Depreciation of Capital Assets

Revenue expenditure is deducted from the receipts while capital expenditure is meted
out a different treatment. The deduction of capital expenditure is spread out over a
number of years. This is called depreciation. Towards claiming depreciation, the
Appendix I under Rule 5(1) of the Income Tax Rules, 1962 requires all capital assets to be
constituted into different block of assets as provided in the abridged table below. For
each block of assets, there is a different rate for claiming the depreciation allowance.
Block of Assets Rate
Part 1: Tangible Assets
1. Building
a) Buildings mainly used for residential purpose except hotels and 5%
boarding houses
b) Buildings other than those used for residential purpose 10%
c) Purely temporary erections such as wooden structures 40%

2. Furniture and Fittings

a) Furniture and fittings including electrical fittings 10%

3. Machinery and Plant

a) General Plant and Machinery 15%
b) Motor cars other than those used in business for running them on hire 15%
c) Motor Car used in business of Hire 30%
d) Pollution Control Equipment 40%
e) Computers including Computer Software 40%
(Computer software" means any computer program recorded on any disc,
tape, perforated media or other information storage device. …)
f) Energy Saving Devices 40%
g) Renewal Energy Devices 40%
h) Oil Wells 15%
i) Books for carrying on Profession or Business of running lending library 40%

4. Ships, vessels ordinarily operating on inland waters including speed 20%

boats
Part B: Intangible Assets
a) know-how, patents, copyrights, trademarks, licenses, franchises or any 25%
other business or commercial rights of similar nature

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Identify the block of Assets and depreciation rate for the following assets held by a
Textile Mill for its business.
Asset Block of Asset Rate
Office premises
Spinning machines
Motor cars
Furniture & fixtures
Computers
Purchased IPR
Factory building
Factory Land
Wind Mills

Having constituted the block of assets, the law for claiming the depreciation allowance
for the block of assets is as follows.
Step -1 Begin with the written down value of the block of assets on April 1.
Step -2 Add the cost of acquisition of all the assets during the previous year.
Step -3 Subtract the amount received from the sale of any asset in the block during the
year.
This is the Written Down Value of the block of assets on March 31 before depreciation. It
can be expressed as follows:

Written down Value on March 31 before depreciation =

Written Down Value of April 1
+ Value of all assets acquired during the year
– Net value received from the sale of assets

The depreciation allowance for the year is the rate of depreciation (percentage) of the
Written down Value of March 31 with the qualification that the assets acquired in the
second half of the year get only half the depreciation. Thus, the depreciation allowance
could be expressed as follows:

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Depreciation allowance =
[(Written Down Value of April 1 + Value of all assets acquired before Oct 1 – Net value
received from sale of assets) * Depreciation rate/100] + [(1/2) (Value of all assets
acquired Oct 1 onwards) * Depreciation rate/100]

The written down value on March 31 is subtracted by the depreciation allowance to give
the value of the written down value on April 1 for the next year.

We will notice later that new plant and machinery for manufacturing gets further
additional depreciation. Thus, all the examples which follow will refer to old plant and
machinery.

Case
Neogen is an engineering company. It bought a used machining equipment on 2nd July,
2016 for Rs. 60 lakhs. As the equipment was not up to the customer’s requirements, the
company purchased another used advanced equipment for Rs. 89 lakhs on 4th May,
2017. Calculate the WDV and Depreciation for the Previous Year 2016-17 and the
subsequent Previous Year.

Name of the Block of Assets:

Rate of Depreciation:

PY WDV on WDV on Dep @ WDV on March

1 April March 31 31 after
before depreciation depreciation
2016-17
2017-18
2018-19
2019-20
2020-21

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Case
Seogen, an engineering company, bought a used machining equipment on 2nd July, 2017
for Rs. 60 lakhs. It purchased another used advanced equipment for Rs. 89 lakhs on 4th
May, 2018. The company sold off the first machine on January 25, 2019 for Rs. 40 lakhs.
Calculate the WDV and Depreciation for the Previous Year 2017-18 and the subsequent
Previous Year.

