Rate of depreciation under income tax and related provisions

[Section 32 read with rule 5 along with appendix -1 &1A]

Depreciation on both (i) tangible assets such as buildings, machinery, plant or furniture as well as (ii) intangible assets such as know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, not being goodwill of a business or profession, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed.

How to calculate depreciation?

• In the case of assets of an undertaking engaged in generation or generation and distribution of power, such % on the actual cost thereof to the assessee as may be prescribed as per rule 5 read with appendix 1A[ S-32(1)(i)]
• In case of others, in the case of any block of assets, such % on the written down value thereof as may be prescribed as per rule 5 read with appendix 1[ S-32(1)(ii)]

 Deprecation by Power sector Company:

Provided that the aggregate depreciation allowed in respect of any asset for different assessment years shall not exceed the actual cost of the said asset. [1^st proviso to rule 5(1A)]

 Power company may claim deprecation based on block of assets like other taxpayer if option availed:  as per 2^nd proviso to rule 5(1A)

Provided further that the undertaking specified in of section 32(1) (i)  of the Act . i. e power sector  assessee may, instead of the depreciation specified in Appendix IA, at its option, be allowed depreciation under sub-rule (1) read with Appendix I, if such option is exercised before the due date for furnishing the return of income under sub-section (1) of section 139 of the Act,

(a)   for the assessment year 1998-99, in the case of an undertaking which began to generate power prior to 1st day of April, 1997; and

(b)   for the assessment year relevant to the previous year in which it begins to generate power, in case of any other undertaking :

Provided also that any such option once exercised shall be final and shall apply to all the subsequent assessment years.

 Rule 5(2) Where any new machinery or plant is installed during the previous year relevant to the assessment year commencing on or after the 1st day of April, 1988, for the purposes of business of manufacture or production of any article or thing and such article or thing—

(a)   is manufactured or produced by using any technology (including any process) or other know-how developed in, or

(b)   is an article or thing invented in,

A laboratory owned or financed by the Government or a laboratory owned by a public sector company or a University or an institution recognised in this behalf by the Secretary, Department of Scientific and Industrial Research, Government of India,

such plant or machinery shall be treated as a part of block of assets qualifying for depreciation at the rate of 40 % of written down value, if the following conditions are fulfilled, namely :—

(i)   the right to use such technology (including any process) or other know- how or to manufacture or produce such article or thing has been acquired from the owner of such laboratory or any person deriving title from such owner ;

(ii)   the return furnished by the assessee for his income, or the income of any other person in respect of which he is assessable, for any previous year in which the said machinery or plant is acquired, shall be accompanied by a certificate from the Secretary, Department of Scientific and Industrial Research, Government of India, to the effect that such article or thing is manufactured or produced by using such technology (including any process) or other know-how developed in such laboratory or is an article or thing invented in such laboratory ; and

(iii)   the machinery or plant is not used for the purpose of business of manufacture or production of any article or thing specified in the list in the Eleventh Schedule to the Act.

 Assets acquired and put to use for less than 180 days during the PY: 50% of the deprecation amount shall be allowed. [ 2^nd proviso to section 32(1)

 Depreciation restricted to 40% if rate is higher in certain cases where deprecation claimed under section 32(1)(ii) [ 1^st /2^nd /3^rd proviso to rule 5(1)]

Provided that the allowance under clause (ii) of sub-section (1) of section 32 in respect of depreciation of any block of assets entitled to more than 40% shall be restricted to 40% on the written down value of such block of assets in case of –

(i)   a domestic company which has exercised option under sub-section (4) of section 115BA, or under sub-section (5) of section 115BAA, or under sub-section (7) of section 115BAB; or

(ii)   an individual or Hindu undivided family which has exercised option under sub-section (5) of section 115BAC; or

(iii)   a co-operative society resident in India which has exercised option under sub-section (5) of section 115BAD:

Provided further that, for the purposes of section 115BAA, if the following conditions are satisfied, namely: –

(i)   option under sub-section (5) thereof is exercised for a previous year relevant to the assessment year beginning on the 1st day of April, 2020;

(ii)   there is a depreciation allowance, in respect of a block of asset, from any earlier assessment year or allowance of unabsorbed depreciation deemed so under section 72A, which is attributable to the provisions in clause (iia) of sub-section (1) of section 32; and

(iii)   such depreciation or allowance for unabsorbed depreciation is not allowed to be set off under clause (ii) or clause (iii) of sub-section (2) thereof, the written down value of the block of asset as on the 1st day of April, 2019 shall be increased by such depreciation or allowance for unabsorbed depreciation not allowed to be set off:

