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MEANING:
Fall or decrease in the book value of afixed assets is called DEPRECIATION.
Decrease could be due to wear and tear .
It is necessary to follow the rules of Income
Tax Act for depreciation to be allowed.
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PROVISIONS OR RULES RELATED
TO ALLOWING OF DEPRECIATION1. Assessee /Person must be the owner of the
assets: he can claim deduction to depreciation on assets onlywhen he is the owner of such asset either wholly or partly.
If assets is on lease or rent , then depreciation is not allowed.
2.Assets must be used by person for business andprofession: depreciation will be allowed when assets have beenused in the previous year.
3.Assets on which depreciation is allowed by theINCOME TAX ACT : (dep. Is a revenue loss.)
Building and home/house Machinery
Plant and Machinery
Furniture and Fixture
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4. Asset on which depreciation is not allowed:
Land
Guest house
If any assets is sold, dismantled, cancelled etc. in the previous year.
Foreign car purchased in 28th feb,1975 but before 1st apr,2001and
neither used for taxi nor in profession.
5.Assets taken on lease:
I. If a person is operating any business or profession from abuilding taken on rent or lease then dep. is not allowed.
II. If he incurs any capital expenditure on renovation,
development or improvement then dep. is allowed.
6.Depreciation on foreign car: if any car is purchased after28.02.1975 but before 1.4.2001 then dep. Is allowed
I. Foreign car used as taxi
II. Foreign car used in other country in business and profession.
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7.Asset used for less than180 days : if asset is used inprevious year less than 180 days then 50% on normal rate depreciationis charged.
8. Additional depreciation on plant and machinery :(assessment year 2003-2004,purchased on or after 1.04.2002 as newmachinery)
i. 20% of actual cost is allowed.
ii. New machinery is used less than 180days then 10% additionaldepreciation.
Additional depreciation is not allowed on followingasset:
Ship and aeroplane
Office and equipment
Plant or machinery installed in office building , residential buildingor guest house
Plant and machinery on which deduction has been allowed for thewhole cost.
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9.Addtional depreciation for industrial undertaking
existing before 1.04.2002 :If 10% or more expansion in ayear than additional depreciation @15%is allowed the same previous
year.
10.Additional depreciation on plant and machinery
established after 31.03.2005.: if purpose of encouragingnew industries in such case 20% dep. Is charged for which
expansion is not applicable.If machinery or plant is used for less than 180 days then 10%
additional rate is charged.
NOTE: points 8,9 and 10 are allowed only when certificate of
chartered accountant is certify the claims of assessee.
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BASIS OF DEPRECIATION :
There are two method :
1.Written down value method
2.Straight line method
Computation of depreciation:
1.Block of Assets
2.Actual cost of assets3.Written down value of assets
4. Computation of depreciation
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Block of
assets
Group Assets include in the group Rate of
depreciation
1. building G.1 Building used for residence (excepthotel and boarding)
5%
G.2 Building used for residence (including
hotel and boarding house)
EG: Factory, Godown etc.
10%
G.3 Building acquired after 1.09.2002 and
in which plant and machinery have
been installed.
100%
2.Furniture
and Fittings
G.1 All type of furniture and fittings 10%
3.Machinery
and Plant
G.1 General rate
Rate for ships , Speedboats
15%
20%
G.2 Car purchased after 31.03.1990 and let
out on hire.
Foreign car purchases after 30.03.2001
15%
20%
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G.3 Vehicles which are let out on hire EG: bus, taxi
etc.
Aeroplane including engine
Moulds used in rubber and plastic factories
Medical equipment
Vehicle acquired after 1.10.1998 but before1.04.1999 commercial vehicle used in business
before 1.04.1999.
30%
40%
30%
40%
40%
G.4 Utensils made of glass or plastic and used in
refilling.(w.e.f.1997-98)Commercial vehicle acquired in 2002-02 and
used in business before 1.4.2002
Machines used in weaving cloth or in garment
sector purchased after 1.4.2001 but before
1.4.2004 and used in business before 1.4.2004
50%
50%
50%
G.5 Computers(including software)
New commercial vehicle acquired after disposing
off 15 year old which offer 1.10.1998 but before
1.4.1999 and used in business before 1.4.1999.
