Rate of Depreciation

Introduction

The depreciation shall be calculated at the specified rates as per the written-down value method or the straight-line method, as the case may be. An entity engaged in the generation or distribution of power shall have an option to claim depreciation as per SLM or as per WDV. For all other entities, the depreciation shall be calculated as per the WDV method.

To calculate the depreciation as per the WDV method, the depreciable assets have to be classified into various blocks. For current year there are 9 blocks of assets which are classified into 5 categories of tangible and intangible assets such as Building, Furniture & Fittings, Machinery and Plant, Ships and Intangible Assets (not being goodwill of business or profession).

1. Rates Prescribed for the WDV method

In case of depreciable assets of an undertaking, not being an entity engaged in the generation or generation and distribution of power, the following are the prescribed rates of depreciation. These rates shall be referred to for the calculation of depreciation as per the WDV method.

Notes:

1. "Buildings" include roads, bridges, culverts, wells and Tubewells.

2. A building shall be deemed to be a building used mainly for residential purposes, if the built-up floor area thereof used for residential purposes is not less than sixty-six and two-third per cent of its total built-up floor area and shall include any such building in the factory premises.

3. In respect of any structure or work by way of renovation or improvement in or in relation to a building referred to in section 33(6), the percentage to be applied will be the percentage specified against sub-item (1) or (2) of item 1 of Part A as may be appropriate to the class of building in or in relation to which the renovation or improvement is affected. Where the structure is constructed or the work is done by way of extension of any such building, the percentage to be applied would be such percentage as would be appropriate, as if the structure or work constituted a separate building.

4. Water treatment system includes system for desalination, demineralization and purification of water.

5. "Electrical fittings" include electrical wiring, switches, sockets, other fittings and fans, etc.

6. "Commercial vehicle" means "heavy goods vehicle", "heavy passenger motor vehicle", "light motor vehicle", "medium goods vehicle" and "medium passenger motor vehicle" but does not include "maxi-cab", "motor-cab", "tractor" and "road-roller". The expressions "heavy goods vehicle", "heavy passenger motor vehicle", "light motor vehicle", "medium goods vehicle", "medium passenger motor vehicle", "maxi-cab", "motor-cab", "tractor" and "road-roller" shall have the meanings respectively as assigned to them in section 2 of the Motor Vehicles Act, 1988 (59 of 1988).

7. "Computer software" means any computer programme recorded on any disc, tape, perforated media or other information storage device.

8. Machinery and plant include pipes needed for delivery from the source of supply of raw water to the plant and from the plant to the storage facility.

9. "Speed boat" means a motor boat driven by a high-speed internal combustion engine capable of propelling the boat at a speed exceeding 24 kilometers per hour in still water and so designed that when running at a speed, it will plane, i.e., its bow will rise from the water.

2. Rates Prescribed for SLM method

In case of depreciable assets of an undertaking engaged in generation or generation and distribution of power, following are the prescribed rates of deprecation. These rates shall be referred to for calculation of depreciation as per SLM method.

3. Rate if asset is used for part of the year

If an assets is acquired and put to use during the year for less than 180 days, depreciation shall be calculated at 50% of the normal rate specified in above table. This provision is applicable irrespective of the method of depreciation. Thus, the depreciation may be computed under straight line method or written down value method but if the asset is acquired during the year and put to use for less than 180 days during that year, depreciation is restricted to 50% of the normal rates.

If an asset is kept ready for use for more than 180 days before the end of the tax year but actually used for less than 180 days, the aforesaid restriction would not apply. This view is in line with the interpretation of the Courts that "use" includes "ready for use". In other words, the word "used" in this section may be given a wider meaning and embrace passive as well as active user

3.1. Acquired and put to use during the year

If any asset falling within a block of asset is acquired during the tax year and it is put to use for the purposes of business or profession for a period of less than 180 days in that tax year, the depreciation in respect of such asset shall be restricted to 50 per cent of the amount calculated at the percentage prescribed above in the respect of the block of asset comprising such asset.

3.2. Acquired but not put to use during the year

Where an asset is acquired during the year at a time when it can be used only for less than 180 day, but it is put to use in subsequent year, the restriction on allowability of depreciation to the extent of 50% shall not be operative in respect of such asset because acquisition and put to use of asset falls within two different years.

Example, if Machine Z is purchased on February 2, Year 00 but it is put to use on December 12, Year 01, no depreciation shall be allowed on such machine in Year 00 as the machinery was not put to use during that year. This provision for restriction on allowability of depreciation for 50% has no application in the Year 01 as the asset is not acquired and put to use in the same year. Depreciation shall be allowed at the rate specified above.

