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Income Tax Act

Section 32 of Income Tax Act, 1961

August 29, 2022

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This article is written by Shraileen Kaur, a law student at ICFAI University, Dehradun. In this exhaustive article, the author discusses Section 32 of Income Tax Act in detail, its historical evolution, provisions, case laws, as well as related concepts.

It has been published by Rachit Garg.

Table of Contents

Introduction

Financial literacy among India’s working population is increasing as a result of a variety of reasons, including recent technological advancements and media coverage. By putting in place financial literacy programmes, workshops, and courses, the Indian government and its authorities are continuously working toward progress. The nation boasts a sizable number of users of online financial services, including mobile banking, contactless transactions, online tax payments and returns as well as insurance. Due to these reasons, financial literacy in India has improved. However, there is still room for improvement.

People in India are still not aware of the ways of tax planning, even today, by the name of tax planning, they end up doing tax evasion leading to hefty penalties. Chartered accountants today have to go through every single transaction due to which they simply hide important hacks through which an individual can save tax. Hence, this exhaustive article aims at contributing to the financial literacy drive in India by explaining in detail Section 32 of the Income Tax Act, 1961.

Section 32 of the Income Tax Act of 1961, discusses the depreciation concerning buildings, know-how, copyright, furniture, patents, plants or other tangible as well as intangible assets.

What is Section 32 of the Income Tax Act

The provision for permitting depreciation is included in Section 32 of the Income Tax Act of 1961. This section is governed by Rule 5 of the Income Tax Rules, 1962. The Income Tax Act permits the deduction when the cost of the tangible or intangible asset utilised by the assessee decreases. The income-tax department determines the depreciation at the time of the deduction based on the asset’s life cycle cost, not the asset’s total cost. An assessee can use either the straight-line approach or the written line method to determine the reduction in the value of the asset brought on by depreciation. Among different methods of depreciation, the written line approach is a method used by the income tax department.

Decoding Section 32 of the Income Tax Act

Section 32 of the Income Tax Act, 1961 mentions in detail the depreciation and its applicability in numerous forms.

Section 32(1) of the Income Tax Act, 1961 states the types of assets, namely, tangible and intangible assets.

As per Section 32 (1)(i) –

Any building, furniture, plant or machinery will come under the category of tangible assets as they can be seen as well as touched.

As per Section 32 (1)(ii) –

Any franchises, patents, copyrights, know-how, licences, or any other business or commercial rights of similar nature will come under the category of intangible assets as they can neither be seen nor touched. However, this section limits by including only those intangible assets which have been acquired on or after April 1, 1998.

Both tangible, as well as intangible assets, shall be owned either completely or partly by the assessee. Also, the assets should be utilised for the primary objective of carrying out any business or profession.

Section 32 has allowed certain things that can be deducted from the total income on which tax is paid. These deductions are as follows –

(i) In the event of assets owned by a business involved in the production or distribution of electricity or both, the prescribed proportion based on the assessee’s real cost shall be deducted;

(ii) In the event of any asset block, such proportion of the written down value as may be prescribed shall be deducted.

However, there are certain restrictions in respect of deduction. Any deduction on the total taxable income will not be allowed if –

A motor car which is manufactured outside the territory of India and such motor car has been acquired by the assessee between the timeframe 28 February 1975 to 1 April 2001. However, if the motor car is used –

For business operations where the task involves giving the vehicle on hire to travellers; or
For conducting business activities or professions outside the Indian territory.

Any machinery or plant, if its real cost is deducted over the course of one or more years in accordance with an arrangement made by the Central Government in accordance with Section 42 of the Income Tax Act, 1961.

Clause (iia) This clause of Section 32 of the Income Tax Act, 1961 states that if a new plant or machinery (other than ships or aircraft) has been acquired as well as installed after the date of March 31, 2005, such new plant or machinery shall be included under depreciation of a further sum which is equal to 20 percent of the real cost of the good. However, such an amount can only be deducted if –

The assessee is engaged in any kind of manufacturing or production business of any article; or
The assessee is engaged in the business of power generation or distribution and production of electricity.

Further, it is stated that whenever an asset (as mentioned under clause (i), (ii) or (iia)) is acquired by an assessee in the year preceding the year of tax payment and such asset is used for conducting business operations and profession for a timeframe of fewer than 180 days in the year of purchase, the depreciation which is to be deducted under the section shall be limited to only 50 percent of the total amount which is prescribed under clause (i), (ii) or (iia).

In 2016, amendments were introduced in Section 32 of the Income Tax Act, 1961 due to the introduction of the Finance Act of 2015.

The amendments stated that wherever an asset in accordance with clause (iia) or the first proviso of clause (iia) is acquired by an assessee and it fulfils the following criteria, it will be allowed for the deduction of the fifty percent of the outstanding amount under Section 32 of the Income Tax Act, 1961. The criteria required to be fulfilled are as follows –

The asset should be acquired by the assessee during the previous year.
It must be utilised for the business purpose for less than 180 days in the year in which it was acquired i.e., the previous year.
Deduction in the value of the acquired asset is restricted to 50 percent of the total taxable amount calculated at the prescribed percentage.
After such deduction of 50 percent of the total taxable amount, the outstanding amount of 50 percent is left.

This outstanding amount is meant to be deducted in the immediate next year to the date of acquisition of the asset.

However, if the case involves an asset which is a commercial vehicle acquired by the assessee within the time period of October 1, 1998, to April 1, 1999, and such commercial vehicle is used for conducting business or professional activities before April 1, 1999, in such case the deduction in the total taxable income shall be calculated on the percentage which has been prescribed on the basis of the calculation of the written down value.

Section 32 even explains the term ‘commercial vehicle’. It includes the following –

Heavy and medium goods vehicles.
Heavy and medium passenger motor vehicles.
Light motor vehicles.

However, Section 32 also puts certain limitations by excluding certain vehicles from the term ‘commercial vehicle’. It excludes the following –

Maxi-cab.
Tractor.
Road-roller.

The meaning of the above-mentioned words shall be in accordance with Section 2 of the Motor Vehicles Act, 1988. Section 32 of the Income Tax Act, 1961 further states that –

In the case of a company, the exemption pertaining to any block of assets under clause (iia) shall be limited to 75% of the value determined at the prescribed percentage, on the written down value of such assets. Such value shall be determined immediately before the Taxation Laws (Amendment) Act, 1991, came into effect. It should be done in respect of the previous year pertinent to the evaluation year beginning on April 1, 1991.

Section 32 also states the aggregate deduction. It mentions that –

It must be in respect of deduction in the actual cost of the goods i.e., depreciation of any tangible assets like plant, machinery, buildings, or furniture; or in respect of any intangible assets like copyrights, franchises, know-how, licences, patents or any other business or commercial rights of similar nature.
It can be permitted to both predecessor and successor, the amalgamating company and the amalgamated company, or the demerged company and the resulting company.
In case, the deduction has been provided to the successor, it must be governed under clause (xiii), clause (xiiib) and clause (xiv) of Section 47 or Section 170 of the Income Tax Act, 1961.
In the case of a demerger, it shall not be greater than the deduction determined at the prescribed rates in any previous year.
The deduction calculated should be distributed between the parties involved in accordance with the number of days they have used the assets.

