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Depreciation

how a depreciation works

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22 views2 pages

Depreciation

how a depreciation works

Uploaded by

karthik.nagavally7
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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What is Depreciation as per the Income Tax Act?

According to the Income Tax Act, depreciation is the reduction in an asset's value brought on by use, deterioration, aging, or
obsolescence. The Income Tax Act permits businesses to deduct their depreciation costs from their taxable income. Since
depreciation is a non-cash expense, there is no cash withdrawal from the organisation. Rather, it symbolises the distribution of an
asset's cost throughout its useful life. This allocation lowers the entity's taxable revenue and thus its tax obligation.
It's crucial to remember that depreciation can only be applied to tangible assets like furniture, machines, buildings, and cars.
Patents, trademarks, copyrights, and goodwill are a few examples of intangible assets that are not depreciated. When determining
their taxable income, entities must compute and claim depreciation on their assets. The tax authorities may impose penalties and
interest charges for failure to comply.

Block of Assets
To compute depreciation, one has to know the WDV of an asset block. A group of assets from the same asset class that are
gathered together as a block of assets consists of:

Examples of tangible assets are furniture, appliances, plants, and buildings.


Knowledge, patents, copyrights, trademarks, licences, franchises, and any other similar business or commercial rights are some
instances of intangible assets.

The asset block is recognised according to its type, life, and comparable application. In addition, the percentage of depreciation
within each asset class needs to be considered when classifying assets. A block of the asset will be identified for each of these
asset classes that have the same rate of depreciation. Because depreciation is based on a group of assets rather than individual
assets, under the Income Tax Act, individual assets lose their individuality.

Factors Affecting Eligibility for Claiming Depreciation Under the Income Tax
Act
To be eligible for the depreciation deduction, an assessee needs to fulfil several requirements. The prerequisites are listed below:

Classifications of Assets: To receive the benefits of depreciation, the asset's owner must be an assessee. Both tangible and
intangible assets are possible. A house, factory, machinery, or furniture are examples of tangible assets. Patent rights, copyrights,
trademarks, licences, franchises, and similar property acquired on or after April 1, 1998, are examples of intangible properties.
When determining depreciation, the income tax agency only accounts for the house's depreciation. It's possible that they didn't
account for the cost of the land the building is situated on. The argument that the land does not lose value owing to usage or wear
and tear serves as justification for not including the cost of the property in the house.

Ownership vs. Lease: Only capital assets that an assessee owns are eligible for depreciation claims. The assessee must be the
owner of such properties to benefit from the allowance for property depreciation. An assessee doesn't need to be the property
owner. An assessee is entitled to a credit for depreciation on dwellings in cases when he builds one but the property is owned by
someone else. If the assessee lives in and utilises the house, he is not eligible to request the deduction. An assessee is eligible for
depreciation allowances if he constructed a home on the land and took out a mortgage on it. In the case of hire and buy, an
assessee is not entitled to a deduction if he leases the equipment for a short period. Nonetheless, in the case of a loan, an assessee
is qualified to get the deduction if he purchases the property and becomes the buyer.

Co-ownership: A co-owner of an asset has the option to record depreciation on the asset as well.

Used for Business or Professions: A business or vocation may have used the commodity to be eligible for the depreciation
credit. On the other hand, an assessee is not obliged to claim the depreciation credit, for which the asset must be used during the
fiscal year. Consequently, the taxpayer is entitled to depreciation deductions even if he only uses the asset for a brief period
throughout an accounting year. Consider every seasonal factory to understand this concept.

Depreciation on Sold Assets: An assessee is not permitted to deduct depreciable assets. An object cannot be deducted by the
assessee if it is sold, removed, or damaged in the same year that it was purchased.

Conditions to Claim Depreciation



The Income Tax Act and the Companies Act of 1956 have different rules on depreciation. Consequently, regardless of the
depreciation rates recorded in the books of accounts, the Income Tax Act's prescribed depreciation rates are the only ones that are
allowed.


Depreciation must be allowed or assumed to have been approved as a deduction starting with the fiscal year 2002–03,
independent of a taxpayer's claim in the profit and loss account.


If the presumptive taxation plan is employed, the deemed profit is considered to have taken depreciation into account. This
means that the taxpayer can carry forward the WDV after subtracting the depreciation amount.


The assets must be used in conjunction with the taxpayer's business or occupation, and they must be owned fully or partially by
the assessee.


The permissible depreciation will be commensurate with the duration of time the assets are utilised for business purposes, even if
they are utilised for non-business purposes. Co-owners may deduct depreciation up to the value of their joint assets, and Section
38 of the Act gives the Income Tax Officer the authority to determine the proportionate share of depreciation.


Land purchase price and goodwill cannot be depreciated.

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