Phoenix Auditing

Depreciation for AY 2020-2021 under Income Tax Act, 1961

Depreciation is a way of measuring decline in the value of asset. The main causes of depreciation are the usage , wear and tear and obsolescence of the asset. Since assets are used in the business/profession therefore some amount of such asset can be logically debited to the Profit and Loss Account as a non cash expenditure and is an allowable expense. There are several methods of calculating depreciation but in this article we will understand how depreciation is recorded  in the books of accounts as allowed under the Income tax Act.

Depreciation is calculated on the asset which is used for the purpose of business and/or profession.

For claiming depreciation assessee should be the owner of asset. If such asset is partially owned then proportionate amount of depreciation is allowed to the assessee on the basis of his share in the asset. Depreciation is allowed if the assessee is beneficial owner which can be seen in the case of Hire purchase, lease etc.

Depreciation is allowed when an asset is put to use. It is even allowed on the assets which are kept in the premises for emergency purposes. Suppose there are 10 machines in a factory but only 9 are used on daily basis and one is kept for emergency purpose or a reason alike then also assessee can claim depreciation on all 10.

Depreciation can be claimed on both tangible as well as intagible assets except on land.

Concept of days and its relatioith depreciation rate– In a year if the asset is put to use for a period of more than 180 days then asset will be depreciated using the full rate. If an asset is used for a period of less than 180 days then the rate will be halved. No depreciation if asset is acquired but not put to use. For example , A machine was bought and put to use on 10th November 2019 then the depreciation rate will be 15/2=7.5%.

Calculation of Written Down Value (WDV)of block of asset
WDV of block of asset as on 1st day of previous yearxxx
Add: Actual cost of asset bought during the PY of the respective blockxxx
Less: Money payable in respect of asset of the block which are sold, discarded, demolished or destroyed during PY.(xxx)
WDV of the block at the end available for calculating depreciation for the

1. While deriving at the actual cost of the asset add all the related expenses incurred on the asset to make it available for usage such as installation charges, transportation charges, taxes & duties(ineligible for ITC)etc reduced by the amount received on sale of product produced during trial run, subsidy etc

For example,  Calculation of actual cost of a car-

Ex showroom pricexxx
Add: Duties and taxes (non refundable)xxx
Add: Insurancexxx
Add: Essential kitxxx
Actual cost of carxxx

Note: TCS shall be deducted from above for the purpose of calculating depreciation as the same can be claimed or it is adjusted against tax liability.

2. Depreciation shall not be allowable if payment(s) for the asset so bought made to a person in a day is otherwise than through an account payee cheque / account payee DD or use of electronic clearing system exceeds Rs.10000.

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