The section also includes 5 explanations. The explanations provide the following things –

When an assessee’s business or profession is conducted in a building that is not his own but over which he has a lease or any other right of occupancy, provisions of clause (ii) of Section 32 of the Income Tax Act, 1961 shall apply as if the said structure or work were a building that the assessee owned. However, there are other requirements attached to it. These requirements are –

The assessee incurs any capital expenses in conjunction with a lease or other right of occupancy for the purpose of conducting the business activities or profession in relation to the building of any structure or;
The assessee performed any work related to the renovation, expansion, or betterment of the building.

The phrase ‘written down value of the block of assets’ as mentioned under Section 32 shall hold the same meaning as defined in Section 43(6)(c) of the Income Tax Act of 1961.
Section 32 also defines the word ‘assets’. In a nutshell, assets mean –

Tangible as well as intangible assets.
Here, tangible assets include furniture, buildings, plants or machinery.
Also, intangible assets include copyrights, franchises, know-how, licences, patents or any other business or commercial rights of similar nature.

The meaning of the word ‘know-how’ has been mentioned as under –

Any industrial knowledge or skill likely to be useful in the operation of an oil well, mine, or other sources of mineral reserves, or the production or processing of goods.
Additionally, it involves looking for discoveries or examining deposits in order to gain access to them.

In order to avoid any uncertainty and ambiguity, the section states that –

Even if the deduction concerning depreciation is not claimed during the calculation of the total taxable income, the provision of Section 32 shall apply for the deduction on the basis of depreciation in the block of assets.

Clause (iii): The amount by which the money is payable in relation to such building, machinery, processing facility, or furniture, in addition to the amount of scrap value, if any, ‘fall short of the written down value thereof’ in the case of any building, machinery, plant, or furniture in regard to which depreciation is claimed and provided under clause (i) and which is traded, disposed of, discarded, or destroyed in the ‘previous year’:

Here, the expression ‘previous year’ does not include the year in which it was first brought into use.
The phrase ‘fall short of the written down value thereof’ indicates that any deficiency in the amount shall be written off in the account of the assessee.
With respect to clause (iii) of Section 32, ‘money payable’ includes –

Any insurance, salvage, or compensation money payable in connection with it;
The location where the building, machinery, plant, or furniture is sold, the price at which it is sold,

For instance, according to the proviso to clause (1) of Section 43, the money payable in relation to a motor vehicle shall be taken to be a sum that bears the price for which the motor vehicle is sold. If the actual cost of a motor vehicle is assumed to be twenty-five thousand rupees.

The amount of any insurance, salvage, or compensation payments due in relation to it, including the amount of any scrap value, in the same proportion as the amount of INR 25,000 bears to the assessee’s actual cost of the motor vehicle as it would have been calculated without the application of the aforementioned proviso.

The word ‘sold’ refers to ‘a transfer by way of exchange or a compulsory acquisition under any law for the time being in force’. However, the word ‘sold’, excludes a transfer of any asset from the amalgamating company to the amalgamated company in accordance with the agreed plan of amalgamation.

Here, the amalgamated company should be a company registered in India under the Companies Act of 2013, or
The plan of amalgamation should be that of any company involved in offering the banking services in accordance with clause (c) of Section 5 of the Banking Regulation Act, 1949 (10 of 1949). Also, such a scheme of amalgamation should be registered with a banking institution according to Section 45(15) of the Banking Regulation Act, 1949.

All about depreciation

Learning about Section 32 of the Income Tax Act would be incomplete if the concept regarding depreciation is not clear. Hence, before thoroughly understanding Section 32, it is important to know about depreciation in detail.

Depreciation is the decline in asset value brought on by normal wear and tear. Every asset is susceptible to wear and tear both during regular use and as time goes on. The asset’s initial cost is stretched out over time and is regarded as an expense.

It is used on long-term investments that provide advantages over a long period of time. For instance, on furniture, buildings, computers, automobiles, and other equipment. As land is not susceptible to wear and tear, depreciation is only assessed on buildings and not on land.

For effective financial management, depreciation must be viewed as an expense. For instance, if a driver lends his vehicle to a traveller, he must take into account that the vehicle has a finite lifespan and must be replaced after a certain duration of time. For this, he must take into account the cost of the car, its lifespan, and its resale value after its service life, as well as add it to other costs to determine the entire cost.

According to both the Companies Act. 2013 and the Income Tax Act, 1961 depreciation is also permitted as an expense. Despite the fact that both acts use a different calculation method, this discrepancy also results in the formation of a deferred tax asset or deferred tax liability.

These are certain notable points regarding depreciation –

According to the Income Tax Act of 1961, depreciation is authorised as a deduction based on a block of assets using the Written Down Value (WDV) method. Straight Line Method (SLM) depreciation is not recognised under the Income Tax Act, 1961.
A block of assets is a collection of assets that belong to the same class and are subject to the same rate of depreciation.
Depreciation is not calculated for goodwill and land.
Only the asset’s owner is eligible to take deductions for depreciation. Since a lessee does not own the asset, only the lessor is entitled to depreciation.
Depreciation is also permitted for property purchased under a hire purchase agreement.
Depreciation is allowed to the lessee only if he or she has constructed any part of the building or bought some furniture for the building.
Co-ownership allows for depreciation in proportion to each owner’s ownership.
Assets must be utilised for commercial or professional purposes in order to be eligible for deduction on the total taxable income.
Even if the assessee does not claim the depreciation amount as a deduction, it nevertheless reduces the amount of written down value carried forward to the next year.
If profit is determined on a presumptive basis pursuant to Section 44AD or 44AE, then such reported profit is taken into account after all expenses and depreciation permissible under Section 32.
In contrast to the Companies Act of 1956, depreciation is treated differently under the Income Tax Act. As a result, no matter how depreciation is recorded in books of accounts, the depreciation rates specified under income tax are the only ones that can be used.
If a new addition is incorporated into an existing asset, the new addition is considered to be an asset if it increases the asset’s capacity or lowers the cost per unit; otherwise, the new addition should be recognised as an expense.
Depreciation may be claimed on spare parts and equipment even if they are not really being used because they are employed for a business or profession.
Depreciation can be claimed at a lower rate in accordance with the Income Tax Act. However, for the next year, the written-down value will be regarded as decreased by the prescribed depreciation percentage. For instance, if an asset costs Rs. 20 lakh and 50% depreciation is required, but you only deduct INR 40,000, then the asset’s written down value for the following year will be calculated as INR 30,000 rather than INR 10,60,000.
If a person wants to claim an input tax credit for the GST they paid, they cannot depreciate the GST component.

Nature of depreciation

Depreciation lowers an asset’s book value and is considered an expense. Therefore, at the conclusion of the year, a basic journal entry needs to be passed. For instance,

Depreciation account (Dr) INR 45,00,000

To production equipment INR 45,00,000

According to the above entry, depreciation of production equipment is treated as an expense in the books of accounts. Depreciation is therefore represented as an indirect expenditure on the debit side of the profit and loss account, and the asset’s value should be indicated in the balance sheet after depreciation has been subtracted.

