not used for the purposes of
business or profession in such year and subsequent years.

In case of CIT v. Yamaha Motor India Private Limited7, the assessee claimed depreciation on
discarded assets which were written off during the previous year. The AO disallowed the claim
on the ground that the assets were not used for the purposes of business during the previous year.
It was held that that the term ‘used’ appearing in section 32(1) comprise of both active use and
passive use. Further, the expression ‘used for the purposes of business’ used in section 32(1) has
to be read harmoniously with the term “discarded” meaning thereby that the assessee is entitled
to claim depreciation as far as discarded asset is concerned if the asset has been used for the
purposes of business in earlier years. Adopting a realistic approach and harmonious construction,
the expression ‘used for the purposes of business’ appearing in section 32 when used in respect
of discarded asset would mean that the use in the business need not necessarily be in the
relevant previous year but in earlier previous years. Any other interpretation would lead to an
incongruous situation because on the one hand the depreciation is allowed on discarded asset
after allowing inter alia adjustment for scrap value, yet, on the other hand use would be required
of the discarded machinery which use is not possible.

To conclude, the decision of the Delhi High Court is logical considering the existing provisions
of the Act as regards allowability of depreciation on discarded asset. Either the Act must permit
the residual value of the discarded asset to be written off completely in the year in which the
asset is discarded or the interpretation adopted in the aforesaid judgement has to be accepted

Cost of asset

One can understand a fiscal law providing for a heightened tax incentive such as depreciation on
fixed asset and pro tanto there would be a divergence between the written-down value (WDV) of
an asset in the tax records vis-À-vis its accounting records. While this may be unavoidable, the
gulf between the two sets of records can be bridged by agreeing not to disagree at least on the
issue of the cost of the asset. The I-T Act should allow any increase in the rupee payment on
account of acquisition of a fixed asset as expenditure in one shot instead of condescending to

7
(2009) 226 CTR (Del) 304

22
 amortise the same by way of depreciation. And when there is a reduction in rupee payments, the
same should be treated as income straightaway. AS 11 is not payment fixated like Section 43A.
Instead, it mandates revaluation of all monetary items on the balance sheet date. In other words,
it has a balance sheet fixation which of course is understandable. One area where the two can
converge is the cost of the asset — the I-T Act should emulate AS 11 in not tinkering with it in
view of the fact that gyrations in the currency market by themselves do not add to, or detract
from, the value of the asset.

Recent Judicial Decisions In Respect of Deprecation

 In the recent case of CIT v. Star Resorts (P) Ltd. 8 it was held that Depreciation cannot be
determined on the basis of estimate.

 Assessee obtained delivery of the new aircraft purchased by it in the later half of the relevant
previous year and got the same insured, it was held that the aircraft was made ready to use in
business , hence depreciation was allowable.9

 Kochi ITAT decided that when assessee, a charitable body, has already claimed deduction for
acquisition of capital assets by application of money, a further claim of depreciation on same
assets would amount to double benefits .

 Hirer of an asset under hire purchase agreement is entitled to depreciation in view of the
CBDT Circular No. 9 dt 23-3-1943 (C & P Vol. 10. P. 537 -538 4th Edition). (A. Y. 1995-96).10

 An assessee should not be deprived of benefit of depreciation u/s 32 for not running its factory
due to adverse law and order situation.11

 Assessee is entitled to claim depreciation on plant and machinery even if it is used during the
year for trial production.12 Again, Depreciation is allowable even where trial–run production
takes place.13

8
(P&H) 335 ITR 587
9
CIT v E.I.H. Ltd. 54 DTR 249
10
IT vs. Kaveri Engineering Industries 53 DTR 102 (Mad.)(High Court).
11
CIT v Norplex Oak India 10 Taxmann.com 163.

23
 If the assessee have merely financed the vehicles and borrowers are registered owners of such
vehicles it would be a loan transaction and in such case the assessee will not be entitled to
depreciation on such vehicles, on the other hand, if the vehicles are purchased by the assessee
and retained their ownership with registration in their name and the vehicles were either given on
lease or given under hire purchase agreement giving an option to the hirer to purchase if after the
payment of lease rentals or hire charges during the agreed period, then the assessee will be
entitled to depreciation, matter remanded for consideration.14

 In case of expenditure on leased premises in order to make it fit for assessee’s business, if any
extra facility was created by way of brick works and connected expenditure, the same would be a
capital expenditure eligible for depreciation under explanation 1 to s. 32(1) and if not, the
expenditure would be revenue in nature covered by s. 30(a)(ii).15

 Defective machineries found during trial run – Whether depreciation is allowable on machineries
which were brought for business purpose and found to be defective after the trial installation.
Held, Yes. The defective machineries cannot be said that they were not for business purposes.
Hence, the claim is allowable.16

 The Supreme Court held that in case of manufacturer of tea, by virtue of rule 8D, only 40% of
the income is taxed and consequently in deciding liability only proportionate depreciation is
required to be taken in to account as that is the depreciation actually allowed.17

 In case of block of assets, in order to allow assessee’s claim under section 32(1), use of
individual asset for purpose of its business can be examined only in first year when asset is
purchased and subsequent years use of block of assets is to be examined. Existence of an
individual asset in block of assets itself amounts to use for purpose of business and therefore,

12
CIT vs. Mentha & Allied Products 47 DTR 284 (All).
13
Finolex Cables Ltd 29 SOT 595
14
CIT vs. Manappuram Central Finance & Leasing Ltd. (2010) 46 DTR 323 (Ker.)
15
EDS Electronic Data Systems (India) (P) Ltd. (2009) 23 DTR 10 (Del)(Trib).
16
Sri Chamundeshwari Sugar Ltd. 223 CTR 423.
17
Doom Dooma India Ltd. 310 ITR 392 (SC).

