1

ASSIGNMENT

REPORT

ON

LAW OF TAXATION

TOPIC DEPRECIATION ALLOWANCE

UNITARY DEGREE IN LAW

UNIVERSITY OF KERALA

2021
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Depreciation Allowance

Table of Contents

 Introduction
 Meaning Of Depreciation Under The Income Tax Act
 Rates Of Depreciation
 Condition For Claiming Depreciation Under Income Tax
 Written Down Value Method (Block Wise)
 additional Depreciation Under The Income tax act
 Depreciation In Backward Area
 Non-Eligible For The Additional Depreciation
 Additional Depreciation To The Generation Of Electricity
 Depreciation as a tool for tax planning :
 Claiming 100% depreciation & reducing tax liability :
 Non-claiming of depreciation :
 Claim of depreciation only when an asset is used for business :
 Treatment of repairs
 Factors relevant to determine the nature of expenses on repairs :
 Conclusion  
 References
List Of Cases
 CIT v. Star Resorts (P) Ltd . (P&H) 335 ITR 587
 CIT v E.I.H. Ltd. 54 DTR 249
 CIT vs. Metalman Auto P. Ltd. 52 DTR 385
 IT vs. Kaveri Engineering Industries 53 DTR 102 (Mad.)(High Court).
 CIT vs. Mentha & Allied Products 47 DTR 284 (All)
 Finolex Cables Ltd 29 SOT 595
 CIT vs. Manappuram Central Finance & Leasing Ltd. (2010) 46 DTR 323 (Ker.)
 EDS Electronic Data Systems (India) (P) Ltd. (2009) 23 DTR 10 (Del)(Trib).
 Xerox India Ltd. (2010) 127 TTJ 84 (Del).
 Swati Synthetics Ltd. vs. ITO  38 SOT 208 (Mum.)

INTRODUCTION
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The provision for allowing depreciation is contained in Section 32 of the Income Tax  Act,
1961 and is regulated under Rule 5 of the Income Tax Rules. When there is a decline in the
value of the tangible or intangible asset used by the assessee, then the deduction is
permissible under the Income Tax Act. While at the time of the deduction, the income-tax
department calculates the depreciation on the total cost of an asset over the life of the asset.
An assessee can calculate the deduction caused by depreciation under a straight-line method
or by written line method (WLM). The income tax department uses the concept of a written
line method (WLM). However, at the time of deducting depreciation, generating or
distribution of power, the Income-tax department uses the concept of “Additional general
method”. In certain circumstances, the Income Tax Act allows a deduction for additional
depreciation in the year of purchase.1

Depreciation is an allowance on capital assets acquired and put to use and not an expenditure
unlike repairs to machinery, plant or furniture. It need not be incurred by the assessee during
the previous year. The depreciation allowance has to be calculated on the assets of the assesee
as per the methods and rates prescribed under the income tax law. Depreciation allowance is
one of the deductions allowed from business or professional income chargeable under section
28 or other income chargeable under section 56(2)(ii) or 56(2)(iii) of the Income Tax Act,
1961. 2As per section 32 of the Income Tax Act, 1961, depreciation is allowed on tangible
assets and intangible assets owned, wholly or partly, by the assesse and used for the purposes
of business or profession. As per section 57(ii) depreciation deduction is available from the
income from hire of machinery, plant or furniture [Section 56(ii)] or income from buildings
(in case of the building is inseparable from the letting of the said machinery, plant or
furniture) [Section 56(iii)]. On new plant or machinery, apart from depreciation allowance
under section 32(1) and Section 32(2), investment allowance is also available additionally as
per the provisions of sections 32AC and 32AD. 3

Meaning of depreciation under the Income Tax Act

Section 32 of the Income Tax Act 1961 talks about depreciation. Depreciation is defined as a
reduction in the value of the asset due to wear and tear of the asset. People claim the
deduction of depreciation only for accounting or for the purpose of taxation.