Despite its less frequency, there is another way to account for depreciation. This system credits an account called accumulated depreciation with depreciation for all assets, rather than diminishing the asset’s value. After that, it appears as a negative item on the fixed asset balance sheet.

Advantages of depreciation

There is a misconception that depreciation is a loss to the business. However, this is not true at all. Depreciation serves the following advantages:

Depreciation serves numerous taxation benefits. It is considered an expense for income tax purposes, thus it is vital to take it into account.
Depreciation is a mandate under the Companies Act, 2013. Charging depreciation under the Profit and Loss Account is compulsory under the Act.
If depreciation is not taken into account, then expenditure for fixed assets is not considered, and the profits may be shown as a high sum, especially in businesses that need substantial equipment and machinery. Additionally, this could result in a high share payment of dividends to the shareholders and a lack of capital when a company has to replace an asset.

Components required for calculation of depreciation

There are several components which are required for the calculation of depreciation. These components are as follows –

The date on which the asset was put into use

It includes the date the asset is first utilised by the company. It is simple to determine whether utilisation begins immediately after acquisition. However, there are situations when an asset has already been used without being added to the fixed asset accounts. It becomes challenging to pinpoint the date of implementation in such a situation. But doing so would still be crucial. Typically, examples include buildings and other used furniture.

Purchase price

The purchase price refers to the price at which the asset was acquired. It includes the price of the asset, including any applicable taxes, freight, and setup costs. Usually, they are recorded at their past values. However, if an asset was present before it was listed in the fixed assets section, one might need to look up its previous purchase price. An individual might want to get a professional evaluation for a highly valued asset to determine its historical cost. A similar one can also be used to estimate its historical cost in the absence of a professional evaluator.

Residual value

Residual value is often known as salvage value. Salvage value is what an asset is worth at the end of its useful life. Utilisation, degradation, and new developments invariably bring down the cost of the asset. The business may sell the asset at a reduced price if it is no longer beneficial to it.

Estimated useful life

How long is the item expected to be profitable for your company? In other words, a prediction is made on how long the item will continue to be useful. After that, it’s possible that the asset will no longer be useful or economical for business activities.

Method for calculation of depreciation

It is necessary to know how over the duration of the asset’s useful life, how it will be written off against profits. Calculating depreciation can be done in a number of different ways. Some of the most commonly used depreciation methods are, the straight line method, written down value method etc.

When the asset is sold, the bookkeeping services will no longer include the cost of the asset or the accumulated depreciation on it. A profit will be reported if the salvage value obtained exceeds the book value. If the salvage value is less, a loss is noted.

Ways to calculate depreciation of assets

There are different ways which are employed to calculate depreciation. According to Indian Laws, different methods can be used for the calculation of depreciation. However, the methods have been restricted by numerous laws. There are different acts which specify the methods of depreciation that can be used. For instance –

According to the Companies Act, 1956, only 2 methods for calculation of depreciation can be employed based on already specified rates of depreciation of assets, namely –

Straight Line Method.
Written Down Value Method.

According to the Companies Act, 2013, only 3 methods for calculation of depreciation can be employed based on the productive life of assets, namely –

Straight Line Method.
Written Down Value Method.
Unit of Production Method.

According to the Income Tax Act, 1961, only 2 methods for calculation of depreciation can be employed based on already specified rates of depreciation of assets, namely –

Written Down Value Method used on a block of assets.
The Straight Line Method is employed only for power-generating units.

As a businessman or being occupied in a profession, you would like to end the year with a significant amount of profits. Additionally, an asset’s value begins to decline for any organisation the moment it is acquired or bought. Tax relief is possible with some depreciation techniques. The generally accepted accounting principles, or GAAP, are used to describe some of the techniques listed below.

Straight Line Method of calculating depreciation

The simplest way to compute depreciation is by using this approach. The cost of the asset must be subtracted from the salvage value. This discrepancy is the amount that needs to be corrected for lost value or overall depreciation. Now multiply this sum by the anticipated life expectancy in years. The amount obtained is considered as the annual depreciation expense.

It is a simple method that produces fewer errors compared to other methods. It is highly suitable to depreciate assets that provide consistent economic benefits over the course of their useful lives. This method is frequently employed when calculating the economic advantages is challenging.

Annual Depreciation expense = (Value at purchase or Acquisition Value – Residual Value or Salvage Value) / Estimated productive life of the asset.

For instance, an individual has purchased any mechanical equipment worth Rs. 50,00,000. The productive life of the mechanical equipment is estimated to be 5 years. The salvage or residual cost is expected to be Rs. 5,00,000.

Annual Depreciation expense= (50,00,000-5,00,000) / 5 = Rs.9,00,000.

Hence, one needs to take Rs. 9,00,000 as the annual depreciation expense over the next five years.

Year	Depreciation expense (Year wise) (in INR)	Value of the assets after the deduction (in INR)
Year of purchase, say, 2015	There will not be any depreciation as this is the year the asset is purchased.	50,00,000
Year 1 – 2016	9,00,000	41,00,000
Year 2 – 2017	9,00,000	32,00,000
Year 3 -2018	9,00,000	23,00,000
Year 4 – 2019	9,00,000	14,00,000
Year 5 – 2020	9,00,000	5,00,000 – Salvage value or Residual Value

Written down value method of calculating depreciation

The most popular depreciation method is the Written Down Value approach. Additionally, the Income Tax Act only permits depreciation using the Written Down Value method.

Depreciation is applied to the asset’s book value using this approach, and it reduces the asset’s book value each year.

This approach is also known as the diminishing balance approach. With the written down value technique, depreciation continues to decrease over time. This strategy is considered to be the most rational way to depreciate an item because an asset has a higher value to a business in its initial years than it does in later years.

For instance, an asset is acquired at INR 10,00,000 and the prevalent rate of depreciation is 10% then for the first year depreciation is INR 1,00,000 (10% of INR 10,00,000), for second year depreciation is INR 90,000 ( 10% of 9,00,000 [10,00,000 – 1,00,000]) and for the third year depreciation is – INR 81,000 ( 10% of INR 8,10,000 [9,00,000 – 90,000]). The formula for calculating depreciation on the basis of the written down value method –

{1 – (Scrap value at the end of productive life of the asset/Cost of the asset or Written down value of the asset)^1/Remaining productive years of the asset}*100.

Production unit method of calculating depreciation

This method allots an identical amount of depreciation costs to each unit produced. In other words, rather than taking into account the asset’s useful life, the estimate is based on its production. It works best for production facilities that use an assembly line.

The whole calculation involves 2 steps.

First of all, the cost of assets is deducted from the Residual Value. The sum is divided by the anticipated output in units during the course of its useful life. The sum is computed as Per Unit Depreciation.
The amount of units generated throughout the course of a fiscal year is multiplied by per unit depreciation. Therefore, bookkeeping and accounting include the whole depreciation expense for that fiscal year.

Per unit Depreciation = (Value of purchase or acquisition value – Residual value or salvage value) / Estimated number of units that can be produced during its years of productivity.

