DEPRECIATION ALLOWED [SECTION 32(1)]

• For all Assessee other than Power Sector - Depreciation is calculated on written down value of "Block of Assets", except for Power Sector, at rates provided in Appendix I read with Rule 5(1).

• For Power Sector Assessee - Under Section 32(1)(i) in case of undertaking engaged in generation or generation and distributors of power, the depreciation will be allowed on actual cost (i.e., on straight line method) at the rates provided in Appendix IA read with Rule 5(IA) in respect of assets acquired on or after 1st April, 1997.

• Such undertaking however has option to claim depreciation on Written Down Value Method at the rates provided in New Appendix I.

• Such option is to be exercised before the due date for furnishing the return of income u/s 139(1) for the year in which it begins to generate power. Once the option is exercised it applies for all subsequent assessment years.

When such asset on which depreciation is allowed is sold discarded or demolished in a previous year, and if the insurance, salvage, compensation or sale value, as the case may be, receivable in respect of such asset falls short of the written down value, such difference would be allowed as deduction [Terminal Depreciation] u/s. 32(1)(iii). The condition for allowing such deduction is that such deficiency is actually written off in the books of account. Similarly, excess of insurance, salvage, compensation or sale value, as the case may be, receivable in respect of such asset over the written down value is chargeable to tax [Balancing Charge] u/s. 41 (2) up to the amount of actual cost of the asset. Since Section 50 does not apply to such assets, the provisions of capital gains in respect of these assets shall apply as if it is a transfer of asset not forming part of the block of assets.

• In case of any new machinery or plant (excluding ships and aircrafts) acquired and installed after March 31, 2005 by an assessee engaged in the business of manufacture or production of any article or thing additional depreciation of 20% of actual cost shall be allowed.

However no such additional deduction will be allowed in respect of machinery or plant—

— used by any other person in India or outside India before its installation.

— installed in any office premises or any residential accommodation, including a guest house

Any office appliances or road transport vehicles

— the whole of actual cost of which is allowed as deduction in computing income chargeable under the head profit and gain of business or profession of any one previous year.

• Where an asset acquired during the previous year is put to use for the purpose of business or profession for a period of less than 180 days in that previous year, depreciation allowance shall be restricted to 50% of the amount calculated at prescribed rates.

• In case of an asset acquired under hire purchase agreement, where the terms of the agreement provide that the equipment shall eventually become the property of the hirer or confer on the hirer an option to purchase the equipment, the hirer is entitled to claim depreciation allowance.
  
  For computing the depreciation allowance, the difference between the aggregate amount of the periodical payments under the agreement and the initial value (i.e., the amount for which the hired subject would have been sold for cash at the date of agreement) would be spread evenly over the term of the agreement. (Circular No. 9, dated 23-3-1943).

• Fans, air-conditioners, refrigerators, etc., provided by the employer at the residence of the employees, is considered to have been used wholly for the purpose of the employer’s business and full depreciation in accordance with the rules, is allowed in the assessment of the employer. (F. No. 10/14/66-IT(A-I), dated 12-12-1966)

• Where the business or profession is carried on in a building not owned by assessee and any capital expenditure is incurred for construction of any structure or for renovation, improvement or extension of the building, then depreciation will be allowed in respect of such capital expenditure at the rates prescribed for "building".

• No depreciation is allowable in respect of motor car manufactured outside India acquired after 25th February, 1975 but before 1st April, 2001 unless it is used by the assessee

— In the business of running it on hire for tourists

— In his business or profession outside India.

• In case of inadequate profit or loss any depreciation which could not be fully allowed for want of profit, the amount which could not be given full effect of shall be carried forward in the subsequent year and shall form part of the depreciation of such subsequent previous year. (This conditions is subjected to Sec. 72(2) & Sec. 73(3)).