24
 depreciation is allowable on it, even though said asset is not actually used in course of business
during relevant assessment year.18

Unabsorbed Depreciation:

 Assessee company was entitled depreciation in respect of gas sweetening plant which was kept
ready for use but could not be actually used due to lack of availability of raw material during
relevant assessment years.19

 Once it is found that assets are used for business, it is not necessary that all the items falling
within the block of assets have to be simultaneously used for being entitled to depreciation.20

 Unabsorbed depreciation of amalgamated company cannot be deducted while taking written

down value of asset taken over of amalgamated company.21

Additional Depreciation
 Production of ready mixed concrete amounts to manufacture or production of goods and the
assessee is entitled to claim additional depreciation under section 32 (1)(iia) on RMC
machinery.22
 Windmills installed for electricity generation which did not increase plant capacity and which
was not the core business, additional depreciation is allowable.23

Classification of Assets

 Assessee engaged in printing business, used certain hardware for execution of printing process,
said hardware could not be categorized as ‘computer’ and would not be eligible for higher
depreciation. It is only where machine is being used essentially and predominantly for computing
capability and where it is not being harnessed for other specialized industrial uses, be it

18
Swati Synthetics Ltd. vs. ITO 38 SOT 208 (Mum.).
19
ACIT v Chennai Petroleum Corporation (2010) 125 ITD 396 (Chennai).
20
CIT v. Sonal Gum Industries (2010) 42 DTR (Guj) 159.
21
CIT v Silical Metallurgic LTd 324 ITR 29.
22
YFC Projects (P) Ltd. vs. Dy. CIT (2010) 46 DTR 496 (Delhi)(Trib.).
23
CIT vs. Texmo Precision Castings (2010) Taxation 468 (Mad.).

25
 mechanical, electric or electronic (or a composite thereof) activity that it could be called as a
computer.(A.Y. 2005-06).24

 Generator is to be depreciate @ 15% not 20%.25

 Depreciation is allowable on specified intangible assets like, license or any other business or
commercial rights of similar nature and not on Goodwil.26

 Where assessee company received brand name under a scheme of arrangement under section 391
to 394 of Companies Act 1956, assessee was eligible for deppreciation in respect of brand name
under section 32(1)(ii) of the Income Tax Act.27

 Depreciation is admissible on foreign cars used at foreign sites for assessee’s business.28

 Routers & Switches are to be included in Block of Computer entitled to depreciation @ 60%.29

 Though JCB has been categorized as an excavator and its main function is removing soil or
earth, yet at the same time, JCB’s another function is to carry or transport removed soil and
dump it at another site to discharge function like transshipment and loading into another vehicle
and therefore, for the purpose of depreciation, JCB can be treated as a motor lorry and it would
be eligible for higher depreciation at 40 percent.30

 License granted by State Government for collection of toll on a road which constructed and
maintained by the assessee on build, operate and transfer basis in terms of agreement with the
State Government for a fixed period of 16 years and 9 months is an intangible asset eligible for
depreciation as prescribed u/s. 2(1)(ii). 31 However, in the case of Tamil Nadu Road

24
S. T. Reddiar & Sons vs. Dy. CIT 129 ITD 475 / 135 TTJ 480 / 49 DTR 326 (Cochin)(Trib.).
25
CIT v P Glass Works 333 ITR 355.
26
Osram India (P) Ltd. vs. Dy. CIT 51 DTR 297 (Delhi)(Trib).
27
KEC International Ltd. vs. Addl. CIT (2010) 41 SOT 43 (Mum.).
28
CIT v Punjab Chemi.Plants Ltd (2010) 43 DTR (P&H) 322.
29
DCIT v Datacraft India Limited 6 taxmann.com 85 Mum ITAT / 40 SOT 295.
30
Gaylord Constructions (2008) 175 Taxman 99 (Magz) (Cochin).
31
Asoka Info (P) Ltd. 129 TTJ 77 (Pune) (Trib

26
 Development Company Ltd.32 it was held that Road is not plant but after asst year 1988-89 is
included in the category of building for depreciation as such.

 Commercial rights of exploration of mineral oils acquired by assessee by entering in to

production sharing agreement with the Russian Government fall under the expression ‘any other
business or commercial rights of similar nature’ same being akin to “licence” as stipulated in s.
32(I)(ii) and therefore .they are in the nature of intangible assets eligible for depreciation.33

32
24 DTR 618
33
ONGC Videsh Ltd. 33 DTR 22 (Del)(Trib).

27
 Bibliography

Books:

1. Master Guide to Income Tax Act(2014), Taxmann Publications Pvt Ltd.

2. Dr. Vinod K Singhania & Dr. Monica Singhania(2016), Students Guide to Income Tax,
Taxmann Publications Pvt Ltd.

Websites:

1. www.google.ac.in

2. www.uscourts.gov/about-federal-courts/educational-resources/about-educational-outreach/activity-
resources/about

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