Name of the Block of Assets:

Rate of Depreciation:

PY WDV on WDV on Dep @ WDV on March

1 April March 31 31 after
before depreciation depreciation
2017-18

2018-19

2020-21

Case
Neo, an engineering company, bought a used machining equipment on 2nd July, 2016 for
Rs. 60 lakhs, and on 4th May, 2017 for Rs. 89. It sold off the first machine on January 25,
2018 for Rs. 40 lakhs. On March 7, 2018, it purchased an old packing machine for Rs. 20
lakhs.

Name of the Block of Assets:

Rate of Depreciation:

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 PY WDV on WDV on Dep @ WDV on March
1 April March 31 31 after
before depreciation depreciation
2016-17

2017-18

2018-19

2019-20

Additional Depreciation for New Plant and Machinery

Additional depreciation is given for new plant and machinery for an assessee engaged in
manufacture of article or things. The requirements for claiming the allowance are as
follows:

1. The assessee must be engaged in manufacture/ production of any article or thing.

2. The plant and machinery should not be one among the followings:

 Ships or aircrafts
 Used plant or machinery
 Plant or machinery used in office or residential accommodation
 Office appliances including computer or computer software or road transport
vehicles
 Whole of the cost is allowed as a deduction in any previous year

In the table below indicate whether the following plant and machinery are eligible for
the additional depreciation.

Plant and Machinery Yes/No

New computer installed in chemical plant

Old lathe machine

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 New Power plant in a textile company

Cargo ship

Guest house Computer

Refurbished formulation plant machinery

New motor lorries in a mining company

Helicopter purchased by petroleum Co.

Air-conditioner plant in office building

New computer aided gear mfg. machine

Blow seal machine by a research company

The additional depreciation is claimed as follows. The rate of depreciation for the plant
and machinery for the year of its acquisition is added by 20%. All other principles
remain the same. The additional depreciation is only for the year of the acquisition.
That is, the asset will get half depreciation if acquired after Oct 1.

In order to encourage acquisition and installation of plant and machinery for setting up
of manufacturing units in the notified backward areas of the States of Andhra Pradesh,
Bihar, Telangana and West Bengal, a proviso has been inserted to section 32(1)(iia) to
allow higher additional depreciation at the rate of 35% (instead of 20%) in respect of
the actual cost of new machinery or plant (other than a ship and aircraft) acquired and
installed during the period between 1st April, 2015 and 31st March, 2020 by a
manufacturing undertaking or enterprise which is set up in the notified backward areas
of these specified States on or after 1st April, 2015.

Case

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Ocean Pearl Limited is a watch manufacturing company. The WDV of the block of assets
comprising of plant and machinery was 200 lakhs on April 1, 2019. The company bought
a new machine for making components of the watch in May, 2019 for Rs. 100 lakhs.
Calculate the WDV and Depreciation for the Previous Year 2019-20 and the subsequent
Previous Year.

Name of the Block of Assets:

Rate of Depreciation:

PY WDV on WDV on Dep @ WDV on March

1 April March 31 31 after
before depreciation depreciation
2019-20
2020-21

Case
Axel Limited is a glass manufacturing company. The WDV of the block of assets
comprising of plant and machinery was 400 lakhs on April 1, 2020. The company bought
a new machine for shaping glass in Nov, 2020 for Rs. 200 lakhs. Calculate the WDV and
Depreciation for the Previous Year 2020-21 and the subsequent Previous Year.

Name of the Block of Assets:

Rate of Depreciation:

PY WDV on WDV on Dep @ WDV on March

1 April March 31 31 after
before depreciation depreciation
2020-21

2021-22

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Case
The details of Anagram Consulting Solutions Private Limited, a company engaged in
financial consultancy for the previous year 2019-20 is as follows:

 WDV on April 1, 2019 (computers): 4 lakhs

 WDV on April 1, 2019 (Furniture): 1 lakhs
 Two new computers are purchased and put to use on June 15, 2019 for a total
amount of Rs. 1 lakh.
 Income from consultancy: Rs. 40 lakhs
 Total revenue expenses: Rs. 20 lakhs