Total Depreciation Expense for the financial year = Per Unit Depreciation x Units Produced in that financial year.

For instance, a business bought a machine worth INR 1,00,00,000. The estimated units that will be produced during its productive life are 2,00,00,000 pieces. The residual value expected is Rs. 10,00,000. During this financial year, 8,00,000 pieces were produced.

Step 1: Per unit Depreciation = (1,00,00,000-10,00,000)/20,00,000 = INR 0.45.

Step 2: Total Depreciation expense for this financial year = INR 0.45 x 8,00,000 pcs = INR 3,60,000.

Hence, the total expense on depreciation is INR 3,60,000.

Year	Expense on depreciation	Value of the assets after the deduction
Year of purchase	There will not be any depreciation as this is the year the asset is purchased.	1,00,00,000
Year 1	3,60,000	96,40,000

Declining Balance method of calculating depreciation

It falls within the category of accelerated depreciation. This can be changed for depreciation considerations depending on the asset’s nature and intended use. It is used to reduce tax exposure and accelerate depreciation written-off value. With this approach, depreciation is computed over the planned life at a declining rate.

Because the efficiency of any asset declines over time, it is a widely used strategy. Additionally, it aids in maximising your gain at the time of receiving the salvage or the residual cost. This can be seen, for instance, in the Double-Declining Balance technique.

This doubles the percentage determined using the Straight Line approach. The asset value left at the beginning of each year is adjusted by this same percentage.

Depreciation = 2 times the percentage calculated in accordance with the Straight Line Method*Book Value of the Asset at the beginning of the financial year.

It should be noted that for calculating the book value of the asset at the beginning of the financial year, depreciation should be deducted from the value of the acquired asset at the beginning of the financial year.

The declining balance method is popularly used in cases where with the passage of time, the productivity of the machine decreases.

Significance of depreciation

The full value of the asset will be deducted from your statement of profit and loss in the year of acquisition if it is not depreciated. It will invariably cause a substantial loss in the year of purchase. In contrast, succeeding years will display healthy earnings with no offset expenses. Companies keep track of depreciation in order to record the appropriate earnings.

The cost of the asset gradually shifts from the balance sheet to the income statement over the course of its productive lifespan. So, depreciation is a necessity for the following things –

Save income tax

Depreciation is a strategy used to distribute a portion of the value of an asset to years during which the tangible assets contributed to revenue generation. The amount of taxable earnings is decreased by a company’s depreciation expense, which lowers the amount of taxes due.

Depreciation costs are treated as tax deductions by tax authorities. To put it another way, taxpayers can lower their taxable income and the amount of taxes due by claiming depreciation charges for qualified assets. Your profit and loss account will display more earnings if depreciation expense is not included in bookkeeping. Additionally, the government would require you to pay higher income tax. Hence, claiming depreciation is essential for saving income tax.

Evaluation of assets

Depreciation is a measure of how much of an asset’s useful life has been consumed. It enables businesses to generate revenue from their assets by paying for them over time. The real and fair valuations of the assets are indicated in the balance sheet. Your company’s financial situation will turn out to be true and even more accurate. You can expect your company’s financial situation to be accurate and true.

Shows the exact profits

A depreciation expense has a significant impact on the profit shown on a statement of the financial position of the company. The greater the depreciation expense in a particular year, the lower the company’s disclosed net earnings i.e., its profit. Depreciation, on the other hand, is a non-cash expense, so it has no effect on the operating cash flow of the company. Also, depreciation is a revenue expense, hence the true profits are higher. The accurate profit or loss figure cannot be determined unless it is debited to your statement of profit and loss.

Depreciation fund

The term “depreciation fund” describes the sum of money that a business has on hand to purchase new assets. It originates from the investment of an amount equivalent to the depreciation allowance for its existing assets. For the purpose of adding new vehicles to the fleet and replacing older ones, the director keeps a depreciation fund. Depreciation leads to the creation of a depreciation fund which acts as a saving. This source of money can be utilised to replace an old, inefficient asset with a new one.

Business sale

The balance sheet amount for this fund serves as a helpful reminder of when it is ideal to reinvest in assets. Furthermore, when investors and venture capitalists would need to replace assets that would have an impact on their future revenue is one of the factors they take into account.

Calculation of depreciation under Section 32 of Income Tax Act

For calculation of depreciation under Section 32, two things are required – The written down value of an asset as well as the written down value of the block of assets.

Written down value of an asset can be calculated by deducting all the depreciation ‘actually allowed’ to the taxpayer inclusive of any unabsorbed depreciation from the actual cost incurred by the assessee.

= Actual cost incurred by the assessee – depreciation ‘actually allowed’ to the taxpayer inclusive of any unabsorbed depreciation

The written down value of the block of assets can be calculated by –

Aggregate of the written down value of all the assets that come under the category of a particular block of asset(s). (Value at beginning of the year)	XXX
Add: Real cost of the assets that come under the category of a particular block of asset(s). (Value at the time of acquiring in the previous year)	XXX
Less: Amount received or expected to receive for any asset(s) in that block of assets that are sold, destroyed, discarded, or demolished. (Amount as per previous year)	XXX
Written down value at the end of the year	XXX

Once this written down value at the end of the year is calculated, depreciation at the rate of the block is deducted to get the final value of the block of assets at the end of the year. However, this step is only taken if the value outcome at the end of the year is positive.

Written down value at the end of the year	XXX
Less: Depreciation at block rate	XXX
Final value/closing value of the block of the asset (at the end of the year)	XXX

The closing written down value will be zero if the written down value is negative, in which case no depreciation is permitted and the amount will be treated as a capital gain. If the amount is positive and there are no assets in the block, the amount will be considered a short-term capital loss, and no depreciation will be permitted.

Calculation of capital gain or loss in case of sale of depreciable asset under Section 32 of Income Tax Act

Whether the asset is held for more than three years or not, the capital gain or loss from depreciable assets is always classified as short-term.

A capital gain or loss can be calculated as such –

Aggregate of the written down value of all the assets that come under the category of a particular block of asset(s). (Value at beginning of the year)	XXX
Add: Real cost of the assets that come under the category of a particular block of asset(s). (Value at the time of acquiring in previous year)	XXX
Less: Amount received or expected to receive for any asset(s) in that block of assets that is sold, destroyed, discarded, or demolished. (Amount as per previous year)	XXX
Written down value at the end of the year	XXX

After the above calculation, there can be 2 situations –

Short-term capital gain (If the final outcome is a negative written down value).
Short-term capital loss (If the final outcome is a positive written down value and there is no asset in the block of assets).

Depreciation in the year in which an asset is purchased

The asset must be used in the year it was purchased for the depreciation claim to be authorised.
The degree of asset utilisation will not be taken into account when deciding whether or not the property is put to use. For instance, it is deemed to have been put to use if the asset was used for a trial task.
The amount equivalent to 50% of the sum computed using standard depreciating rates is permitted as depreciation if an asset is in use for fewer than 180 days. i.e. If an asset is put into service on or before October 3rd of that year or 4th of October in case of a leap year, 100 percent depreciation is permitted. If the asset is used for more than 180 days, the depreciation claim can be 50 percent.
On the basis of the block of asset’s written down value, deprecation will be permitted.

