Module 1:

PROFITS AND GAINS FROM

BUSINESS AND PROFESSION

Dr. Rakesh Nadig H S [Link]., MBA., [Link]., SLET., Ph.D.

SOC, SJCC
DEPRECIATION SEC. 32:

Depreciation usually means loss or decline in value which

occurs gradually over useful life of a material thing, due to
physical wear, tear and decay, and is generally limited to losses
or decline in value which cannot be restored by current repairs
and maintenance.
According to explanation, depreciation allowable under Section
32(1) is Mandatory and therefore shall be allowed even if the
assesse has not claimed the deduction in respect of
depreciation in computing his total income. The assessing
officer must allow the depreciation in accordance with
provisions of law.
 Difference between Depreciation under Accounting Rules and Taxation
Rules

No. Accounting System Taxation System

1. Charges against profit. Allowances in nature
2. WDV / SLM method is allowed. Only WDV method is allowed.
(Electricity
Generation Unit can adopt SLM
Method)
3. Depreciation is charged on IndividualDepreciation is charged on Block of
Asset asset.
4. On the basis of number of days asset50% of normal Depreciation (If asset is
used. used
below 180 days) or Normal
Depreciation.
5. Only on Tangible Asset. Tangible and Intangible asset.
6. Life of the asset. Prescribed rate.
 Conditions for Claiming the Depreciation:
Condition-1 Asset must be owned by the assessee.

Condition-2 It must be used for the purpose of business or profession.

Condition-3 It should be used during the relevant previous year.

Condition-4 Depreciation is available on tangible as well as intangible

assets.
Depreciation under the Income Tax Acts
• Block of Asset U/s 2(11)
• Falls under the same category.
• On which same rate of depreciation is applied.

• Block of assets means a group of assets falling within a

class of assets comprising of:
• Tangible assets being building, Machinery, Plant or
Furniture.
• Intangible- being technical knowhow, Patents, goodwill,
copyrights, trademarks, licenses and franchises or any
other business or commercial rights of similar nature. In
respect of which same percentage of depreciation is
prescribed.
Assets Which Are Qualified For Depreciation
1. Tangible assets - Building, Machinery, Plant or Furniture
2. Intangible assets - acquired after March 31, 1998 Know-how,
Patents, Copyrights. Trademarks, Licenses, Franchises or any
other business or Commercial rights of similar nature.

Depreciation under the Income-tax Act is allowed on the basis

of block of assets as per written down value (WDV) method of
calculating depreciation.

However, units engaged in the power sector can claim

depreciation either on straight line method (individually on
each asset) or on written down value method on block of asset.
 Blocks of Assets
Sl. Particulars
No
A. Tangible Assets
Group I Buildings
1 5% Block Residential Building excerpt hotels and boarding houses
2 10% Block All non-residential buildings
3 40% Block Buildings acquired after 1-9-2002 for installing machines plants forming part of
water supply project and water treatment and used for the business
Group II Furniture
10% Block Furniture and fittings including electric fittings
Group III Plant and Machinery
1 15% Block Plant and machinery, motor car except used as taxi, scooter, cycle, bus, truck,
air conditioners, surgical equipment

2 20% Block Inland vessels and ocean going ships and speed boats
3 30% Block Motor buses, lorries, taxis, moulds used in rubber and plastic goods, machinery
used in semi-conductors
4 40% Block Aircraft, aero engines, lifesaving medical equipment, computers, books
acquired for professional use other than annual publication, energy saving
devices, pollution control equipment, books being annual publication.
B. Intangible Asset
25% Block Know-how, patents, copyright, trademarks, licenses, franchises, or business or
commercial rights
Actual Costs:
Actual cost of asset includes
• Cost paid for acquiring the asset
• Cost of installation
• Expenses on insurance, freight, loading and unloading
• Expenses on modification and repairs incurred before the
actual us eof the asset
• Expenses on salaries, rent, lighting etc., relating to the period
before production has commenced can be added in actual
cost.
Conditions Of Allowance Of Depreciation :
There are two essential conditions :
• Asset should be owned, wholly or partly by the assessee.
• It should be used for the purpose of assessee’s business or
profession
Important Notes
1. If the asset is purchased and put to use for more than 180
days during the previous year- (100%) Full rate depreciation
2. If the asset is purchased and put to use for less than 180 days
during the previous year -50% of Rate of Normal depreciation
3. Asset purchased during the previous year but not put to use -
No Depreciation
4. No depreciation is admissible on imported cars.
Additional Depreciation
• Enhanced depreciation at rate of 20% actual cost shall be
allowed 32 Sec in respect of new machinery and plant
acquired and installed after 31/3/05. Only as assessee
engaged in the business of manufacturer or production of any
article or thing can claim such enhanced depreciation.
• In enhanced depreciation in respect of new plant and
machinery is allowable even for existing business. The rate of
enhanced depreciation is restricted to 10% in the case of
plant and machinery is put to use for less than 180 days
during the year of installation.
 Computation of Additional Depreciation
Condition-1 The assesse must be engaged in manufacturing/production of
any article or thing