1
D.P. Mittal, Interpretation Of Statutes (Tax), (ed. 2nd 2012)
2
Id
3
Anirudh Bhatia, Principles Of Taxations , 4th edn., Central Law Publications, (2011)
 4

Income Tax Act of 1961 allows the depreciation of tangible assets and intangible assets. In
the case of a tangible asset, you can claim the deduction against building, plant, and
machinery. In the case of an intangible asset, you can claim a deduction against the patents,
trademark, copyright, license, franchise or any other business or commercial right of similar
nature. You can claim the deduction on depreciation on those assets which have been used by
the assessee for the purpose of business or profession during the previous year.4

If any asset which has been used for more than 180 days then 50% of depreciation is
allowable in that year. For availing the benefit of deduction under depreciation, it is not
mandatory that assets should be used by the assessee in the previous year. If an asset is
purchased by the assessee and then leased out to the lessee, the assessee can claim the
deduction of depreciation under the Income Tax Act.  5

Rates of depreciation

Rates of depreciation on the following assets: 6

Building for residential use: 5%;  

Building for non-residential use: 10%;

Furniture and fittings: 10%;

Computers including software: 40%;

Plant and machinery: 15%;

Motor vehicles for personal use: 15%;

Motor vehicles for commercial use: 30%;

Ships: 20%;

Aircraft: 40%;

All intangible assets: 25%. 

Condition for claiming depreciation under Income tax

4
Rakesh Bhargava, Tax Laws, (Taxmann eds.,15th ed.,2014)
5
Id
6
SCC Online, http://www.scconline.co.in
 5

For availing the deduction on depreciation, an assessee will have to fulfill some conditions.
These conditions are as follows:7

Classification of Assets: For availing the benefit of depreciation, the owner of the asset
should be an assessee. The asset can be tangible or intangible. With respect to a tangible
asset, the asset should be a building, machinery, plant or furniture. With respect to intangible
assets, assets should be patent rights, copyrights, trademark, license, franchise or any similar
nature which is acquired on or after 1.04.1998. While calculating the depreciation on the
building, the income tax department calculates the depreciation only on the building. They
don’t calculate the cost of the land on which the building is situated. The reason behind not
including the cost of the land into the building is that land does not suffer any depreciation
because of wear and tear or its usage. 8

Ownership vs lease: An assessee can claim the depreciation only on those capital assets
which are owned by him. If the assessee wants to avail the deduction on the depreciation of
building then assessee should be the owner of those buildings. It is not necessary that an
assessee should be the owner of that land. If an assessee has constructed the building but the
land belongs to someone else then he has a right to claim the deduction of depreciation on
buildings. If the assessee is a tenant or using the building then he can’t claim the deduction. If
an assessee has taken the lease of the land and has constructed a building on that land, he is
entitled to avail the allowances of depreciation. In the case of hire and purchase, if an
assessee hires the machinery for a short period of time then, in that case, he is not entitled to
claim the deduction. But, in case of purchase, if an assessee acquires the property and
becomes the owner of the property he is entitled to claim the deduction.9

Used for the purpose of profession or business: for availing the allowance for depreciation, it
is necessary that the asset has been used for the purpose of business or profession. However,
it is not necessary for availing the allowance for depreciation, for which an assessee will have
to use the asset throughout the accounting year. Thus, if the assessee has used the asset for a
small period of time in an accounting year then he is entitled to avail the allowances for
depreciation. You can take the example of any seasonal factory. Let’s take the example of
sugar factories. Sugar factories don’t open for a whole year but if the asset has been used at
any time during the accounting year in a factory then in such conditions factory owners are

7
Vikram Khanna, Taxation In India And Its Implications , Eastern Book Company (2014)
8
Id
9
Id
 6

entitled to claim depreciation. Under Section 38 of the Income Tax Act 1961, the income tax
officer has a right to determine the proportionate part of the depreciation. 10

Can’t claim the deduction on sold assets: An assessee can not claim the deduction on
depreciable assets. If an asset is sold, destroyed or demolished in the same year when it was
acquired then assessee can not claim the deduction.11

If an asset has a co-owner then the co-owner can also claim the depreciation on the asset. 

Written down value method (Block wise)

Every year the book value of the asset decreases and depreciation of the asset is computed on
the book value of the asset. The written down value (WDV) method is the best way to
calculate the depreciation of the asset because the depreciation amount goes on decreasing
with time. Section 32(1) of the Income Tax Act 1961 says that depreciation should be
computed at the prescribed percentage on the WDV of the asset, which in turn is calculated
with reference to the actual cost of the asset. When an assessee is acquiring the asset in the
previous year then the actual cost becomes the WDV. While the asset acquired in earlier year
WDV shall be equal to the actual cost incurred less depreciation allowed under the Act.  