Calculate the taxable income for 2019-20

Case
Mr. Abhimanyu is engaged in the business of generation and distribution of electric
power. He always opts to claim depreciation on written down value for income-tax
purposes. From the following details, compute the depreciation allowable as per the
provisions of the Income-tax Act, 1961 for the assessment year 2019-20:

(Rs. in lacs)

Opening WDV of block (15% rate) 42

New machinery purchased on 12-10-2018 10

Machinery imported from Colombo on 12-4-2018 9

New computer installed in generation wing unit on 15-7-2018 2

Case:
Mr. X, a proprietor engaged in manufacturing business, furnishes the following
particulars:

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 Particulars Rs.
(1) Opening WDV of plant and machinery as on 1.4.2019 30,00,000

(2) New plant and machinery purchased and put to use on 20,00,000
08.06.2019

(3) New plant and machinery acquired and put to use on 8,00,000
15.12.2019

(4) Computer acquired and installed in the office premises 3,00,000

on 2.1.2020

Compute the amount of depreciation and additional depreciation as per the Income-tax
Act, 1961 for the A.Y. 2020-21. Assume that all the assets were purchased by way of
account payee cheque.

Case:
Mr. Gopi carrying on business as proprietor converted the same into a limited company
by name Gopi Pipes (P) Ltd. from 01-07-2019. The details of the assets are given below:
Rs.
Block - I WDV of plant & machinery (rate of depreciation @ 12,00,000
15%) on 01.04.2019

Block - II WDV of building (rate of depreciation @ 10%) on 25,00,000

01.04.2019

The company Gopi Pipes (P) Ltd. acquired plant and machinery in December 2019 for Rs.
10,00,000. It has been doing the business from 01-07-2019.
Compute the quantum of depreciation to be claimed by Mr. Gopi and successor Gopi
Pipes (P) Ltd. for the assessment year 2020-21. Assume that plant and machinery were
purchased by way of account payee cheque.
Note: Ignore additional depreciation.

Case:
A newly qualified Chartered Accountant Mr. Dhaval, commenced practice and has
acquired the following assets in his office during F.Y. 2019-20 at the cost shown against
each item. Calculate the amount of depreciation that can be claimed from his
professional income for A.Y.2020-21. Assume that all the assets were purchased by way
of account payee cheque.

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 Sl. Description Date of Date when Amount
No. acquisition put to use Rs.
1. Computer including 27 Sept., 19 1 Oct., 19 35,000
computer software
2. Computer UPS 2 Oct., 19 8 Oct., 19 8,500
3. Computer printer 1 Oct., 19 1 Oct., 19 12,500
4. Books (other than 1 Apr., 19 1 Apr., 19 13,000
annual publications
are of Rs. 12,000)
5. Office furniture 1 Apr., 19 1 Apr., 19 3,00,000
(Acquired from a
practicing C.A.)
6. Laptop 26 Sep., 19 8 Oct., 19 43,000

Case:
Mr. Gamma, a proprietor started a business of manufacture of tyres and tubes for motor
vehicles on 1.1.2019. The manufacturing unit was set up on 1.5.2019. He commenced his
manufacturing operations on 1.6.2019. The total cost of the plant and machinery
installed in the unit is Rs. 120 crore. The said plant and machinery included second hand
plant and machinery bought for Rs. 20 crore and new plant and machinery for scientific
research relating to the business of the assessee acquired at a cost of Rs. 15 crore.
Compute the amount of depreciation allowable under section 32 of the Income-tax Act,
1961 in respect of the assessment year 2020-21. Assume that all the assets were
purchased by way of account payee cheque.

Scientific Research (Section 35)

Section 43(4)(i) defines scientific research to mean “any activities for the extension of
knowledge in the fields of natural or applied science including agriculture, animal
husbandry or fisheries.”

Expenditure on in-house research and development facility. Sec.35(2AB)

If the following conditions are fulfilled the sum equal to 100% of the expenditure so
incurred shall be allowed as deduction.

