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2 I am very thankful to everyone who have supported me for the completion of my project effectively and on time. I am very grateful to my teacher Dr. Amandeep and the thankful to her for her moral support and guidance throughout the completion of my project.

3 The income tax act 1961 nowhere defines the term depreciation, though It is a very important item treated under the head profit & gains of business or profession. In simple language depreciation is decrease in the value of an asset due to its wear and tear and passage of time. It is the process of allocating the cost of long term asset to the time periods in which it is used in a systematic and rational,manner. As the time passes the value of a capital asset goes on decreasing and depreciation measures this decreases in monetary value which in turn is treated as business expenditure and debited to profits and loss account of the assessee.

4 Objects of calculating depreciation depreciation is calculated with the following three objects: (a)To arrive at the real business profits by charging the monetary value of decrease in efficiency of any asset used for the business. (b)To determine the book value of asset at any given time so as to assess the net worth of the business. (c)To know the real position about the assets and arrange for its replacement or renewal by setting aside a specified sum out of each year’s profits.

5 Charge of depreciation Depreciation can be charged out of: 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)) A.Tangible assets (A) BUILDING it includes factory, office, godown, workshop, residential house of employees, school, hospital, creche, club, canteen etc. constructed for welfare of employees. depreciation can be claimed on building constructed on a piece of land taken on lease or rent. The term building includes itself the roads, bridges, wells and tubewells etc. Classification of building. With effect from assessment year the new rate schedule has classified the building into four categories. 1.buildings(non factory) 2.Buildings ( factory) 3.Buildings( priority) 4.Building( temporary structures)

6 (B) MACHINERY machinery is that complex combination of mechanical parts which help in production. It is a complex system of appliances used to achieve a desired result. (C) PLANT U/s 40(3) of the income tax act 1961 the word plant includes ships, vehicles, scientific apparatus, technical know how, surgical equipments etc. used for the purpose of business or profession of the assessee. Sanitary and pipeline fittings of a hotel, service lines and switch gears of electric supply company are also included in the definition of plant. (D) FURITURE. The term furniture includes tea bushes, livestock, or building or furniture and fittings. The object of furnishing or decorating some premises. The decoration articles are also included in the definition of furniture. Intangible assets Know how, patents, copyrights, trademarks, license, franchise, or any other business or commercial rights.

7 RATES OF DEPRECIATION Block no. Rate assets a.Tangible assets Group 1- building 1.5% all building used mainly for residential purpose excepts hotels and boarding houses. 2.10% all non residential buildings % a. all buildings acquired on or after 1/9/2002 for installing machines, plant forming part of water supply project or water treatment system and which is put to use for the purpose of business of providing infrastructure facilities u/s 801A(4) (1). b. purely temporary erections such as wooden structures. Group 2- furniture 10% block furniture and fittings including electric fittings, fans etc. Group 3- plant & machinery 1.15% block plant & machinery: except given at 2 or 7 motor cars except used a taxi scooter, motor cycle, bus, truck air conditioner surgical equipments

% block * Motor buses, motor lorries and motor taxis used in a business of running them on hire. *Moulds used in rubber and plastic goods industry % block *Aircraft, Aero engines. *Life saving medical equipment % block *Containers made of glass and plastic used as refill. *Textile machinery acquired under technology up-gradation fund scheme during to % block *Computers. *Books required for professional use other than annual publications. *Gas cylinder, including valves, burners, direct fire glass melting, furnaces. *Mineral oil concerns % block * Energy saving devices % block * Pollution control equipment for air, water or solid pollution. * Books owned by assesses carrying on business in running lending libraries. * Books being annual publications. Group 4 Ships 20% block *Inland vessels and ocean going ships. 2INTANGIBLE ASSETS 3 25% BLOCK *know-how, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights.

