The presentation contains provisions of Income Tax law on depreciation and related concepts.

1. AY 2021-22
Depreciation
&
Tax Planning
Part-III
Classroom Deliberations
CA. Dr. Prithvi Ranjan Parhi
© CA. Dr. Prithvi Ranjan Parhi

2. 1001- TAX PLANNING & MANGEMENT
Utkal -IMBA
Unit-I Tax Planning concept, tax planning in different organizations, Concept of
capital and revenue, income, receipt and expenditure; Computation of income
for corporate form of organizations, deductions and reliefs, rebates,
exemptions, recent development.
Unit-II Business expenditure and tax planning, depreciation and tax planning,
capital Gains and tax planning.
Unit-III Tax planning for new industries, export oriented units, holding
company and subsidiary company, new projects in infrastructure like power,
telecom, incentives for new project.
Unit-IV Tax Planning for foreign companies, foreign collaborations, foreign
technicians, Amalgamation, mergers.
Unit-V Administration- Income Tax Authorities, Assessment, Procedures, Tax
Payment, interest Penalities, MAT, Search and Seizure, Appeals and Remission.
© CA. Dr. Prithvi Ranjan Parhi

3. Depreciation [Section 32]
Charge of depreciation mandatory:
• Section 32 allows a deduction in respect of
depreciation resulting from the diminution or
exhaustion in the value of certain capital assets.
• The Explanation 5 to this section provides that
deduction on account of depreciation shall be
made compulsorily, whether or not the
assessee has claimed the deduction in
computing his total income.
© CA. Dr. Prithvi Ranjan Parhi

4. Conditions to be satisfied for allowance of depreciation:
• The allowance of depreciation which is regulated by
Rule 5 of the Income-tax Rules, 1962, is subject to
the following conditions which are cumulative in
their application.
– The assets in respect of which depreciation is claimed
must belong to either of the following categories,
namely -
• buildings, machinery, plant or furniture, being tangible assets;
• know-how, patents, copyrights, trademarks, licenses, franchises
or any other business or commercial rights of similar nature,
being intangible assets acquired on or after 1st April, 1998.
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5. Conditions to be satisfied for allowance of depreciation:
1. The depreciation in the value of any other capital assets cannot be claimed
as a deduction from the business income.
2. No depreciation is allowable on the cost of the land on which the building is
erected because the term ‘building’ refers only to superstructure but not
the land on which it has been erected.
3. The term ‘plant’ as defined in section 43(3) includes ships, books, vehicles,
scientific apparatus and surgical equipments used for the purposes of the
business or profession but does not include tea bushes or livestock or
buildings or furniture and fittings.
4. The word ‘plant’ does not include an animal, human body or stock-in-trade.
Thus, plant includes all goods and chattels, fixed or movable, which a
businessman keeps for employment in his business with some degree of
durability.
5. The expression ‘plant’ includes part of a plant (e.g., the engine of a vehicle);
machinery includes part of machinery and building includes a part of the
building.
6. Similarly, the term ‘buildings’ includes within its scope roads, bridges,
culverts, wells and tubewells.
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6. Conditions for allowance of depreciation:
The assets should be actually used by the assessee for
purposes of his business during the previous year
The asset must be put to use at any time during the
previous year.
The amount of depreciation allowance is not proportionate
to the period of use during the previous year.
• If the assets are not used exclusively for the business or
profession of the assessee but for other purposes as well,
the depreciation allowable would be a proportionate part
of the depreciation allowance to which the assessee
would be otherwise entitled.
• This is provided in section 38.
© CA. Dr. Prithvi Ranjan Parhi

7. Conditions for allowance of depreciation:
• Asset used for less than 180 days - However, it has been provided that
where any asset is acquired by the assessee during the previous year
and is put to use for the purposes of business or profession for a period
of less than 180 days, depreciation shall be allowed at 50 per cent of
the allowable depreciation according to the percentage prescribed in
respect of the block of assets comprising such asset.
• It is significant to note that this restriction applies only to the year of
acquisition and not for subsequent years. Depreciation would be
allowable to the owner even in respect of assets which are actually
worked or utilized by another person e.g., a lessee or licensee.
• The deduction on account of depreciation would be allowed under this
section to the owner who has let on hire his building, machinery, plant
or furniture provided that letting out of such assets is the business of
the assessee.
• In other cases where the letting out of such assets does not constitute
the business of the assessee, the deduction on account of depreciation
would still be allowable under section 57(ii).
© CA. Dr. Prithvi Ranjan Parhi

