Effect of Depreciation Depreciation
although a non-cash item of cost is deductible expenditure in determining taxable income. Depreciation provisions are prescribed by the Companies Act accounting purposes and by the Income Tax Act for taxation purposes. Tile purpose of the provisions of depreciation contained in the Companies Act is the commotion of managerial remuneration, dividend payment and disclosure in financial statements. Since companies in India are regulated by the Companies Act, they should provide depreciation in books of accounts in accordance with Schedule XlV”of the Al1 which prescribes the rate depreciation for various types of appreciable assets on written down value (WDV) basis as well straight line basis. It also permits companies to charge depreciation on any other basis provided has the effect of writing off 95 per cent of the original CO!! of the asset on the expiry of the specified period and has the approval of the government. In actual practice. however, companies follow the provisions of the Income Tax Act with the basic objectives of its tax destructibility. The provisions of Income Tax Act relating to depreciation are contained in Section 32. The section envisages three importation conditions for following depreciation, namely, (j) the as~t is.owned by the aS~l’~~·l’. (ii) the asset is used by the assesses for the purpose of business and (iii) the asset is in the form of buildings. furniture, machinery and plant, including ships. vehicles. books, scientific apparatus, surgical acquiescent and so on. Tile amount of annual depreciation on determined by (a) the actual cost (If the asset and (b) i L classification in the relevant block of ass •.t~. The actual cost means the cost of -acquisition of the asset and the expenses incidental then-to which arc necessary to put the a fact in a usable state. for instance and Carrier inward, installation charges and expenses incurred to facilitate Hill of the asset like expenses on the training of the operator or on essential construction work.
Depreciation is charged, with a view 10 simplify computation. not on an individual asset hut on a block of assets. ” block of assets defined :IS a group of assets falling within a class of assets, being building, machinery, plant or furniture in respect of which the same rate of depreciation is. prescribed. 11 IUS. which fall Within the same class of assets and in respect of which the same percentage ‘rate of depreciation h.ls been prescribed irrespective of their nature form one block of assets. For example, all assets under the category of plan! and machinery which qualify for depreciation at 25 per cent will form one block and depreciation is computed with reference to the actual cost of the block. Similarly, assets decipherable at 40 per cent will constitute another block; a third block consists of assets appreciable at ‘;0 per cent, and the fourth block comprises assets subject to a 100 per cent write-off. Depreciation is computed at block-wise rates on the basis of written down value method only. Presently, the block-wise rates Cor plant and machinery are at 2′) per cent, 40 per cent and 100 per cent. The depreciation allowance’ on office buildings and furniture and Sittings is 10 per cent. Where the actual cost of plan! and machinery cost not exceed Rs 5,000, the entire cost is allowed. to be written ofT in’ the first year of its use. If an asset acquired during a year has been
used for a period of less than ISO days during the year, depreciation on such assets is allowed only at 50 per cent of the computed depreciation according to the relevant rate. Apart from the Simplification of the computation of the amount of depreciation, a significant implication of categorizing assets into blocks is that if an asset falling in a block is sold out, there is no capital gain or terminal depreciation or balancing charge sale proceeds of the asset arc reduced from the IDV of the block. Capital gain/loss can arise in these situations
(j) When the sale proceeds exceeds the WDV of the whole block
(ii) When the entire block is sold out; and
(iii) In case of 100 per cent decipherable assets. 111e terminal loss is not allowed in the relevant assessment ‘year but is spread over a number of years to be allowed by way of depreciation. .
In case of insufficiency/absence of profit, absorbed depreciation can be off against income under any head against business income as in the case of absorbed Jose Effective 1996- 97, it can he carried forward for a maximum period of eight years. The mechanics .of computation of depreciation is illustrated in Example ·10.1.
Assume the following fa”,-, relating 10 Avon l.Id (AL):
AS Soldiering amounted to Rs Lakisha (Block A) and Rs 36 lakh (block B). II is expected that fresh investments in lSM ,during 2OX’H will be: Block A (Rs 16o lakh) and Block B (R. 80 lakh). II is also projected by the AI. that disinvestment proceeds from the will amount 10 Rs 45 lakh in case of Block A and Rs 25 lakh in case of Block B. Assume that about 50 per cent of additional investment during 2OX5 will be made after September 20X5 Compute the relevant depredation charge for 20X4-5 and the Protected depredation charge for’ 2OXS-O.
Solution The relevant depreciation charge for 20X4-5.and the ~ed depreciation charge for 2OX4 is calculated in Tables 10.3and 10.4 respectively
Note: If the entire block or assets is sold during a year for an amount exceeding (1 + 2) or the sale Proceeds of the block sold is higher than'(1 + 2), the difference represents short term capital gains subject to tax. ere the sale proceeds are lower than (1 + 2), the difference is short-term capital loss and the At is entitled to tax shield