9 CONDITIONS FOR DEPRECIATION 1.Depreciation is allowed only on capital assets. Depreciation is allowed only on the capital assets namely buildings, machinery, plant and furniture. Capital assets other than these shall not be eligible for depreciation. 2.Use of asset during the yearn case of newly acquired asset during the previous year full year’s depreciation is allowed if asset is installed and used for 180 or more than 180 days and half year’s depreciation is allowed if installed and used for less than 180 days. (1)If asset was acquired in any previous year earlier than but is put to use during the previous year the condition of 180 days shall not be applicable. As such it shall be eligible for full year’s depreciation even if used for less than 180 days. (2)Block of assets (a) Tangible assets being building, machinery, plant; (b) Intangible assets being know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature

10 4. Asset must be owned by the assessed To claim depreciation it is essential that the assessed must be owner of the business. 5. Assets actually used for the business in the previous year. The deduction of depreciation allowed on those assets which are actually used in the business or profession of the assessed in the previous year. 6. No depreciation in the year of the sale of assets. Depreciation is only a book entry which is passed on the last day of the year. If any assets are sold during the year, such assets will not be with the business, so depreciation cannot be charged on the assets which are not in the existence at that time. The deduction of depreciation will not be allowed o assets which are sold during the year. The loss suffered due to the sale of the asset, however will be considered under STCG. 7. Full particulars of the asset on which depreciation is to be charged must be furnished to the A.O. all the assesses who are to charge depreciation, must furnish all the particulars of the asset to the concerned assessing officer. The assessed has to fill in a form which is prescribed for this purpose. 8. Depreciation is allowed on the basis of WDV of the asset. When a new asset is purchased, the cost price of same will be the WDV of the asset in the first year. But in the case of assets engaged in generation or generation and distribution of power, the assessed can opt for straight line method at the rates prescribed in appendix1-a with effect from assessment year

11 9. Meaning of word plant. Plant includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purpose of the business or profession on but does not include tea, bushes and livestock. 10. Car manufactured outside India and imported into India after but before In case of succession or amalgamation. Depreciation will be calculated on plant and machinery. Building or furniture for full year and shall be allocated on the basis of number of days for which asset were used by predecessor and successor or by the amalgamation company and amalgamated company as the case may be..

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13 Block of assets [ section 2(11) ] Depreciation on actual cost basis Depreciation on WDV basis Actual cost of assets { section 43(1) ] (a) actual cost means cost of asset actually met by assessee. (b) actual cost to include certain expenses (c) motor car imported into India after but before (d) asset earlier used for scientific research (e) asset acquired by way of gift or inheritance (f) transfer of asset to reduce tax liability (g) asset re acquired Method of depreciation Written down value Computation of depreciation Additional depreciation section 32(1) (2a) Computation of depreciation in case of capital expenditure on a building taken on lease [section 32(1a)] Unabsorbed depreciation [section 32(2)]

14 With effect from A.Y an additional 20% of actual cost of P & M is allowed if following conditions are fulfilled: the assessee is engaged in the business of manufacture or production of any article or thing or goods. In case any new plant and machinery is acquired and installed on or after in case any new plant and machinery is acquired before but installed on or after , then additional depreciation is not available. It is allowed in addition to normal depreciation and shall be taken into consideration for calculating written down value.

15 to claim additional 20% of actual cost the condition of use for 180days during the R.P.Y shall be applicable for this depreciation also. If used for less than 180 days additional depreciation shall also be 10%. The plant and machinery is new and it has not been used earlier either in India or outside India. The plant and machinery is not eligible to be written 100% of its actual cost in any previous year. The plant and machinery is not in the nature of office appliances or road transport vehicles The return of income must be accompanied by the details of plant and machinery and expansion has been correctly claimed the return of income must be accompanied by a a report by the chartered accountant that the deduction has been correctly claimed.

16 additional depreciation is not allowed in case of following assets. Ships and aircrafts Old plant and machinery used either in india or outside by any other person Any plant and machiney installed in office premises, residential accommodation and guest house. Office appliances or road transport vehicles. Any other plant and machinery the whole of cost of which is going to be debited to his profit and loss account by way of depreciation or otherwise in any previous year. In the case of power generating units, additional depreciation is not available.