Provided also that, for the purposes of section 115BAC and section 115BAD, if the following conditions are satisfied, namely: –

(i)   the option under sub-section (5) of the respective section is exercised for a previous year relevant to the assessment year beginning on the 1st day of April, 2021;

(ii)   there is a depreciation allowance, in respect of a block of asset, from any earlier assessment year which is attributable to the provisions in clause (iia) of sub-section (1) of section 32; and

(iii)   such depreciation is not allowed to be set off under sub-clause (a) of clause (ii) of sub-section (2) of section 115BAC or clause (ii) of sub-section (2) of section 115BAD, the written down value of the block of asset as on the 1st day of April, 2020 shall be increased by such depreciation not allowed to be set off.

APPENDIX IA

Table of rates at which depreciation is admissible– generation or generation and distribution of power

[See rule 5(1A)]

[NEW APPENDIX I

[Effective from assessment year 2006-07 onwards]

[See rule 5]

TABLE OF RATES AT WHICH DEPRECIATION IS ADMISSIBLE

PART B

INTANGIBLE ASSETS

Know-how, patents, copyrights, trademarks, licences, franchises or any

other business or commercial rights of similar nature                                                                                                                                                               25 %

Notes:

1. Substituted by Income-tax (9th Amendment) Rules, 2019, w.r.e.f. 23-8-2019. Prior to its substitution said sub-item (2) read as under :

“(2) Motor cars, other than those used in a business of running them on hire, acquired or put to use on or after the 1st day of April, 1990”

2. Substituted by Income-tax (9th Amendment) Rules, 2019, w.r.e.f. 23-8-2019. Prior to its substitution said sub-item (3) read as under :

No deprecation on goodwill of a business or profession from AY 2021-22 due to amendment by Finance Act 2021.

Background : Hon’ble SC has allowed the deprecation on goodwill in the case of smiff securities Ltd (2012) 348 ITR 302(SC) but after amendment  in the income tax law no deprecation whether self-generated or purchased goodwill, summery of amendment as under:

As per section 2(11) block of assets” means a group of assets falling within a class of assets comprising—

(a)   Tangible assets, being buildings, machinery, plant or furniture;

(b)   intangible assets, being know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, not being goodwill of a business or profession, in respect of which the same percentage of depreciation is prescribed ;

Section 32. (1) In respect of depreciation of—

(i)   Buildings, machinery, plant or furniture, being tangible assets;

(ii)   know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, [not being goodwill of a business or profession,]

Owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed—

Explanation 3.—For the purposes of this sub-section, [the expression “assets“] shall mean—

(a)   tangible assets, being buildings, machinery, plant or furniture;

(b)   intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature [, not being goodwill of a business or profession].

 Also amendment in section 43(6) explaining meaning of WDV.

Note: consequential amendment in section 50 and 55(2)(a) as well.

Section 32(2) c/f and set off of unabsorbed depreciation:

 Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year59, or owing to the profits or gains chargeable59 being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73, the allowance or the part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years.

Priority of set off:

 First set off current year depreciation

Secondly set off brought forward business loss

Thirdly set off brought forward unabsorbed depreciation

Is it mandatory to claim deprecation? What would happen if not claimed?

Explanation 5.—For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income;

Additional depreciation on new machinery or plant from 1^st April 2005 [section 32(1)(iia)]

 In the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 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, a further sum equal to 20% of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii) :

Provided that where an assessee, sets up an undertaking or enterprise for manufacture or production of any article or thing, on or after the 1st day of April, 2015 in any backward area notified by the Central Government in this behalf, in the State of Andhra Pradesh or in the State of Bihar or in the State of Telangana or in the State of West Bengal, and acquires and installs any new machinery or plant (other than ships and aircraft) for the purposes of the said undertaking or enterprise during the period beginning on the 1st day of April, 2015 and ending before the 1st day of April, 2020 in the said backward area, then, the provisions of clause (iia)shall have effect, as if for the words “20% “, the words “35%” had been substituted :

 Provided further that no deduction shall be allowed in respect of—

1. any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person; or
2. any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house; or
3. any office appliances or road transport vehicles; or
4. any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of business or profession” of any one previous year;]

No depreciation block become nil:  if block of assets become nil due to sale or disposal of all assets or assets sold at more than WDV, in such cases no depreciation allowed.

Proportionate depreciation allowed to two different entity if succession of business during the previous year in the ratio of the number of days for which the assets were used by them.  [5^th proviso to section 32]

 Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xiii), clause (xiiib) and clause (xiv)]of section 47 or section 170( succession otherwise than on death) or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them.