8. Conditions for allowance of depreciation:
• Use includes passive use in certain circumstances: One of the
conditions for claim of depreciation is that the asset must be
“used for the purpose of business or profession”. Courts have
held that, in certain circumstances, an asset can be said to be
in use even when it is “kept ready for use”.
• For example, stand by equipment and fire extinguishers can
be capitalized if they are ‘ready for use’’.
• Likewise, machinery spares which can be used only in
connection with an item of tangible fixed asset and their use
is expected to be irregular, has to be capitalised. Hence, in
such cases, the term “use” embraces both active use and
passive use.
• However, such passive use should also be for business
purposes.
© CA. Dr. Prithvi Ranjan Parhi

9. Conditions for allowance of depreciation:
• The assessee must own the assets, wholly or partly - In the case of buildings,
the assessee must own the superstructure and not necessarily the land on
which the building is constructed. In such cases, the assessee should be a
lessee of the land on which the building stands and the lease deed must
provide that the building will belong to the lessor of the land upon the expiry
of the period of lease. Thus, no depreciation will be allowed to an assessee in
respect of an asset which he does not own but only uses or hires for purposes
of his business. Depreciation is allowable not only in respect of assets “wholly”
owned by the assessee but also in respect of assets “partly” owned by him
and used for the purposes of his business or profession.
• The Explanation 1 to section 32 provides that where the business or
profession of the assessee is carried on in a building not owned by him but in
respect of which the assessee holds a lease or other right of occupancy, and
any capital expenditure is incurred by the assessee for the purposes of the
business or profession or the construction of any structure or doing of any
work by way of renovation, extension or improvement to the building, then
depreciation will be allowed as if the said structure or work is a building
owned by the assessee. © CA. Dr. Prithvi Ranjan Parhi

10. Computation of Depreciation Allowance -
• Depreciation allowance will be calculated on the following basis:
• Power generation undertakings: In the case of assets of an undertaking
engaged in generation or generation and distribution of power, such
percentage on the actual cost to the assessee as prescribed by Rule 5(1A).
• Rule 5(1A) - As per this rule, the depreciation on the abovementioned assets
shall be calculated at the percentage of the actual cost at rates specified in
Appendix IA of these rules. However, the aggregate depreciation allowed in
respect of any asset for different assessment years shall not exceed the actual
cost of the asset. It is further provided that such an undertaking as
mentioned above has the option of being allowed depreciation on the written
down value of such block of assets as are used for its business at rates
specified in Appendix I to these rules.
• However, such option must be exercised before the due date for furnishing
return under section 139(1) for the assessment year relevant to the previous
year in which it begins to generate power. It is further provided that any such
option once exercised shall be final and shall apply to all subsequent
assessment years.
© CA. Dr. Prithvi Ranjan Parhi

11. Block of Assets:
• A “block of assets” is defined in section 2(11), as a
group of assets falling within a class of assets
comprising—
– Tangible assets, being building, machinery, plant or
furniture,
– Intangible assets, being know how, patents, copyrights,
trade-marks, licenses, franchises or any other business
or commercial rights of similar nature
in respect of which the same percentage of depreciation
is prescribed.
© CA. Dr. Prithvi Ranjan Parhi

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17. Points
• Money payable includes insurance compensation
• ‘Sold’ includes compulsory acquisition.
• Depreciation shall not be charged on the assets
sold during the PY.
• Date of sale is immaterial.
© CA. Prithvi R Parhi 17

18. Points
• If the asset is
– acquired during the PY &
– put to use for the purpose of business or profession for <
180 days,
• depreciation shall be allowed for the ½ year.
• Asset will be tested individually for their use in the
1st year.
• In subsequent years block is to be tested.
© CA. Prithvi R Parhi 18

19. When No depreciation will be charged
• When closing WDV of the block of asset before
depreciation is –ve.
– Such –ve value shall be treated as Short Term Capital
Gain.
• When closing WDV of the block of asset before
depreciation is +ve or zero but the block is empty,
– Such + ve value shall be treated as Short Term Capital
loss.
© CA. Prithvi R Parhi 19

20. Sec 50.
• Depreciable asset shall always fetch STCG /
STCL irrespective of the period of holding.
© CA. Prithvi R Parhi 20