60%
60%
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Commercial vehicle acquired
after disposing off 15year old
which offer 1.4.1999 but before
1.4.2000 and used in business
before 1.4,2000.
Books kept by professionals
such as doctors, lawyers,
chartered accountants etc,
except annual publications and
library book.
60%
60%
G.6 Gas cylinder, flour mill, heat
pump cinematographic films,
pollution control instruments
etc.
80%
G.7 Machinery and plant acquired
and installed after 1.9,2002 forwater supply project.
Wooden parts of machinery
used in manufacturing artificial
silk.
100%
100%
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Bulbs of film studio, machinery
related to cinema.
Wooden match frames.
Machines used in mines.
Books of professional including
annual publications.
Books of libraries, Water and air
pollution control equipments
100%
100%
100%
100%
100%
4.Intangible
assets
G.1 All types of intangible assets
acquired after 31.3.1998. forexample, technical know-how,
patents, trademark etc. 25%
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Mr. Sachin Gupta had following assets on 1.4.2011.Building A 5% 1,50,000
Building B and C 10% 2,00,000
Machine R 15% 1,80,000
Machine S 15% 1,50,000
Furniture X 10% 1,00,000Acquired following assets in previous year 2011-12.
Machine Q 15% 50,000
Car Y 15% 2,00,000
Trademark S 25% 60,000
Sold following assets in previous year 2011-12.Building B 1,80,000
Machine R 1,50,000
Calculate written down values of above assets.
EXAMPLE:-
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ACTUAL COST OF
ASSETS:-
Meaning:the total cost including its purchase price or
construction cost and related expenses such as interest
payable on loan taken to purchase/acquire the assets expenses
on fright, installation and bringing the assets into working
condition.
Actual cost of an asset includes:(i) purchase price/construction cost + interest payable on loan taken
(ii) freight + installation expenses
(iii) expenses incurred to bring the asset in working condition for the
first time.
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Actual cost of acquiring asset in
various conditions:
1.Assets used for scientific research : if an asset is acquiredto be used in scientific research but after some time it is
used in business then actual cost of such asset will be:
Actual cost- Deductions allowed regarding scientific
research.2 .Assets acquired in gift or inheritance: actual cost in this
case will be: Actual cost to the previous owner
Depreciation allowed (from assessment year 1988-89)
3. Purchase of old assets: if an assessee purchases assetsfrom any other business (old assets) then actual cost of
such assets will be the cost deemed fit by the assessing
officer.
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4. Assets previously sold by assessee reacquired: if an assesseereacquires any asset previously sold by him then actual cost ofsuch asset will be the lesser of the two:
(i) amount paid to reacquire such asset.
(ii)balance amount after deduction of total depreciation allowedon the original cost of the asset.
5. Building used in business: if any business is personalproperty of the assessee but is being used in business after28.02.1946 then actual cost of such building will be :
Purchase price of assetDepreciation allowed from the dateof purchase to previous year.
6. Mutual transfer of assets between holding and subsidiarycompanies: actual cost of such asset will be the cost thatwould have been for the transferring company and for whichthe following two conditions need to be fulfilled.
(i) subsidiary company should be an Indian company.
(ii)100% shares of the subsidiary company are with the holdingcompany.
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7. Transfer of asset under scheme of amalgamation :
actual cost of such asset to be amalgamated company
will be the actual cost that would have been to the
transferring company if the asset is being in business.
8. Foreign asset: if any asset is purchased from any
other country and due to devaluation of rupee if the
amount paid exceeds and the cost of asset then excesspayment made will be added to the cost of asset.
9. Assets acquired on after 1.4.1994 :balanceremaining after deducting custom duty excise tax from
the cost of asset will be the actual cost of sheet.
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EXAMPLE :-Mr. Omkar purchased a machine for rs.4,00,000 0n 1st july , 2009 for
his business. He sold this machine on 1.10.2010 for rs. 2,00,000 and
again repurchased it on 1.8.2011 for rs. 2,40,000. Rate of depreciation
is 15%. For the previous year 2011-12 calculate cost of the machine.