Condition - New plant and machinery should be acquired and installed after
2 March
31, 2005

Condition-3 It should be an eligible plant and machinery.

Rate of additional depreciation
1. If the asset is put to use for a period of 180 days or more,
additional depreciation will be charged at 20% of actual cost of
the asset.
2. If the asset is put to use for a period of less than 180 days,
additional depreciation will be charged at 10% of Actual cost of
assets.
Unabsorbed depreciation:
While dealing with unabsorbed depreciation the following step must
be taken into consideration:
1. Depreciation allowance of previous year is first deductable from
income chargeable under the head profits and gains of business.
2. If the depreciation allowance is not fully deductable under the head
profit and gains of business of absence or inadequacy of the profits, it
is deductable from income chargeable under the heads of income
[except the head income from salaries] for the assessment year.
3. If the depreciation allowance is still unabsorbed, it can be carried
forward to the subsequent assessment year or years by the same
assessee. No time limit is fixed for the purpose of carrying it.
4. In the subsequent years unabsorbed depreciation can be set of
against any income whether chargeable under the head profits and
gains of business or under any other head of income.
The Following Plant And Machinery Assets Are Not Eligible For
Additional Depreciation
1. Road transport vehicles.
2. Ships and Aircrafts.
3. Any plant or machinery which is installed in any office or
premises or any residential accommodation or accommodation
in the nature of guest house.
4. Any plant or machinery which, before its installation by the
assessee, was used either within or outside India by any other
person.
5. Any plant or machinery, the entire cost of which is allowed as
a deduction (by way of depreciation or otherwise) during the
previous year.
Assessee's engaged in the following activities are not eligible
for additional depreciation
1. Cooking food in a hotel.
2. Construction of dam, building or contract for civil engineering.
3. Cutting and polishing raw diamonds.
4. Hatching of eggs.
5. Pressure pilling for building.
6. Mining of stones.
Points to be considered while computing the depreciation
1 . Depreciation is calculated on the WDV of the block after
adjusting the sales and purchase during the year in that block.
2. Rates of depreciation for different assets are taken as
prescribed in rules.
3. Depreciation will not be allowed on a block if WDV of that
block comes to Zero, even if some assets in that block may be
existing.
4. Similarly, no depreciation will be allowed on a block, in
which no assets are left and the block become empty, or
ceases to exist, WDV of the block will be treated as short term
loss.
5. Depreciation will be allowed at 50% of the prescribed rates, if
the asset is put to use for less than 180 days in the year of
acquisition.
6. Straight Line Method (SLM) method is applied in case of the
assets of the power companies i.e. Undertakings engaged in
generation or generation and distribution of power at the
prescribed rates of depreciation on the actual cost of the
assets.
7. Additional depreciation of 20% is calculated on actual cost of
the asset in certain cases
8. Depreciation will not be allowed on scientific research assets,
as entire cost of which is allowed as deduction u/s 35.
 Format for computation of Depreciation :

Opening WDV of block xxx

Add Actual Cost of asset acquired during P.Y. xxx

Less Money payable in respect of asset sold / discarded / damaged, etc. xxx

WDV for Depreciation xxx

Less Depreciation at prescribed rate xxx

Closing WDV xxx