Change in Business

How to Charge Depreciation on Assets of Business? Complete Review

Depreciation means a reduction in the real value of tangible used by the assessee in the course of business or profession. Depreciation can be claimed as a deduction by the assessee for investing in assets like furniture, plant & machinery or other such tangible assets, for the previous year.

The concept of depreciation was introduced under the Income Tax Act for writing off the cost of an asset over its useful life. Depreciation is a compulsory deduction that can be claimed by a taxpayer. There are different methods for calculating depreciation on assets, the most popular ones being – Straight-line method (SLM) and the Written Down Value method (WDV).

Depreciation – An Overview

Section 32 of the Income Tax Act, 1961^[1] regulates & governs the depreciation in respect of:

• Tangible assets such as building, furniture, plant & machinery, etc
• Intangible assets such as patent, trademark, copyrights, know-how, licenses, franchises, etc.

It is pertinent to mention that these assets must be used in connection with business or profession and should be owned, either wholly or partly, by the assessee.

Allowance of Depreciation

Allowance of depreciation is calculated as per the WDV method with the exception of an undertaking that is engaged in the generation of power or distribution of power.

• If the undertaking is engaged in the business of generation of power or distribution of power, depreciation can be calculated as a percentage of the actual cost.
• In any other case, depreciation can be calculated as a percentage of written down value.

Depreciation allowance is apportioned in case of amalgamation or demerger of two companies. Such allowance is proportionate between an amalgamated and amalgamating company in case of amalgamation. And in the case of demerger, it is proportioned between demerged and the resulting company.

As per the Accounting Standard-19, in the case of financial lease transactions, the right to claim depreciation is allowed to lessee as he exercises such rights in the capacity of the owner.

Rates of Depreciation

Following are the different rates of depreciation depending upon the class of assets as made applicable with effect from 01.04.2017:

1. Buildings that are used for a residential purpose other than hotels & boarding: 5%
2. Buildings other than mentioned above: 10%
3. Building for installing plants for water supply projects, water treatment system pr for providing infrastructure facilities: 40%
4. Temporary erection such as wooden structure: 40%
5. Furniture & electrical fittings: 10%
6. Motor cars: 15%
7. Motor bus, lorries or any motor used for running them on hire basis: 30%
8. Airplanes: 40%
9. Vehicles used for commercial purpose & put to the use of business or profession: 40%
10. Machinery used for the delivery of raw water from the place of supply to the plant: 15%
11. Molds used in rubber & plastic manufacturing factories: 30%
12. Pollution control equipment, such as:

Air pollution control	40%
Water pollution control	40%
Solid waste control	40%

• Plant & machinery used in semiconductor business: 30%
• Plant & machinery used for the manufacture of the article by the use of any technology or know-how: 40%
• Plant & machinery used in weaving, processing & garment sector of textile industries: 40%
• Plant & machinery installed in the project of water supply & water treatment: 40%
• Life-saving medical equipment: 40%
• Containers made of glass: 40%
• The plastic used as refills: 40%
• Computers: 40%
• Books owned by professionals such as annual publications or any other books: 40%
• Books owned by any individual who carries on the business of lending libraries: 40%
• Ships: 20%
• Intangible assets such as know-how, patent, trademark, copyrights, licenses, franchise, and other similar rights: 25%

Rates of Depreciation before amendment w.e.f 01.04.2017

Following were the earlier rates of depreciation that prevails before amendment dated 1^st April 2017:

1. Furniture includes all sorts of the article for decorating & convenience of building & premise of business. It includes electrical fitting as well, such as wiring, switches, fans, etc. The rate of depreciation for furniture was 10%.
2. Plant & machinery includes AC, service lines, electrical transformer, cylinders for storing gas, etc. Depreciation for plant & machinery falls under seven different categories:
3. Motor cars not used in the business of running them on hire: 15%
4. Motor buses used in the business of running them on hire: 30%
5. Plant & machinery such as airplanes, commercial vehicle, life-saving instruments, etc.: 40%
6. Plant & machinery such as computers, books owned by professional, gas cylinders, etc.: 60%
7. Plant & machinery such as rollers, windmill, electric generators, etc.: 80%
8. Plant & machinery used in water supply projects or water treatment system, wooden parts used in artificial silk factories, books owned by professional for annual publications, etc.: 100%

Methods of Depreciation

The method for calculating the depreciation can vary as per the class of assets. The useful life of the assets also varies as per the different classes of assets. Calculation of depreciation differs as per accounting & taxation purpose based on asset-type and industry in which such asset is being used.

Following are the methods for calculating depreciation:

• As per Companies Act, 1956:
• Straight Line
• Written Down Value

• As per Companies Act, 2013:
• Straight Line
• Written Down Value
• Unit of Production

• As per the Income Tax Act, 1961:
• Straight Line for power generating units.
• Written Down Value (Block Wise)

Written Down Value Method

As per the Income Tax Act, 1961, written down value is calculated based on the actual cost of an asset.

• If an asset is acquired in the previous year:

Actual Cost of an asset = Written Down Value

• If an asset is acquired earlier than the previous year:

Written Down Value = Actual Cost – Depreciation Allowed.

As per section 32 of the Income Tax Act, 1961, depreciation shall be calculated at the specified rate of percentage on written down value.

Claim of Depreciation

Assessee can avail the deduction of depreciation only if he satisfies the following conditions:

1. The assessee must own the asset, wholly or partly.
2. Such an asset must be put to use in business or profession.
3. Depreciation would be on a proportionate basis in case an asset is used partly for business purposes and partly for other purposes. 
4. In case if the asset is owned partly, it means there are two owners of the same asset. Depreciation can be claimed by a particular co-owner to the extent of the value of an asset owned by such owner.
5. Assessee cannot claim the depreciation on the cost of land.
6. Depreciation is a compulsory allowance with effect from AY 2002-03 for all the assessees engaged in business or profession. It is allowed or deemed to be allowed irrespective of the fact whether the taxpayer claims the same in profit & loss account or not.
7. Depreciation can be claimed for the entire block of assets.
8. Depreciation is calculated from the date when an asset is being put to use and not the date when it was acquired.
9. It shall be allowed to the extent of 50% of the amount calculated in case an asset is put to the use for only half a year in the preceding year.