Calculation of depreciation in subsequent years of acquiring the asset

If the above-mentioned criterion is met, full depreciation is permitted in the following years. It applies even if an asset is not used during the year of the acquisition or is used for just under 180 days. Even if just one asset out of a block of assets is used at any given time during the year, the group as a whole can still depreciate.

Prevalent rate of depreciation

Asset	Prevalent depreciation rate
Only annual publications owned by an assessee who practices any profession	100 percent
Assets used in a business of publication, distribution or library-related work i.e., books	100 percent
Books owned by an assessee practising any profession, excluding annual publications	60 percent
Motor buses, taxis, and trucks used for hire that are purchased by a company within the timeframe of August 23, 2019, to April 1, 2020. Also, the asset must be used before April 1, 2020.	45 percent
Desktop, laptops and their software	40 percent
Constructions that are only transitory, such as wooden structures	40 percent
Buses, cabs, and trucks that are operated for rent by a company	30 percent
Automobiles (except those companies that rent them out) bought before April 1, 2020, but on or after August 23, 2019. Also, the asset was used before April 1, 2020.	30 percent
Copyrights, franchises, know-how, licences, patents or any other business or commercial rights of similar nature	25 percent
Motor vehicles other than those rented from companies	15 percent
Any type of furniture or fixtures, including electrical fixtures	10 percent
Hotel and boarding facilities	10 percent
Residential structures besides hotels and boarding properties	5 percent

Depreciation as an instrument for tax planning under Section 32 of Income Tax Act

Tax planning can be accomplished with the use of depreciation. Buildings, machinery, plants, furniture or any other tangible asset may be depreciated beginning with the assessment year 1999-2000, as stated in Section 32(1). It is also possible to claim depreciation on intangible assets owned by the taxpayer and utilised for carrying out business activities or professions, such as know-how, patent rights, royalties, registered trademarks, licences, franchises, or any other commercial rights obtained on or after 1st April 1998. One should be aware that “building” covers things like roads, tunnels, drainage systems, boreholes, and septic tanks for depreciation purposes. Printing presses, office equipment, fax machines and multifunction printers, desktops, instruments, and books are all included in plant and machinery which are commonly used by professionals.

Depreciation is permitted at a prescribed percentage ranging from 5% to 100% on the written-down value of numerous blocks of the asset. However, according to the second proviso to Section 32(1), depreciation shall be limited to 50% of the prescribed percentage in regard to such asset procured by the claimant during the previous year and used for the purpose of carrying out business activities or profession for a period of fewer than 180 days in that previous year. Another substantial shift is that the first proviso to Section 32(1), which allowed for a full tax rebate of the actual cost of any plant or equipment costing up to Rs.5,000, has been removed by the Finance Act, 1995, with effect from the financial assessment year 1996 to 1997. However, there is still 100 percent depreciation allowed on professional books with effect from the financial year 1996 to 1997.

Depreciation and reduced tax liability

According to Section 32 of the Income Tax Act, 1961, the machinery and plant category includes a variety of items that are eligible for 100% depreciation. These include wind turbines and other unique devices like electric generators and pumps that run on wind energy, biogas plants and engines, agricultural as well as municipal waste conversion machines that produce energy, electrically powered automobiles like rechargeable batteries or fuel-cell powered cars, solar power generating mechanisms, etc. A current industry with sizable taxable earnings may plan industry diversification and be eligible to claim 100% depreciation for new equipment and plant. Recent years have seen a large number of businesses effectively implement this type of tax planning, which is entirely legal and in line with government initiatives to encourage investment in particular industries.

However, in March 2022, the Income Tax Appellate Tribunal in Ahmedabad while hearing the case regarding the Sports Authority of Gujarat, held that income from interest only cannot attract a claim for depreciation under Section 32 of the Income Tax Act.

The tribunal further stated that-

“Section 57 clause (ii) of the Income Tax Act provides that depreciation under Section 32(1) or 32(2) is allowable in case any income is accessible under this head only if it is income from letting on hire of any machinery, plant or furniture. However, in the instant case, since income received is from interest on the investment of surplus funds and since the same is accessible under the head ‘income from other sources’, depreciation under Section 32 of the Act is not allowable to the assessee”.

Is deferring depreciation under Section 32 of Income Tax Act legal

The same was discussed in the case of Commissioner of Income Tax v. Mahendra Mills Ltd. and others (2000). In this case, the Apex Court held that –

The provision for depreciation claims is for the advantage of the taxpayer. It is not possible to compel someone to use a benefit if they do not want to for any reason. The claim of depreciation must be weighed against the interest of the taxpayer. According to Section 28 of the Income Tax Act, income falling under the heading “Profits and Gains of Business or Profession” is subject to income tax, and Section 29 of the Act specifies how income should be determined. Sections 30 to 43A of the Act contain the relevant computation rules. In light of the limitation included in Section 34, the argument that just because Section 32 provides for depreciation, it must be recognised in computing the assessee’s income cannot be accepted in all instances.

The demand for depreciation under Section 32 will not be accepted if Section 34 is not satisfied and the assessee does not provide the particulars. Therefore, other Act provisions should be considered as one reads Section 29. If the updated return is a legitimate return and the taxpayer has withdrawn the claim for depreciation, the assessment cannot be made based on the prior return. Depreciation allowance is based on the written down value of the asset, which is equivalent to the real procurement costs of the asset deducting the total of all rebates “actually allowed” to the assessee over the previous years.

Actual permission does not equate to ‘notionally allowed’. It cannot be argued that the taxpayer had a notional right to a depreciation deduction if he had not requested one in any previous year. Once anything is claimed, it is ‘allowed.’ When we compare the terminology used in Sections 16, 34 and 37 of the Income Tax Act, we notice a small distinction. A privilege cannot be a liability, and an option cannot turn into a requirement, it is said with some justification. When the assessee does not request a deduction for depreciation, the authorised officer cannot give one.

The legality and repercussions of deferring depreciation can be judged on the basis of 2 cases. These cases are as follows –

CASE I – When depreciation is not claimed under the Income Tax Act, 1961

Sometimes it may be more advantageous to refrain from claiming depreciation than to do so. As a result, one may decide not to claim depreciation in one year and to do so in another. Also, depreciation can be claimed at a relatively high written-down value as a result of not claiming it in the first year. The advantage of depreciation is not sacrificed in this approach; it is merely postponed. It is advised not to claim depreciation in the following circumstances:

(1) In cases where certain deductions and allowances, such as brought-forward return on assets, may lapse due to lack of profits in a given year if the depreciation is claimed.

(2) If a non-corporate assessee’s current income is in a lower tax slab and they anticipate making a higher profit in the coming year or years, taking advantage of depreciation claims in those years will help them reduce their taxable income and avoid paying tax that would otherwise have been due at a higher rate based on the applicable slab rates. It is possible to go beyond Section 50’s requirements by not claiming depreciation. It should be highlighted that under Section 50, the profit on the sale of a depreciable asset is considered a short-term capital gain.

