The concept of “Depreciation” is that any asset, on account of normal wear and tear, is required at a point of time in future. Therefore, to enable a business to meet the cost of such replacement, the wear and tear is permitted to be calculated at a notional rate of percentage of cost of the assets.
Under income tax act, the assets are broadly categorized into 2 types for the purposes of depreciation:
1) Tangible assets;
2) Intangible assets.
Tangible assets are again sub-divided into 3 classes 1) Buildings; 2) Machinery & plant; 3) Furniture. In each class there are a few block of assets.
Conditions for claiming depreciation:
1. Depreciation is allowable only for certain tangible and certain intangible assets.
2. Assets should be owned by the assessee.
3. Assets should be used by the assessee for the purpose of business or profession.
Once the above 3 conditions are satisfied, depreciation shall be allowed irrespective of the assessee has claimed the deduction while computing the total income.
Condition 1: -
Depreciation can be claimed only on certain types of tangible and intangible assets. Let us know what are those certain tangible and intangible assets.
Tangible assets:With regard to tangible assets; the asset in respect of which depreciation allowance is claimed must be either “Buildings; Machinery; Plant or Furniture”. Depreciation with regard to any other capital asset cannot be deducted from business profits.
Depreciation is not allowable on the cost of land on which the building is erected or on the expense incurred for locating the plant site, but is allowable on land development cost. Buildings include roads which link buildings and other structures. However, construction of roads alone does not qualify for buildings.
Intangible assets:Intangible assets on which depreciation is allowable include know-how; patents; copyrights; trademarks; Licenses; Franchises; and any other business or commercial rights of similar nature.
Depreciation is allowable on above intangible assets which are acquired only on or after 1st April 1998. Rate of depreciation is 25% and it is allowable as per WDV method.
Condition 2: - Asset should be owned by the assessee:
It is only in respect of property owned by the assessee that depreciation allowance can be granted. No depreciation allowance is granted in respect of any capital expenditure that is incurred on the property of others by the assessee.
The term OWNED refers to that the person in possession of property has dominion over the property and has the right to receive income from that property.
If the assessee is in possession of building on part payment and it is not registered in his name, then also assessee can claim depreciation.For motor vehicles, ownership is determined by possession and its usage for business. Registration is not mandatory.
Certain cases where depreciation can be claimed by a person who is not the owner of the asset:
1. Assessee carrying business in a leased building and capital expenditure is incurred for renovation etc. Then, he can claim depreciation on the capital expenditure incurred
2. In the case of Finance lease, the lessee can claim depreciation as he is the real owner.
Condition 3: - Asset should be used for business: -
It is the responsibility of the assessee to prove that the asset has been used for the business. If the asset is not capable of being put to use in the business that year or no business has been carried out during the year, then depreciation cannot be claimed.
If the asset is used partly for business purposes and partly for personal purposes, then depreciation shall be allowed on proportionate basis.
It is not necessary that the asset must be used for the entire year. Use includes both passive and active use. Hence the assessee can claim depreciation from the date when it is ready for use.
Use of asset for trail run is also considered as used for business purposes.
If all the above conditions are satisfied then depreciation can be claimed by the assessee. The current year depreciation can be set-off against PGBP profits and income under any other head except salary & casual income. Unabsorbed depreciation can be carried forward for indefinite number of years.