This may be easily followed by the following example:

Depreciable assets on 1.04.2017 on which the depreciation is available at the same rate of
25%.12

Asset A 3,00,000

Asset B 5,00,000

Asset C 7,00,000

Total  15,00,000

Less: Depreciation @ 25% of 15,00,000 (3,75,000)

1.  Written down the value on 1.4.2018 of a block of the asset. 11,25,000

Add: Cost of Asset purchased during 2018-19 6,00,000

10
C R Datta, Tax Laws & Procedures, (ed. 6th ,2008)
11
Id
12
D.P. Mittal, Interpretation Of Statutes (Tax), (ed. 2nd 2012)
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Ii. Balance  17,25,000

Asset B sold during the year 2018-19 (6,75,000)

iii) Balance  10,50,000

Less: Depreciation for 2018-19 @ 25% of Rs. 10,50,000     (2,62,5000)

Written down value of all assets on 1.04.2019 7,87,500

Additional depreciation under the Income Tax Act

The Income Tax Act only permits the written down value method. As per the Additional
depreciation method, you can get the deduction only on those assets which have been used in
the business or profession. However, an assessee can get the deduction only when assets are
used in the year in which it was purchased.13 But as per the new amendment in the Income
Tax Act, 1961, Section 32(1)(iia) says that an assessee can get depreciation of 20% on those
plants and machinery which have been involved in the business of manufacture or production
of an article. For availing the deduction under additional depreciation the purchase and
installation date should be after the 31st March 2005. An assessee can not avail of the
additional depreciation on aircraft and ships. These are excluded from additional
depreciation. 14

From the assessment year 2013-14, a new provision has been added. Further, from 2017-18,
another new provision has been added in the Income Tax Act, 1961 15 which says that those
assessees who are involved in the profession of power, can also avail the benefits of the
additional depreciation. If an asset has been used for less than 180 days then additional
depreciation is allowed at 50% of the rate of additional depreciation.  16

Depreciation in backward area

From 1st April 2016, Section 32(1)(iia), of the Income Tax Act, 1961 allows the possibility
of depreciation in the backward areas. If an assessee sets up a business of manufacturing or
production in any backward state (Bihar, Andhra Pradesh, Telangana, West Bengal) then, the

13
Rakesh Bhargava, Tax Laws, (Taxmann eds.,15th ed.,2014)
14
Id
15
Anirudh Bhatia, Principles Of Taxations , 4th edn., Central Law Publications, (2011)
16
D.P. Mittal, Interpretation Of Statutes (Tax), (ed. 2nd 2012)
 8

additional depreciation available to those assessees is 35%, not 20%. Shifts and aircraft are
excluded from the additional depreciation. However, an assessee can purchase and install the
machinery.    17

Non-eligible for additional depreciation

As per Section 32(1)(iia) of the Income Tax Act, 1961, if an assessee fulfills the below
conditions, they are not eligible for availing the deduction under additional depreciation:

Additional depreciation can not be claimed on plants and machinery which has been used
outside India, before being installed in India. 

You cannot claim the deduction on those plants and machinery which have been installed in
the office premises or in residential accommodation. 

An assessee can not claim the deduction under additional depreciation on assets such as
furniture, buildings, ships, aircraft, office appliances, the vehicle used in road transport,
residential accommodation including in the nature of the guest house.  18

Additional depreciation to the generation of electricity

Deduction on additional depreciation is permissible only for that assessee who is involved in
the production. A matter of conflict has been raised by the assessee who was generating the
electricity. However, a certain amendment has been made by the parliament for allowing the
additional depreciation to the assessee.

A claim was raised by the assessee, a joint venture company which was involved in thermal
power plant for availing the benefit of deduction on additional depreciation under
Section 32(1)(iia) of the Income Tax Act. However, an assessing officer rejected the claim on
the ground that this type of benefit will only be granted to the assessee who is involved in the
production of an article and this does not include the generation of electricity. After that, the
Income-tax department served the notice to the assessee under Section 154 of the Income Tax
Act 1962 the assessee gave an explanation to the income-tax officer which was not accepted
by the assessing officer. 19

17
Id
18
SCC Online, http://www.scconline.co.in
19
Lexis Nexis Academica, http://www.lexisnexis.com/academica
 9

In 2013, Section 32(1)(iia) of the Income Tax Act was amended and after the amendment
Income Tax Act 1961, made a provision that says that additional depreciation could be
granted to an entity that is involved in the business which generates and distributes power. In
the case of the State of Andhra Pradesh vs NTPC, the Supreme Court held that electricity is
able to be transmitted, transferred and delivered. So on this logic, the Income-tax Officer can
not deny an assessee from claiming additional depreciation for generating electricity. The
Supreme Court gave the judgment in favor of the assessee and held that an assessee who is
generating electricity can claim the deduction of additional depreciation under Section 32 (1)
(iia) of the Income Tax Act, 196120.   

