Computation of Written Down Value (WDV)
Introduction
The written-down value is the depreciated value of an asset for purposes of computation of depreciation. The WDV of any block of asset is adjusted with the actual cost of asset acquired during the tax year and sale proceeds realised from sale of asset during that year.
1. About
There are several methods for charging depreciationbut the most commonly employed methods are - Straight Line Method (SLM) and Written Down Value (WDV) method. The Income-tax Act allows a business entity to follow only WDV method for computation of depreciation. However, an entity, engaged in generation or generation and distribution of power, can follow either of the two methods mentioned above to claim depreciation on fixed assets.
2. How to calculate WDV?
2.1. In general
An assessee is allowed depreciation at the prescribed rate on the aggregate written down value of the block of assets at the end of the tax year. The mode of computing written-down value is given below:
| Particulars | Amount |
Opening WDV of block of assets Add: (a) Actual cost of any asset, not being goodwill of a business or profession, acquired during the tax year under that block Less: (a) Money payable in respect of any asset, sold, destroyed discarded, or demolished during the tax year together with the scrap value, if any (as reduced by the amount chargeable to tax under Section 45(4) which is attributable to capital asset remained with specified entity) (b) WDV of the assets, transferred under ‘slump sale’ falling under that block |
xxx xxx (xxx) (xxx) (xxx) |
| Closing WDV of block of assets | xxx |
The term ‘money payable’ includes any insurance, salvage, compensation money in respect thereof. Where the asset is sold, money payable includes the price for which it is sold. This term shall be interpreted to mean only actual money or cash and not as any other thing or benefit which could be evaluated in terms of money. Thus, where insurance company restores the destroyed assets to the insured assessee, the excess of market value of replaced assets over the written-down value of the destroyed asset cannot be taxed as balancing charge
The purpose of calculation of WDV is to compute the depreciation. However, the scheme of depreciation comes to end if block of assets ceases to exist or the closing WDV of the block is nil. In such case, the scheme of capital gain/loss under Section 74 shall be operative.
2.2. WDV in case of slump sale
Slump sale means the transfer of one or more undertaking by any means for a lump-sum consideration without being values assigned to the individual assets and liabilities in such transfer. Any profit and gains, arising from slump sale in the tax year, is chargeable to tax as capital gains in the tax year in which undertaking is transferred. For computation of the capital gains, the net-worth of the undertaking is deemed as the cost of acquisition. Net worth of the undertaking is the excess of aggregate value of total assets of the undertaking over the value of liabilities, appearing in the books of account. For computing net worth, depreciable assets are taken at written down value and non-depreciable asset at book value.
The written-down value for computation of net worth is computed as if such asset was the only asset in the relevant block of assets. Thus, actual cost of the asset transferred minus depreciation allowed in respect of such asset is its written-down value.
| Computation of Written-down Value | Rs. |
|
Cost of acquisition of the capital assets Less: (a) Depreciation allowed as if each asset transferred under slump transfer, is the only asset in the relevant block |
xxx (xxx) (xxx) |
| Written-down value of depreciable assets | xxx |
2.3. WDV in case of demerger
Where a demerged co. transfers any asset forming part of a block of assets to the resulting company, the WDV of block of assets of the demerged company for the immediately preceding tax year shall be reduced by the WDV of the assets transferred to the resulting co. pursuant to the demerger.
2.4. WDV in hands of resulting co.
Where a demerged co. transfers any asset forming part of a block of assets to the resulting company, the WDV of block of assets in the case of the resulting company shall be the WDV of transferred assets as appearing in the account books of the demerged co. immediately before the demerger.
2.5. WDV in case of succession
If in case of succession in business or profession, the predecessor isn’t traceable and assessment is made on successor under Section 313(2), the WDV of any block of assets shall be the amount which would have been taken as its WDV if the assessment had been made directly on the person succeeded to. In other words, in case of succession of business or profession, the depreciation shall be calculated taking the WDV of block of assets as if there had been no change in the ownership at all.
2.6. WDV in case of scheme of corporatisation
If in a tax year, any asset forming part of a block of assets is transferred by a recognised stock exchange in India to a company under a Scheme for Corporatisation (approved by SEBI), the WDV of the block of assets in the hands of such company shall be the WDV of the transferred assets immediately before such transfer.
2.7. WDV of asset if entity is earning exempt income
When a person enjoys exemption or deductions in respect of his profits from business or profession, he is not required to compute his income from the said source. Thus, when exemption is withdrawn, he is required to compute the taxable profits after claiming depreciation. The block of asset may include certain assets which were acquired during the period when income was exempt from tax. In such a case, the WDV of the block of asset shall be computed as under:
(a) The actual cost of such asset shall be adjusted by the amount attributable to the revaluation of such asset, if any, in the books of account
(b) The total amount of depreciation on such asset, provided in the books of account in respect of the tax years preceding the relevant year under consideration, shall be deemed to be the depreciation actually allowed under this Act for the purposes of this provision. This depreciation shall be adjusted by the amount of depreciation attributable to such revaluation of the asset.
Example, X Co. is exempt from tax in Year 00 and Year 01. In Year 00, it acquired a machinery for Rs. 50,000. The Co. has maintained books of account during that period. It recognized the depreciation of Rs. 18,000 on such machinery in accordance with the provisions of the Income-tax Act in the books of account. When the exemption is withdrawn, the WDV of such machinery in Year 02 shall be Rs. 32,000 (Rs. 50,000 less notional depreciation of Rs. 18,000).
2.8. WDV of asset if entity earns agriculture income
Where income of an assessee comprises of agricultural income, while computing the WDV of the assets acquired before the tax year, the computation of depreciation shall be made as if the entire income is derived from the business of the assessee under the head PGBP and the depreciation so computed shall be deemed to be the depreciation actually allowed under the Act.
Example, Mr. X earned Rs. 50 lakhs from normal business and Rs. 10 lakh from agriculture during the year 00. He acquired a machinery during the same year for Rs. 5,00,000 on which depreciation is allowable at the rate of 10%. While computing the WDV of machinery for the year 01, depreciation shall be computed by assuming that the entire income of Rs. 60 lakhs were earned under the head PGBP only. Thus, WDV of the machinery during the year 01 will be Rs. 4,50,000.
References
Circular No. 14 of 2021, dated 02-07-2021 clarifies that Rule 50 also applies to capital assets forming part of block of assets. Thus, if amount taxed under section 67(10) is attributable to capital asset forming part of block of assets, same shall be reduced from sale price of such capital asset.
CIT v. Kasturi and Sons Ltd. (1999) 237 ITR 24 (SC)
This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.