Concept of Depreciation

Conditions for claiming depreciation

• Asset must be used for the business
• Asset should be owned by the Assessee. Registered ownership not required.
• Depreciation is allowed on Block of assets
• Asset must be Put to Use

NOTE –V.V. Imp. - Asset is acquired in the previous year & Put to use for less than 180 days
(up to 179 days) during the same PY – only half depreciation is allowed.
Check Number of days of put to use only if acquisition and put to use are of same PY. If
the year of acquisition and year of put to use are different then full depreciation will be
allowed in the year put to use

Check whether full/ half depreciation will be allowed in following cases for PY 20-21
Case Purchased on Put to use on Depreciation rate
I 01-May-20 15-Jul-20 Full
II 15-Jun-20 10-Oct-20 Half
III 01-Jan-21 01-Jun-21 Not allowed in PY 20-21 as put to use in PY 21 - 22
IV 01-Jan-20 10-Jun-20 Full
V 28-Feb-20 10-Feb-21 Full
(As Year of purchase and put to use are different)

Some important points:

a. Lessor can claim depreciation
b. Roads within a factory eligible
c. Residential quarters eligible
d. construction of metal roads to dump waste is capital exp.
e. Hire purchase – Buyer can claim
f. Normal hire – owner can claim
Depreciation in case of succession of firm/sole proprietary concern by a company or
business reorganization or amalgamation or demerger of companies
 • Calculate depreciation as no business re-organization has been done.
Allocate amount of depreciation on the basis of number of days. Suppose Company A gets
merged with company B on 29th November 2019 – Number of days for Company A will be taken
till 28th November

X.ltd has accounting profits amounting to Rs.2,00,000 for Previous Year 2020-21. It had
acquired a machinery costing Rs.5,00,000 (Life 5 years) on 2nd April 2020.It follows SLM for
computing its depreciation. As per Income Tax Act the rate of depreciation is 15% (WDV
method). Compute Taxable profits.

Expenses allowed by Income Tax Act:

1.Additional depreciation

• It is allowed rate of 20% of actual cost

• Allowed only once, not yearly
• Only on plant or machinery
• Available in the year when it is Acquired + Installed

Assessee engaged in business of printing, manufacture or production, generation,

transmission or distribution of power

2.Scientific Research expenditure

3.Preliminary Expenditure: Preliminary expenditure incurred by Indian companies and other
resident non-corporate assessees shall be allowed as deduction over a period of 5 years
beginning with the previous year in which business commences
4. Insurance premium paid for stock or stores
5.Premium paid by employer for health insurance of employees by any mode of payment
“other than cash”
6. Interest paid in respect of capital borrowed for the purposes of business or profession
7. STT and CTT paid is allowed if the Assessee is engaged in the investment business

Expenses other than above can be claimed as deduction if and only if following conditions are
satisfied:
• it is not in the nature of capital expenditure;
 • it is not a personal expenditure of the assessee;
• it is laid out and expended wholly and exclusively for the purpose of business/
profession;
• it is not incurred for any purpose which is an offence or which is prohibited by law;
and
Examples of specific disallowances:
1.CSR Expenses: Not business expense
2. Expenses incurred in providing freebees to medical practitioners by pharma and allied health
sector industry.
3. Any expenditure incurred for advertisement in any souvenir, brochure, tract, pamphlet etc.
published by a political party is not allowable as deduction.
4. Consequences of payment exceeding Rs.10,000/- otherwise than by account payee cheque or
demand draft
Applicability: Any expenditure in respect of which payment has been made in excess of Rs.
10,000 in a day otherwise than by an account payee cheque or account payee bank draft or use of
electronic clearing system through a bank account or through other prescribed electronic modes
Treatment: 100% of such payment shall be disallowed.
Exception: In the case of payment made for plying, hiring or leasing goods carriages (hereinafter
referred to as Road Transport), the limit of Rs.10,000 has been increased upto Rs. 35,000.
In a nutshell, The monetary limit for attracting disallowance of expenses are as follows:
Case Monetary Limit
Payment made for plying, hiring or leasing Rs.35,000
goods carriages
Payment made for other expense Rs.10,000

Discuss the Tax implications in following cases:

1.Tata Motors allocated its CSR funds to build a school in a remote Village. It spent around 2
crores on the same. If its accounting profits (after considering CSR expenses) were Rs.40 crore,
how much would be its Taxable profits?
2.XYZ Ltd. acquired a machinery (Rs.5,00,000) on 1st January 2021.The machine was put to use
on 2nd April 2021.Rate of depreciation as per income tax act is 20%. How much depreciation can
it claim for financial year 2020-21 and financial year 21-22 as per income Tax act?