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 • The taxpayer is company.
• The company should be engaged in business of manufacture or production of any
article or thing except those specified in the ELEVENTH Schedule.
• It incurs an expenditure on scientific research and such expenditure is of Capital or
Revenue nature (not being cost of Land).
Some prominent entries in Schedule XI are as follows:
1. Beer, wine and other alcoholic spirits
2. Tobacco and tobacco preparations
3. Cosmetics and toilet preparations
4. Tooth paste, dental cream, tooth powder and soap
5. Aerated waters in the manufacture of which blended flavouring concentrates in any
form are used
6. Confectionery and chocolates

Revenue or capital expenditure incurred on in-house research related to own business

Sec. 35(1)/(2)
If the following conditions are fulfilled the sum equal to 100% or 1 time of the
expenditure so incurred shall be allowed as deduction.
• The assessee himself carries scientific research.
• Scientific research should be related to assessee’s business.
• Expenditure is not for acquisition of Land.

To sum the provision related to approved In-house research and development facility
1. If the company is engaged in the Business of Bio- technology or in business to produce
or manufacture any article other than listed in XI schedule – 100% deduction is allowed
for all other expenditure other than Land and Building. 100% cost of building is also
allowed.
2. If expenditure is incurred on scientific research for one’s one business and in all other
cases 100% of cost incurred for other than Land is allowed.

Case:
Innovision Ltd. is a company engaged in manufacturing of computer chips. It incurs
following expenditure in lakhs towards in-house research during the P.Y. 2020-21.
Calculate the allowed deductions:

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 S. Nature of Expenditure Expenditure Weightage Deduction
No
1. Purchase of Research equipment 100

2. Salary to Research scientists 20

3. Purchase of Land for research center 150

4. Research center building construction 60

5. Administrative expenditure for research 20

center

6. Consultancy fees to outside scientists 5

7. Trial run expense at research center 12

Case :-
Blue Ocean Ltd. is a company engaged in manufacturing of cosmetics. It incurs following
expenditure in lakhs towards in-house research during the P.Y.2020-21. Calculate the
allowed deductions:
S. Nature of Expenditure Expenditure Weightage Deduction
No
1. Purchase of Research equipment 100

2. Salary to Research scientists 20

3. Purchase of Land for research center 150

4. Research center building construction 60

5. Administrative expenditure for research 20

center

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 6. Consultancy fees to outside scientists 5

7. Trial run expense at research center 12

Contribution made to Outsiders Sec.35 (1)(ii)/(iii)

There are certain cases where the research is not conducted by the company itself, but it
contributes to certain approved institutions, in such cases the expenditure incurred is
allowed as follows
1. Contributions is made for Scientific Research to
a. Notified approved University/ college/Research association/ other institution, or
b. Approved National Laboratory/university/IIT/ specified person
then, 150% of sum paid is allowed
c. Approved Indian company – then 100% sum paid is allowed
2. Contributions is made for social science or statistical research to Notified approved
University/ college/Research association/ other institution – 100% sum paid is allowed

Case:
Ocean Ltd. made the following contributions during P.Y.2020-21 Calculate the allowed
deductions:

Nature of Expenditure Exp. weight deduction

Donation to approved university for scientific research 20

Contribution to notified company for scientific research 30

Contribution to notified company for social research 12

Donation to approved university for statistical research 25

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 Donation to IIT for scientific research 40

Case:
Mr. A, furnishes the following particulars for the P.Y.2020-21. Compute the deduction
allowable under section 35 for A.Y.2021-22, while computing his income under the head
“Profits and gains of business or profession”.
Particulars Rs.
1. Amount paid to notified approved Indian Institute of 1,00,000
Science, Bangalore, for scientific research

2. Amount paid to IIT, Delhi for an approved scientific research 2,50,000

programme

3. Amount paid to X Ltd., a company registered in India which 4,00,000

has as its main object scientific research and development,
as is approved by the prescribed authority

4. Expenditure incurred on in-house research and

development facility as approved by the prescribed
authority
(a) Revenue expenditure on scientific research 3,00,000