Also, it is advised not to claim depreciation on an asset if the owner intends to hold it for the purpose of reselling it at a later time, particularly if he retains the asset for a long enough period to qualify it as a long-term asset. The profit from the asset’s sale in such a manner will be considered long-term capital gain (LTCG) and go outside the scope of Section 50. As a result, this assessee will be qualified for both the cost inflation index benefit and the lower long-term capital gain tax rate.

It has also become extremely crucial to claim depreciation only in the financial year in which taxable profit occurs because, as of the assessment year 1997–98, it can only be carried forward for 8 financial assessment years.

CASE II – When depreciation is claimed for an asset used for conducting business activities

One of the requirements for claiming depreciation under Section 32(1) is that the assessee must use the asset in the course of his or her business or profession. It has long been debated when an asset is considered to be ‘used’. Some significant judicial viewpoints on the issue are as follows:

Punjab National Bank Ltd. v. Commissioner of Income Tax (1983)

In this case, the High Court of Delhi stated that depreciation on the elevators and the air-conditioning processing facility had to be entirely allowed because they were employed by the assessee for the purpose of its business, regardless of whether they were also used by the leaseholder or tenant of one of the floors, or any customer, or potential guests. A plant or machinery can be said to be used by someone else if that person has real influence over it. Who uses it is determined by the control. The term ‘user’ refers not only to the individual who is receiving benefits, but also to managing, operating, preventing, fixing, installing, and so on.

Whittle Anderson Ltd. v. Commissioner of Income Tax (1971)

In this case, the court stated that the term ‘used’ should be interpreted broadly to include both passive and active users. When equipment is kept ready for use at any time in a specific production plant under an agreement in writing from which taxable profits are obtained, the equipment can be described as ‘used’ for the purposes of the business from which the profits were earned, even if it was not actually worked.

Western India Vegetable Products Ltd. v. Commissioner of Income Tax (1954)

In this case, it is held that when a business is established and ready to begin operations, it is said to be formed. However, it is not set up until it is ready to begin operations. Moreover, there may be a timeframe between the establishment of the business and its commencement, during which all expenses incurred are allowable deductions.

Commissioner of Wealth Tax v. Ramaraju Surgical Cotton Mills Ltd. (1962)

In this case, the Apex Court held that if a unit is not prepared to do the task for which it is being set up, it cannot be claimed to have been set up. It is only possible to say that a unit has been set up once it has been transformed into a form that allows it to begin operating as a manufacturing company or a corporation.

Commissioner of Income Tax v. Industrial Solvents and Chemicals Private Ltd. (1979)

In this case, the court stated that even though the final products obtained by the assessee could be considered substandard, it cannot be argued that the assessee’s business was not established while the plant was being operated because the end product then produced was not of a suitable standard.

Grasim Industries Limited v. Commissioner of Income Tax (2010)

In this case, the High Court of Bombay held that it is not a mandate for a company to have actually started its operation in order to claim depreciation. Even if the company is ready to start its production, it can claim depreciation. Regarding Grasim Industries Limited, the court stated that as the plant was ‘ready’ for commencement of its operations for the financial year of 1992-93, the company is qualified to claim depreciation.

Requirements for depreciation claims under Section 32 of Income Tax Act, 1961

An assessee must meet certain specified requirements in order to be eligible for the depreciation deduction. The following are these requirements:

Asset classification

The proprietor of the asset must be the assessee himself in order to claim for depreciation. The asset may be tangible or intangible. In terms of a physical commodity, the asset ought to be a structure, piece of equipment, plant, or piece of furniture. Intangible assets should include patent rights, copyrights, trademarks, licences, franchises, and other rights of a similar sort acquired on or after April 1, 1998. The price of the land upon which the structure is located is not taken into account by the department of Income Tax. It is done due to the fact that property does not depreciate as a result of the use or wear and tear, its cost is not factored into the building’s cost.

Rent and lease

Only the capital assets that the assessee professionally owns are eligible for depreciation. In order to be eligible for a deduction for building depreciation, the taxpayer must be the owner of the relevant structures. Ownership of the land need not be held by an assessee. Depreciation on buildings may be deducted by an assessee even though the land is owned by another party and the building was constructed by the assessee.

The taxpayer cannot claim the deduction if he uses the building or is a lessee in it. An assessee is eligible to use depreciation allowances only if they have built a building on the leased land. When it comes to hiring as well as purchase, if an assessee hires the equipment for a short time, he is not able to claim the deductions. However, in the case of a transaction, if an assessee buys the property and takes ownership of it, he is qualified to claim the deduction.

Utilised for business or profession-related purposes

In order to qualify for the depreciation allowance, the asset must have been used for either a business or profession-related purpose. However, using the asset for the duration of the accounting year is not required in order to take advantage of the provision for depreciation. In light of this, the assessee is qualified to apply for the depreciation allowances even if he used that asset for only a very short time throughout the accounting year.

For instance, a farmer growing a seasonal crop, let’s say, Sugarcane. Even though the sugarcane is not grown through the entire year, if the asset is employed in a field of sugarcane at any point throughout the accounting year, the farmer is still eligible to claim depreciation. The income tax officer is entitled to decide whether the amount of the depreciation is proportionate under Section 38 of the Income Tax Act of 1961 or not.

No deduction is allowed for sold assets

Depreciable assets are not eligible for a deduction by the assessee. The assessee is not eligible for a deduction if a sale takes place, or the asset is destroyed or demolished the same year as its acquisition. If there is a co-owner of an asset, the co-owner may also write off the depreciation of the asset.

Additional depreciation as per Section 32 of Income Tax Act

If the assessee meets the following criteria, additional depreciation will be permitted:

Only newly purchased and installed machinery or plant, with the exception of ships and aeroplanes, is eligible for further depreciation after March 31, 2005.
The assessee must be involved in the business of producing and manufacturing any kind of commodity. For instance, laptops or desktops used for processing data in industrial areas are eligible for additional depreciation).
Assessees who work in the power generating and distribution industry will be able to take advantage of increased depreciation beginning with the 2016–17 financial year. Publishing and printing are also regarded as manufacturing.
Additional depreciation is permitted at a rate of 20 percent of the actual cost of the assets.
If the assessee begins producing or manufacturing any goods on or after April 1, 2015, in any designated underdeveloped region of Andhra Pradesh, Bihar, Telangana, or West Bengal, and purchases and deploys any new equipment between April 1, 2015, and March 31, 2020, the additional depreciation is permitted at a rate of 35 percent.
However, if the asset is used for less than 180 days, extra depreciation will be permitted at half of the actual cost, or 10 percent or 17.5 percent, depending on the scenario.
As of the 2015–16 financial year, further depreciation may be taken into account in the year the asset is put to use at a rate of 50 percent, with the remaining 50 percent allowed in the following year.

However, there are specific cases where additional depreciation is not allowed –

Plant and equipment that was previously in operation, either inside or outside of India, before being installed by the assessee.
any workplace equipment or automobile used for transportation.
Any equipment or machinery that has been put in a business location or a residence, including a visitor’s apartment,
Any equipment whose real cost is permitted as a deduction via depreciation or another method when determining income charged under the heading Profits and gains of business or profession of any preceding year.