Solution:
Actual cost 1.7.2009 4,00,000
less : dep. @ 15% 2009-10 60,000
WDV 1.4.2010 3,40,000
Less : dep. @ 15% 2010-11 51,000
WDV 1.4.2011 2,89,000
(i)WDV as on 1.4.2011 2,89,000
(ii) Cost of acquisition 2,40,000
actual cost will be Rs.2,40,000
Which ever is
less
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WRITTEN DOWN VALUE OF ASSETS :(1) Actual cost of asset if acquired in previous year.
(2) Balance amount after deduction of depreciation uptoprevious year from the original cost (when asset is
purchased before previous year).
(3)WRITTEN DOWN VALUE OF BLOCK OF ASSETS:
(i) Balance amount after deduction depreciation from the written down
value of the block of assets in the previous year.
(ii) The actual cost of assets acquired in the previous year are added to this
amount.
(iii) From the total of points (i) and (ii) the cost of asset in the previous
year is deducted.(iv) After allowing depreciation the balance remaining is the written down
value.
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EXAMPLE
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EXAMPLE :-Written down value of a block of assets in which there are twomachines p and q is rs.6,00,000 on 1.4.2011. one machine was
purchased on 31.10.2011 for rs.3,00,000.This machine was put
to use on the same day Machine was sold on 1.2.2012 forrs.3,50,000. calculate written down value on 31.3.2012.
Solution: Rs.
WDV as on 1.4.20116,00,000
Add: Machine N acquired3,00,000
9,00,000
Less: Machine N Sold3,50,000
WDV for claiming depreciation5,50,000
Less: Dep.@ 15%82 500 WDV24 May 2013 19
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COMPUTATION 0F DEPRECIATION :
Following steps should be taken to computedepreciation.
(i) Putting the assets into various blocks.
(ii) Calculate the value of each block separately.(iii) Add the cost of asset purchased or acquired to
the concerned block.
(iv) Deduct the asset sold or destroyed from theconcerned block.
(v) Ascertain written down value of blocks of assetson 31st march.
(vi) Charge depreciation at given rates on the writtendown values.
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EXAMPLE :
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EXAMPLE :Calculate depreciation on the assets of Mr. Prakash for the assessment year 2012-13.
Rs.
Written down value of motor taxi on 1.4.2011 80,000
Written down value of car on 1.4.2011
(purchased 0n 1.4.1990) 2,00,000
Purchased car manufactured in India in november , 2011
(used in business) 1,00,000
Purchased foreign car in the previous year (used in business in India) 1,20,000
Purchased foreign car in august 2011 which was let on hire. 3,00,000
solution :Rs.
WDV of motor taxi @ 30%24,000
WDV of car purchased on 1.4.1990@ 15%30,000
Car purchase in nov.2011 @ 15% (50% of normal rates )
used for less then 180 days7,500
Imported car @ 20%24,000
Imported car for running on hire @ 30%90,000
depreciation allowed1 75 500
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ASSET USED FOR LESS THAN 180 DAYS:
When an asset is used in less than 180 days in the
previous year then 50% depreciation is charged on normal
rate but for that following should be followed:
1) Asset should have been purchased or acquired in the
previous year.
2) Asset should have been used in the business previous
year.
3) Asset should have been used for less than 180 days in
the previous year.
4) Asset should exist in business on the 31st Mar.
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Example:Written down value of a block of assets consisting of machine A,B and C is Rs.18,50,000 on 1.04.2011.Machine S was purchased on 1.09.2011 forRs.2,50,000.This machine was brought into use on 15.09.2011.Cost of machine N
purchased on 20.12.2011 was Rs. 4,50,000.Machine A which was purchased on1.04.1999 for Rs.15,00,000 was sold on 1.03.2012 for Rs.17,00,000. Depreciationon machines is charged @15%.Calculate depreciation for the assessment year 2012-13.
Solution:
Rs.Machine (15%) 18,50,000
Add: Machine S (used for more than 180 days) 2,50,000
Machine N (used less than 180 days) 4,50,000 7,00,000
25,50,000
Less: Sale consideration of Machine A 17,00,000WDV as on 31.03.2012 8,50,000
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Depreciation: Rs.
4,50,000 x 15%x 50% = 33,750
(8,50,000-4,50,000)x15% = 60,000
93,750
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