(b) Capital expenditure (including cost of acquisition of land 7,50,000

Rs. 5,00,000) on scientific research

Amortisation of Preliminary Expenses [Section 35D]

Income and expenditure fall under the head of business and profession only when the
business has started. Thus, expenses incurred towards setting of the business do not get
deducted. Expenses which are of a capital nature will become the capital assets on the
start of the business. Section 35D provides for absorbing some of the other expenses

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made before the start of the business. This is called amortisation. It includes three checks
to prevent the misuse of amortisation.
One, amortisation can be claimed only after the business has commenced. Two, only the
expenses listed in the section can be amortised. Three, there is a limit on the total
expenses that can be amortised. The limit is fixed according to the size of the business.

Applicable:
This section applies
(a) only to Indian companies and resident non-corporate assessees;
(b) in the case of new companies to expenses incurred before the commencement of the
business;
(c) in the case of extension of an existing undertaking to expenses incurred till the
extension is completed, i.e., in the case of the setting up of a new unit - expenses
incurred till the new unit commences production or operation.

The kinds of expenses which are eligible for amortisation are:

1. Expenditure in connection with preparation of feasibility report, project report;
conducting market survey or any other survey; engineering services relating to the
business of the assesse.
2. Legal charges for drafting any agreement between the assessee and any other person
for any purpose relating to the setting up or conduct of the business of the assesse.
3. Legal charges for drafting the Memorandum and Articles of Association of the
company.
4. On printing of the Memorandum and Articles of Association.
5. Registering the company under the provisions of the Companies Act.
6. Public subscription of the shares of the company, including underwriting commission,
brokerage and charges for drafting, typing, printing and advertisement of the prospectus.

Overall Limits
There is a limit on the total amount that can be amortised. This is fixed at 5% of the ‘cost
of project’ or in the case of an Indian company, or, at the option of the company, 5% of
the capital employed.
Section 35 defines the ‘cost of the project’ on the basis of the actual cost of the fixed
assets, including land, buildings, plant, machinery, furniture and fittings of the business.
The final amount eligible for amortisation has to be deducted in five equal instalments
starting with the year in which the business commences.

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Thus, the following steps will need to be followed to determine the amount for
amortisation:
1. Take the date of commencement of the business and identify all the expenses incurred
before that date, which are eligible to be amortised.
2. Total the expenditure eligible for amortisation.
3. Compare the total expenditure with five per cent of the ‘cost of project’ and take the
lower of the two. This is the value that will be actually amortised.
4. Divide the value to be amortised by five and deduct it in each of the five previous
years, starting with the year in which the business commences.

Case
Imperial Enterprise is setting up a new business with Rs. 2,500 lakhs cost of project. The
expenses incurred are mentioned in lakhs. Calculate the deduction available under
Section 35D in the year the business commences.
S. Nature of Expenditure Expenditure Eligible Amount
No Yes or no
1. Company formation expenditure 10

2. IPO expenses 90

3. Project feasibility and market study 40

4. Legal fees for drafting of project and 20

joint venture documents

5. Commission for first commercial sale. 10

Total

Use the total eligible amount further to work out the amount eligible for amortisation in
the year in which the business commences.
Case:
Mr. Venus., engaged in manufacture of pesticides, furnishes the following particulars
relating to its manufacturing unit at Chennai, for the year ending 31-3-2021:
(Rs. in lacs)

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 Opening WDV of Plant and Machinery 20
New machinery purchased on 1-9-2020 10
New machinery purchased on 1-12-2020 8
Computer purchased on 3-1-2021 4
Additional information:
•All assets were purchased by A/c payee cheque.
•All assets were put to use immediately.
•New machinery purchased on 1-12-2020 and computer have been installed in the
office.
•During the year ended 31-3-2020, a new machinery had been purchased on31-10-2019,
for Rs. 10 lacs. Additional depreciation, besides normal depreciation, had been claimed
thereon.
•Depreciation rate for machinery may be taken as 15%.Compute the depreciation
available to the assessee as per the provisions of the Income-tax Act, 1961 and the WDV
of different blocks of assets as on 31-3-2021.

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