Additional depreciation in generating electricity

Only those assessees who are directly involved in production are eligible to deduct additional depreciation. Therefore, the Parliament made a specific provision to allow the assessee to take advantage of increased additional depreciation.

The assessee, a joint venture business engaged in thermal power plants, made a claim in order to be eligible for the deduction for additional depreciation as per Section 32(1)(iia) of the Income Tax Act.

An assessing officer, however, denied the claim on the grounds that this type of benefit will only be given to the assessee who is involved in the manufacture of an object, and that this does not cover the generation of power. Following that, the assessee received the notification from the income-tax department in accordance with Section 154 of the Income Tax Act of 1961. The assessee provided an explanation to the income-tax officer, but the assessing officer did not accept it.

The Income Tax Act’s Section 32(1)(iia) was revised in 2013 to introduce a clause that states that an entity engaged in the business of producing and distributing electricity may be eligible for further depreciation.

Who cannot claim additional depreciation

An assessee is not allowed to claim the deduction for further depreciation if they meet the following criteria, according to Section 32(1)(iia) of the Income Tax Act of 1961:

Plants and equipment that were used outside of India before being placed in India are not eligible for further depreciation.
An individual is not eligible to deduct the cost of any plants or machines that are installed in commercial or residential buildings.
An assessee is not eligible to claim a deduction for further depreciation on items including furniture, buildings, ships, aeroplanes, office equipment, vehicles used for road transportation, and residential accommodations.

Depreciation for businesses in underdeveloped areas

As of April 1, 2016, depreciation is possible in underdeveloped areas under Section 32(1)(iia) of the Income Tax Act, 1961. The additional depreciation accessible to those assessees is 35 percent as compared to the earlier 20 percent, if they establish a manufacturing or production business in any backward region such as Bihar, Andhra Pradesh, Telangana, or West Bengal. Aircraft and shifts are not subject to additional depreciation. The machinery can, however, be bought and installed by an assessee.

Concept of unabsorbed depreciation

If a loss occurs in a business and profession and the cause of such loss is depreciation, in that case, the loss is referred to as unabsorbed depreciation and may be carried forward to the succeeding year.

These are some of the important points regarding unabsorbed depreciation –

Even for businesses or professions that are related but do not exist, depreciation must be carried forward.
The submission of a return of loss is not required for the carry forward of unabsorbed depreciation.
The assessor should account for losses that were brought forward in the following ways –

Initial adjustments will be made to the current year’s depreciation.
Then brought forward business losses whether speculative or non-speculative or both will be set off against business profits.
Finally, unabsorbed depreciation will be set off against business income.
Depreciation that has not been absorbed can be carried forward indefinitely.
In any year, unabsorbed depreciation can be deducted from any source of income other than salary and capital gains.

The High Court of Himachal Pradesh gave one of the landmark judgments on unabsorbed depreciation in the case of Commissioner of Income Tax v. Kriti Resorts Private Limited (2011).

In this case, the High Court of Himachal Pradesh held that unabsorbed depreciation, if any, can be carried forward to the next assessment year. It can be written off against the taxable income under the head of ‘income’ in the books of accounts of the next year. However, such unabsorbed depreciation can either be for or up to the assessment year of 1996-97.

Due to the assessee’s right to a deduction under Section 10B up to A.Y. 2005-06, the provisions of Section 10B(6) are not applicable in the relevant A.Y., ie 2004-05, and thus unabsorbed depreciation carried forward from assessment years before 2000-01 can be set off against business profits or any other head of income, including income from other sources.

Case laws related to Section 32 of Income Tax Act, 1961

Commissioner of Income Tax v. East India Hotels Ltd. (2011)

In this case, the Income Tax Appellate Tribunal held that as the assessee took delivery of the new aircraft it had acquired in the second half of the relevant preceding year and had it insured, the aircraft was prepared for use in a business setting and depreciation was therefore permissible for the assessment year of 1996 to 1997.

Deputy Commissioner of Income Tax v. Metalman Auto Private Ltd. (2001)

In this case, the Income Tax Appellate Tribunal of Kochi held that a second claim for depreciation on the same assets would result in receiving double the benefits if the assessee, a charity organisation, had already claimed a deduction for the use of funds to acquire capital assets. The assets that were acquired in the name of the assessee business’s managing director and his wife but were used only for the assessee’s business were eligible for depreciation under Section 32 for the assessee company in the assessment year 2005 to 2006.

Deputy Commissioner of Income Tax v. Lafarge India Ltd. (2011)

According to the Mumbai Income Tax Appellate Tribunal, the assessee was granted depreciation on the real cost recorded in the books of accounts. When the cost of capital assets was adopted by the assessor based on a registered valuer’s report, there was no evidence of a collusive transaction or an attempt to lower tax liability, and there was no provision for the payment of goodwill. Hence, the entitlement was correct for the assessment year 2000 to 2001.

Commissioner of Income Tax v. Manappuram General Finance and Leasing Limited (2010)

In this case, the High Court of Kerala held that a transaction will be considered a loan transaction if the assessee has funded the vehicle by the outside agents i.e., borrowers. Also, the borrowers should be the actual owners of the vehicle. In this case, the assessee cannot claim depreciation on the vehicle.

The court further stated that if the automobile is bought by the assessee who retained the ownership along with the registration in his or her titles, depreciation can be claimed. However, that vehicle was either leased or given under a hire purchase agreement, giving the hirer the option to buy it after the payout of lease payments or hire costs during the predetermined period.

Commissioner of Income Tax v. Yamaha Motor India Private Limited (2010)

In this case, the High Court of Kerala stated regarding abandoned machinery, the actual use of the equipment was not required, and the requirement that the equipment is used for business purposes in order to qualify for depreciation would imply that the abandoned equipment was used for business purposes in the prior years for which depreciation was permitted.

Commissioner of Income Tax v. Paliwal Glass Works (1986)

In this case, the High Court of Allahabad stated regarding subsidies granted by the State Government for the particular purpose of purchasing a generator set. Subsidy should be taken out when calculating actual cost.

Commissioner of Income Tax v. EDS Electronic Data Systems (India) Private Limited (2009)

Considering the facts and circumstances of the case, the court held that if any extra infrastructure was developed by way of brickwork and linked expenses, the same would be considered as a capital expenditure qualified for depreciation under Explanation 1 to Section 32(1). However, if any extra infrastructure was not developed, the expenditure would be revenue in nature covered by Section 30(a)(ii) in the case of expenditure on leased assets in order to make it function for the assessee’s business.

Commissioner of Income Tax v. G R Shipping (2009)

In this case, a barge that belonged to the assessee and was part of the block of assets was used in the shipping company. On 6 March 2000, the barge was involved in an accident and sank. The barge was sold in May 2001 on an agreed amount since efforts to salvage it would not have been profitable considering the assessment year 2002-03. The assessment officer rejected the depreciation claim since the barge wasn’t operable and wasn’t used for business at all in the previous assessment year 2001-02.

