PROFITS AND GAINS - II

DEPRECIATION
MCQ FROM PREVIOUS LECTURE….

An assessee uses plant and machinery for the purpose of carrying on his business. Under
section 31, he shall be eligible for deduction on account of-

(a) both capital and revenue expenditure on repairs

(b) current repairs

(c) current repairs plus 1/5th of capital expenditure on repairs.

(d) both (a) & (b)

MCQ FROM PREVIOUS LECTURE….

An assessee uses plant and machinery for the purpose of carrying on his business. Under
section 31, he shall be eligible for deduction on account of-

(a) both capital and revenue expenditure on repairs

(b) current repairs

(c) current repairs plus 1/5th of capital expenditure on repairs.

(d) both (a) & (b)

 To recognize the conditions which need to
be fulfilled for chargeability of
depreciation under income tax law.
LEARNING
OUTCOME
S:
Demonstrate the calculation of
depreciation using different methods and
rates applicable on various tangible and
intangible assets under income tax law.
WHAT IS DEPRECIATION?

Depreciation under Income Tax Act is

the decline in the real value of a
tangible asset because of
consumption, wear and tear or
obsolescence. The concept of
depreciation is used for the purpose
of writing off the cost of an asset
against profit over its life.
WHY DEPRECIATION?

To arrive at real business profits.

To determine the book value of assets.

To arrange the replacement/renewal of the asset.

CHARGE OF DEPRECIATION

1.Profits & gains of business or profession carried

on by the assessee during relevant previous year; or

2.Income from other sources in case of assets let

out for a certain period of time and letting is not the
regular business of assessee (sec56(2))
ASSETS:

Tangible Intangible
Assets Assets

Building Machinery Plant Furniture

Non- Temporary
Factory Priority
factory Structures
PROVISIONS REGARDING
DEPRECIATION
1) DEPRECIATION IS
ALLOWED ONLY ON
CAPITAL ASSETS
2) USE OF ASSET DURING THE YEAR
Full year depreciation if installed
and used for 180 days or more
Half-year depreciation if used for
installed and used for less than 180 days
For subsequent years, full years
depreciation will be charged.
No depreciation, if asset was not at all
used during the relevant previous year.
2) Calculate depreciation on Furniture
1,00,000 Rs [15% block] which was
acquired and installed on: 1/4/2020
15,000
1,500
7,500
10,000
2) Calculate depreciation on Furniture
1,00,000 Rs [15% block] which was
acquired and installed on: 1/4/2020
15,000
1,500
7,500
10,000
3) Calculate depreciation on Furniture
1,00,000 Rs [15% block] which was
acquired and installed on: 1/1/2021
15,000
1,500
7,500
10,000
3) Calculate depreciation on Furniture
1,00,000 Rs [15% block] which was
acquired and installed on: 1/1/2021
15,000
1,500
7,500
10,000
3. THE ASSETS MUST BE OWNED, WHOLLY OR
PARTLY, BY THE ASSESSEE.
4. THE ASSET SHOULD BE ACTUALLY USED
FOR THE PURPOSE OF BUSINESS.
5. BLOCK OF ASSETS
6. ASSET MUST BE OWNED BY THE ASSESSED
7. ASSETS ACTUALLY USED FOR THE BUSINESS
IN THE PREVIOUS YEAR.
8. NO DEPRECIATION IN THE YEAR OF THE SALE
OF ASSETS
9.FULL PARTICULARS OF THE DEPRECIABLE
ASSET IS TO BE CHARGED MUST BE FURNISHED
TO A.O.
10. DEPRECIATION IS ALLOWED ON THE BASIS
OF WDV OF THE ASSET.
 METHODS OF DEPRECIATION:
Group-III
Group-I Group-II Intangible
• Assets of (Plant and
same nature (Buildings) (Furniture) Asset
Machinery)
and same
rate of 5% Block 10% 15% 25%
depreciation • Building used for • Furniture and • Cars, scooters, AC, • Know-how,
will be put in residential fittings including surgical patents,
same block, purposes electric fittings, equipment, plant copyrights,
fans. and machinery trademarks,
and licenses, franchise
depreciation 10% Block
is charged on • All non-residential 40%
buildings • Computers, books
the basis of for professional
block of use, gas cylinder,
assets. burners
40% Block
• Temporary
erections, building 30%
acquired for • Motors buses, motor
installing lorries, motor taxis
machines used in the business
of running them on
hire
4) XYZ Ltd. incurred capital expenditure of ` 1,50,000 on 1.4.2017 for acquisition of patents
and copyrights. Such expenditure is -

(a) Eligible for deduction in 14 years from A.Y.2018-19

(b) Eligible for deduction in 5 years from A.Y.2018-19

(c) Subject to depreciation @ 25% under section 32

(d) Subject to depreciation @ 15% under section 32

4) XYZ Ltd. incurred capital expenditure of ` 1,50,000 on 1.4.2017 for acquisition of patents
and copyrights. Such expenditure is -

(a) Eligible for deduction in 14 years from A.Y.2018-19

(b) Eligible for deduction in 5 years from A.Y.2018-19

(c) Subject to depreciation @ 25% under section 32

(d) Subject to depreciation @ 15% under section 32

5) Mr. X, a retailer acquired furniture on 10th May 2017 for ` 10,000 in cash and on 15th May
2017, for ` 15,000 and ` 20,000 by a bearer cheque and account payee cheque, respectively.
Depreciation allowable for A.Y. 2018-19 would be –

(a) ` 2,000

(b) ` 3,000

(c) ` 3,500

(d) ` 4,500
5) Mr. X, a retailer acquired furniture on 10th May 2017 for ` 10,000 in cash and on 15th May
2017, for ` 15,000 and ` 20,000 by a bearer cheque and account payee cheque, respectively.
Depreciation allowable for A.Y. 2018-19 would be –

(a) ` 2,000

(b) ` 3,000

(c) ` 3,500

(d) ` 4,500
DEPRECIATION ON WDV BASIS

Take the aggregate of written down value of all the assets in a

block at the beginning of previous year.
Add the actual cost of any asset acquired during the previous
year
Deduct the amount received along with scrap value in regard
to asset sold, discarded or destroyed.
 FORMULA
• Depreciation = WDV of Block as on the last day of the previous year X Rate of Depreciation
100
ADDITIONAL DEPRECIATION

Manufacturing or production business

New machine acquired and installed
Allowed in addition to normal depreciation
@20% if ready to be used for equal or more than 180 days.
@10% if ready to be used for less than 180 days.
 6) The W.D.V. of a block (Plant and Machinery, rate of depreciation 15%) as on 1.4.2017 is
3,20,000. A second hand machinery costing 50,000 was acquired on 1.9.2017 but put to use
on 1.11.2017. During Jan ’2018, part of this block was sold for 2,00,000. The depreciation for
A.Y.2018-19 would be -

(a) 21,750

(b) 25,500

(c) 21,125

(d) 12,750
 6) The W.D.V. of a block (Plant and Machinery, rate of depreciation 15%) as on 1.4.2017 is
3,20,000. A second hand machinery costing 50,000 was acquired on 1.9.2017 but put to use
on 1.11.2017. During Jan ’2018, part of this block was sold for 2,00,000. The depreciation for
A.Y.2018-19 would be -

(a) 21,750

(b) 25,500

(c) 21,125

(d) 12,750