3.3. Ready for use but not put to use

There may be situations wherein an asset is kept ready for use for more than 180 days during the tax year, but it is put to use for less than 180 days. In this case, whether depreciation should be allowed at prescribed rate or it should be restricted to 50%? This issue has always been a matter of dispute between the revenue and the taxpayers. In this regard, the Madhya Pradesh High Court

Summary

4. Meaning of Assets

4.1. Building

The term 'building' includes factory building or non-factory building, that is, building used for office, storage, employees' quarters or welfare of employees. Example, workers' canteen or sports pavilion, etc. Building includes a part of a building.

Building constructed on leasehold land is eligible for depreciation even if the building would be handed over to the lessor after the expiry of lease. It is not necessary that building should have a roof for claiming depreciation. A large stadium or an open swimming pool would be a building as it is a permanent structure and designed for a useful purpose. It would qualify for depreciation

4.1-1. Toll, Roads and Bridges

Toll, roads and bridges are considered as building for the purpose of depreciation

In Build-Operate-Transfer (BOT) arrangements for development of roads or highways, the possession of land is handed over to the developer for construction of project. The developer only gets the right to develop and maintain such asset and title in the land that remains vested with the Govt. or its agencies. Thus, a developer cannot be treated as an owner of the property, for the purposes of allowability of depreciation.

The CBDT has clarified

4.2. Machinery

The word 'machinery' has not been defined in the Act. It is a contrivance whereby several things are put together to work in such a way that force may be applied at most convenient point in a most convenient way to get a particular work or an item of work done to produce a specific article or manufactured goods.

4.3. Computers

Computer peripherals such as printers, scanners, servers, UPS, routers, switches, etc., form an integral part of the computer. Therefore, such assets shall be subject to depreciation at the higher rate applicable in case of a computer

The website shall not be treated as 'software' and it would fall under the definition of 'intangible asset' which are subject to depreciation at the rate of 25 per cent

4.4. Plant

The term 'plant' includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of the business or profession but does not include tea bushes and livestock.

The definition of the word 'plant' is inclusive and not exhaustive and hence it has to be given a wider meaning. The word 'plant', therefore, includes whatever apparatus or instrument, any article or object, fixed or movable, used by a businessman in carrying on his business and it is not confined to an apparatus used by mechanical operator.

4.5. Furniture

There is no definition of the word 'furniture' in the Act. All articles of convenience or decoration, used for furnishing a dwelling place or a place of business or an office, are articles of furniture.

4.6. Intangible Assets

Any payment for use of intangible rights, not owned by the assessee, would not be covered under the scheme of depreciation. Such payment may be allowed as revenue expenditure under Section 37(1).

Example, if a payment is made to get the right to use the 'trademark' of another business entity for a period of 12 months, no depreciation shall be allowed because the trademark is not owned by the assessee. The payment made for the use of trademark would be allowed as revenue expenditure under Section 37(1).

An intangible asset would cover following:

4.6-1. Know-how

The expression 'know-how' means any industrial information or technique likely to assist:

(a) In manufacture or processing of goods; or

(b) In working of a mine, oil well or other sources of mineral deposits (including searching for discovery or testing of deposits for the winning of access thereto).

4.6-2. Patents

It has not been defined by the Act. In commercial usage, it is understood as a license from government to an individual or organization conferring for a set period the sole right to make, use, or sell some process or invention.

4.6-3. Copyright

Copyright is an exclusive right given by law for certain terms of years to an author, composer, etc. (or his assignee or heirs) to print, publish and sell copies of his original work or translation thereof.

4.6-4. Trademark

It is 'a mark' used by a manufacturer or trader to distinguish his goods from the goods of other concerns. Trademark is a distinctive sign, device or mark of authenticity, through which the products of a particular person or organization are distinguished or distinguishable from those produced or dealt in by others.

4.6-5. Licence

The licence is not defined under the Act. Licence is 'a formal permission from a constituted authority to do something which without such permission would be illegal'.

4.6-6. Franchise

The Act has not defined this term. Black's Law Dictionary defines it as 'a licence from the owner of a trademark or trade name permitting another to sell a product or service under that mark or name'.

References

Vishwanath Bhaskar Sathe v. CIT 10 ITC 386 (Bom.), CIT v. Vindhyachal Distilleries (P.) Ltd. [2005] 147 Taxman 127 (MP)

CIT v. Vindhyachal Distilleries (P.) Ltd. [2005] 147 Taxman 127

Y.V. Srinivasamurthy v. CIT [1967] 64 ITR 292 (Mysore)

CIT v. Noida Toll Bridge Co. Ltd. [2014] 220 Taxman 6 (All.)

Circular No. 9/2014, dated April 23, 2014

American Express Services India Ltd. v. CIT [2013] 57 SOT 22 (Delhi)

Makemytrip (India) (P.) Ltd. v. CIT [2012] 51 SOT 19 (Delhi)

Federal Bank Ltd. v. CIT [2011] 332 ITR 319 (Ker.)

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.