On appeal from the assessee, the Tribunal held that individual assets had lost their identities in accordance with the Taxation Laws (Amendment) Act of 1988 which introduced the concept of ‘block of assets’ and that only the ‘block of assets’ needed to be taken into account. It was decided that the block of assets as a whole, rather than the individual assets, should be subjected to the ‘user’ test. When the Revenue department appealed, the High Court of Bombay rejected the case, stating that its earlier rulings had already ruled in favour of the assessee on the matter.

Department of Income Tax v. Sri Chamundeshwari Sugar Limited (2016)

In this case, an issue regarding faulty machinery found during the trial task was raised. The question before the Income Tax Appellate Tribunal of Bangalore was –

Whether equipment that was purchased for business use but later discovered to be defective after installation during a trial period is eligible for depreciation?

After taking into consideration the facts and circumstances in the matter, the tribunal answered the question with ‘Yes’. The tribunal stated that if in case the equipment bought for business purposes is found to be faulty, it cannot be concluded that they were not used for the required purpose. Hence, the depreciation claim made by Sri Chamundeshwari Sugar Limited stands valid.

State of Andhra Pradesh v. National Thermal Power Corporation Limited (2002)

The Supreme Court ruled in the State of Andhra Pradesh v. National Thermal Power Corporation Limited (2002) that power can be transported, transferred, and distributed. Therefore, the Income-tax Officer is unable to prevent an assessee from obtaining additional depreciation for producing electricity. The Supreme Court ruled in favour of the assessee and held that Section 32(1)(iia) of the Income Tax Act, 1961 permits an assessee who is producing electricity to claim additional depreciation.

Conclusion

Summarising the above-mentioned concepts, it can be concluded that even if the deduction concerning depreciation is not claimed during the calculation of the total taxable income, the provision of Section 32 shall apply for the deduction on the basis of depreciation in the block of assets. Also, Section 32(2) mentions the depreciation allowance which is a statutory provision. However, the scope of this section is not limited to merely depreciation caused due to normal wear and tear. There are numerous other concepts which are a part of Section 32 of the Income Tax Act, 1961. These concepts include additional depreciation, unabsorbed depreciation, etc.

Also, considering the case laws as mentioned in the article, it can be stated that in order to avoid legal proceedings, assets should be properly allocated their block depending on the rate of depreciation and characteristics.

Any asset should always be bought in perfect condition, and preparations should be made well in advance in order to use it properly and primarily for commercial purposes. The government must grant the necessary authorizations and licences far in advance of the deadline related to business and profession. In order to at least specify the legal position in the situation and ensure that depreciation is always permitted when calculating income over time, it is preferred that the modification be amended to utilise the words ‘use and used’.

Hence, the recommendations provided above should be implemented properly for the better functioning of the legal statutes.

Frequently Asked Questions (FAQs)

Is it necessary to mention the exact total income before the calculation of the taxable income liability?

As per the Income Tax Act, 1961, the income tax department does not expect you to mention the exact amount of the total income. In fact, the individual paying the tax is supposed to round off the total amount.

According to Section 288A of the Income Tax Act, 1961,

This section also specifies rules that should be considered when rounding off the total income for the payment of taxes. Some of these rules are mentioned below:

As per the rule, the closest multiple of ten is used to round off the total income calculated in conformity with the Income-tax Law.
First, any rupee value that contains a paisa should be eliminated.

After paisa is eliminated, if the total taxable amount is not in the multiples of ten and the last number is five or higher, the amount is increased to the following higher multiple of ten; if the last number is less than five, the amount is decreased to the subsequent lower multiple of ten; and the amount so rounded off is considered to be the taxpayer’s total income.

For instance, Mr G has a total taxable income of INR 33,55,456.63.

Now, first of all, the amount of paisa will be eliminated, i.e 0.63. Now the leftover is INR 33,55,456. Considering the figure, it is clear that the last figure is more than 5, so the amount will be rounded – off to the next multiple of ten. The rounded-off amount shall be INR 33,55,460. So, the total taxable income of Mr G shall be INR 33,55,460.

On the other hand, if the total taxable income of Mr P is INR 23,67,542.78. Now, first of all, the amount of paisa will be eliminated, i.e 0.78. Now the leftover is INR 23,67,542. Considering the figure, it is clear that the last figure is less than 5, so the amount will be rounded – off to the preceding lower multiple of ten. The rounded-off amount shall be INR 23,67,540. So, the total taxable income of Mr P shall be INR 23,67,540.

According to the Income Tax Act, 1961, who has the obligation of the form of the return of income? Is it the duty of the Income Tax Department?

According to the Income Tax Act, 1961, the person paying the tax is under the obligation to file a return. Also, the person paying the tax is then in charge of making sure the tax credits are present in the tax credit statement and any TDS/TCS certificates that are received. The person also has the responsibility for submitting complete information about the income and tax payments to the Income-tax Department in the form of a Return of Income before the deadline set forth in this regard.

The company is claiming depreciation on the automobile that the manager uses for personal travel. Is the claim of the company justified? It falls under which head – tax management, tax evasion, or tax avoidance?

According to Section 32 of the Income Tax Act of 1961, it is not permitted to claim depreciation on an automobile that is utilised for personal purposes. Depreciation claimed by the business on a car that the manager uses for personal purposes is, therefore, an instance of tax evasion.

Is it true that goodwill being an intangible asset is not subject to depreciation under Section 32 of the Income Tax Act, 1961? Analyse.

Depreciation is permitted with regard to patents, copyrights, trademarks, licences, franchises, and any other intangible assets of a comparable character, as stated in Section 32(1)(ii) of the Income Tax Act. It is possible to conclude from a quick glance at this section’s structure that depreciation is permitted for both tangible as well as intangible assets, and clause (ii) lists the intangible assets eligible for depreciation. Other trades or corporate rights of a comparable character are among the assets that are covered by the definition of “intangible assets” under Section 32(1)(ii).

In order to fully comprehend what constitutes an intangible asset, it is important to consider factors such as the type of goodwill involved, how it was created, how it was valued, the contract under which it was acquired, the type of intangible asset it embodies, such as a registered trade mark, patent, or intellectual property rights, and whether it would fall under the clause “any other business or commercial rights which are of similar nature.” However, before numerous Courts and Tribunals, the question of whether goodwill can be depreciated was a point of contention.

It has been ruled in a number of cases that goodwill does not qualify for depreciation since it does not share the characteristics of intangible assets as defined by Section 32 of the Income Tax Act of 1961. In the case of Smifs Securities Ltd., the Supreme Court put an end to the aforementioned issue by ruling that goodwill, which is the difference between the price paid and the value of the shares in an amalgamation plan, is an asset that can be depreciated under Section 32 of the Act. The phrase ‘any other business or commercial rights of a similar nature’ includes goodwill for the purposes of allowability of depreciation, according to the Supreme Court. In this case, the Apex Court used the principle of ‘Ejusdem Generis’. (The Latin phrase ejusdem generis, or of the same kind, is applied to interpret ambiguous worded statutes. When a law mentions certain categories of people or things and then makes general references to them, the general assertions only apply to the particular categories of people or things that are stated.)

References

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