21. Hire Purchase
• In case of Hire Purchase, Depreciation shall be
on Cash Price.
© CA. Prithvi R Parhi 21

22. Q#1
• A, B & C are three assets which form a block. Rate of
Depreciation is 15%. WDV on 1st April 2020 is 10 Lac. Compute
depreciation in the following cases;
1. Machinery A sold for Rs. 4 Lac on 15th July 2020.
2. Machinery D purchased on 19th August 2020 for Rs.6 lac &
machinery A sold for 1 lac.
3. Machinery D purchased on 12th December 2020for Rs.3 lacs &
machinery B sold on 2nd February 2021 for 6 lacs
4. Machinery E purchased on 15th December 2020 for 5 lacs &
machinery A sold on 5th May 2020 for Rs. 20 lacs.
5. Machinery A, B, & C sold for Rs. 1 lac, 2 lac & 3 lacs
respectively.
© CA. Prithvi R Parhi 22

23. Q#1…Contd….
6. Machinery D was purchased on 8th August 2020 for Rs. 1
lac and A, B, & C was sold for 3 lac.
7. Machinery E was purchased on 19th December 2020 for
Rs. 2 lac and A, B, & C was sold for 2 lac.
8. Machinery A & B are sold for Rs. 3 lac & 5 lac respectively
on 7th Nov 2020. Machinery E purchased for Rs. 1 lac on
15th July 2020.
9. Machinery E purchased for Rs. 50,000 on 10th July 2020 &
the same put to use on 15th December 2020.
10. Machinery D purchased for Rs. 7 Lacs on 7th August 2020
but the same sold for Rs. 9 lac on 17th December 2020.
© CA. Prithvi R Parhi 23

24. A #1
Case 1 Case 2 Case 3 Case 4 Case 5
Opening WDV 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000
Add : Addition during the year - 6,00,000 3,00,000 5,00,000 -
Less: Money receivable from
sales etc
4,00,000 1,00,000 6,00,000 20,00,000 6,00,000
Closing WDV before
Depreciation
6,00,000 15,00,000 7,00,000 (5,00,000) 4,00,000
Depreciation charged* 90,000 2,25,000 82,500 Nil -
Closing WDV after
Depreciation
5,10,000 12,75,000 6,17,500 Nil Nil
Short Term Capital Gain 5,00,000
Short Term Capital Loss 4,00,000
*Depreciation Working 6,00,000 *
15%
15,00,000*
15%
4,00,000*15
% +
3,00,000*15
% *1/2
Negative. No
Depreciation
Block empty.
No
depreciation
© CA. Prithvi R Parhi
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25. A #1
Case 6 Case 7 Case 8 Case 9 Case 10
Opening WDV 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000
Add : Addition during the
year
1,00,000 2,00,000 1,00,000 50,000 7,00,000
Less: Money receivable from
sales etc
3,00,000 2,00,000 8,00,000 - 9,00,000
Closing WDV before
Depreciation
8,00,000 10,00,000 3,00,000 10,50,000 8,00,000
Depreciation charged * 1,20,000 1,35,000 45,000 1,53,750 1,20,000
Closing WDV after
Depreciation
6,80,000 8,65,000 2,55,000 8,96,250 6,80,000
*Depreciation Working 8,00,000*
15%
8,00,000*
15% +
2,00,000*
15%*1/2
3,00,000*
15%
10,00,000
*15% +
50,000*
15% *1/2
8,00,000*
15%
© CA. Prithvi R Parhi 25

26. Additional depreciation on Plant or Machinery acquired by
an Industrial Undertaking
• Additional depreciation is allowed on any new machinery or plant
(other than ships and aircraft) acquired and installed after 31.3.2005 by
an assessee engaged in the business of manufacture or production of
any article or thing or in the business of generation, transmission or
distribution of power at the rate of 20% of the actual cost of such
machinery or plant
Asset put to use for less than 180 days:
• Additional depreciation @10% (i.e., 50% of additional depreciation of
20%) to be allowed, where the plant or machinery is put to use for less
than 180 days during the previous year in which such asset is acquired.
• Further, the balance additional depreciation @10% (i.e., remaining 50%
of the additional depreciation of 20%) on new plant or machinery
acquired and used for less than 180 days, which has not been allowed
in the year of acquisition and installation of such plant or machinery,
shall be allowed in the immediately succeeding previous year.
© CA. Dr. Prithvi Ranjan Parhi

27. Additional Depreciation
• Assesee must be engaged in manufacture/ production or
generation/ distribution of power
• Has installed new eligible plant & machinery in factory during PY
• Rate : 20% of actual cost (35% in backward areas of AP,
Telengana, WB)
• If put to use < 180 days then ½ of additional depreciation
• Allowed even when block is – ve or nil.
• Allowed only in the 1st year. Not subsequently.
• Shall be subtracted from the value of block of asset.
• STCG shall be computed ignoring additional depreciation.
Additional depreciation shall not increase STCG
• Not allowed to power sector opting SLM of depreciation
© CA. Prithvi R Parhi 27

28. Additional Depreciation Not allowed
• Building
• Furniture
• Ships/ aircraft
• Road transport vehicles
• Office appliances
• 2nd hand/ old asset
• Plant & machinery eligible for 100% depreciation
• Intangible asset
• Plant & Machinery installed in office/ residence/
guest house
• If installed & sold in the same year
© CA. Prithvi R Parhi 28

29. Additional Depreciation
• Textile goods manufacturers can claim additional depreciation
on Windmill. ( CIT Vs. VTM Limited).
Hire Purchase
• Hire Purchase buyer can claim depreciation on cash price (CIT
Vs. General Industries Corporation.
Super Construction by lessee
• If used for business/ profession depreciation can be claimed.
Expenditure on transfer
• Shall not be deducted for depreciation.
• Shall be deducted from sales consideration for computation of
STCG
© CA. Prithvi R Parhi 29

30. Amalgamation/ Demerger/ Succession/ Pvt,
Public Conversion to LLP
• Depreciation allowed to both in the ratio of number
of days used by both of them.
• Benefit of date of amalgamation/ demerger shall be
allowed to amalgamated/ resulting company.
• Total depreciation in any previous year shall not
exceed the deprecation calculated at the prescribed
rate if the succession/ amalgamation/ demerger or
conversion had not taken place.
© CA. Prithvi R Parhi 30

31. Actual Cost of asset
• Expenses on acquisition, installation etc. shall be
added to actual cost.
• Subsidy from Govt : Subtracted from actual cost.
• Indirect Taxes eligible for ITC : Shall not be included
in actual cost
• Indirect Taxes not eligible for ITC / Not claimed :
Forms a part of actual cost.
© CA. Prithvi R Parhi 31

32. Trial Run Expenditure
• Shall be capitalized.
• Any income by way of sale of trial product
shall be subtracted from the cost of the asset.
© CA. Prithvi R Parhi 32

33. Gifted Asset
• Actual cost of asset to the previous owner
reduced by depreciation allowable as if asset
was the only asset in the block.
© CA. Prithvi R Parhi 33

34. Personal building brought into business
• Cost of such building shall be actual cost of the
building as reduced by notional depreciation by
applying the rate of depreciation applicable as
on the date of such conversion.
• This provision is only for building.
• Meaning, for other asset the original cost shall
be treated as cost of asset.
© CA. Prithvi R Parhi 34

35. Carry forward and set off of depreciation
[Section 32(2)]
• Section 32(2) provides for carry forward of unabsorbed
depreciation.
• Where, in any previous year the profits or gains chargeable are
not sufficient to give full effect to the depreciation allowance,
the unabsorbed depreciation shall be added to the
depreciation allowance for the following previous year and
shall be deemed to be part of that allowance.
• If no depreciation allowance is available for that previous year,
the unabsorbed depreciation of the earlier previous year shall
become the depreciation allowance of that year.
• The effect of this provision is that the unabsorbed depreciation
shall be carried forward indefinitely till it is fully set off.
© CA. Dr. Prithvi Ranjan Parhi

36. Depreciation & Deferred Tax
• Depreciation affects Deferred Tax Liability (DTL)
or Deferred Tax Asset (DTA) which forms an
important part of Financial Statements.
© CA. Dr. Prithvi Ranjan Parhi
Sl.No Entity Profit Status Entity –
Current
Entity – Future Effect
1 Book profit higher
than the Taxable
profit
Pay less tax
now
Pay more tax
in future
Creates
Deferred Tax
Liability
(DTL)
2 Book profit is less
than the Taxable
profit
Pay more
tax now
Pay less tax in
future
Creates
Deferred Tax
Asset (DTA)

37. Thanks
© CA. Dr. Prithvi Ranjan Parhi