Depreciation as a tool for tax planning :

Depreciation can be used as an effective tool for tax planning. According to section 32 (1),
depreciation can be claimed in respect of building, machinery, plant or furniture and w.e.f.
assessment year 1999-2000 depreciation on intangible assets such as know-how, patent
rights, copyrights, trade marks, licenses, franchises, or any other business or commercial
rights acquired on or after 1.4.98 can also be claimed, which are owned by the assessee and
used for the purposes of business or profession.21

It may be noted that for the purpose of depreciation “Building” includes roads, bridges,
culverts ,wells and tubewells. Likewise, plant and machinery includes Typewriters,
Photocopiers, Telex & Fax Machines, Computers, Tools and Books (used by the
professionals). Depreciation is allowed at prescribed percentage, which varies between 5% to
100% for various blocks of assets on the written down value. However, as per second proviso
to section 32(1),depreciation shall be restricted to 50% of the prescribed percentage in respect
of such asset which is acquired by the assessee during the previous year and put to use for the
purpose of business or profession for a period of less than 180 days in that previous year.
Another important point is that the first proviso to section 32(1) , which provided for full
deduction of the actual cost of any machinery or plant costing upto Rs.5,000,has been omitted
by the Finance Act , 1995 with effect from Assessment Year 1996 -97. However depreciation
on professional books has been allowed at the rate of 100% with effect from Assessment
Year 1996-97.22

Claiming 100% depreciation & reducing tax liability :

20
Id
21
Id
22
C R Datta, Tax Laws & Procedures, (ed. 6th ,2008)
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Wind mills and other special devices including electric generators and pumps running on
wind energy, bio-gas plant, bio-gas engines, agricultural and municipal waste conversion
devices producing energy and electrically operated vehicles including battery powered or
fuel-cell powered vehicles, solar power generating systems etc., are some of the items
included in machinery and plant which are eligible for 100% depreciation. An existing
industry having considerable taxable profits may plan diversification in the industries and can
claim 100% depreciation in respect of the new plant and machinery. In the recent past many
companies have successfully done such tax planning, which is absolutely within the legal
frame work and in accordance with the Govt. policy to promote investments in certain
sectors.23

In the case of – CIT v. Mahendra Mills and ors. [2000] 243 ITR 56 (SC). Supreme court has
held that the provision for claim of depreciation is for the benefit of the assessee. If he does
not wish to avail of that benefit for some reason, the benefit cannot be forced upon him. It is
for the assessee to see if the claim of depreciation is to his advantage. Income under the head
‘ Profits and gains of business or profession’ is chargeable to income-tax under section 28
and income under section 29 is to be computed in accordance with the provisions contained
in sections 30 to 43A24. The argument that since section 32 provides for depreciation it has to
be allowed in computing the income of the assessee cannot in all circumstances be accepted
in view of the bar contained in section 34. If section 34 is not satisfied and the particulars are
not furnished by the assessee his claim for depreciation under section 32 cannot be allowed.
Section 29 is thus to be read with reference to other provisions of Act. It is not in itself a
complete code.

If the revised return is a valid return and the assessee has withdrawn the claim of depreciation
it cannot be granted relying on the original return when the assessment is based on the revised
return. Allowance of depreciation is calculated on the written down value of the assets, which
written down value would be the actual cost of acquisition less the aggregate of all
deductions “actually allowed” to the assessee for the past years. “Actually allowed” does not
mean “notionally allowed”. If the assessee has not claimed deduction of depreciation in any
past year it cannot be said that it was notionally allowed to him. A thing is “allowed” when it
is claimed. A subtle distinction is there when we examine the language used in section 16 and
sections 34 and 37 of the Act. It is rightly said a privilege cannot be a disadvantage and an

23
D.P. Mittal, Interpretation Of Statutes (Tax), (ed. 2nd 2012)
24
Id
 11

option cannot become an obligation. The Assessing Officer cannot grant depreciation
allowance when the same is not claimed by the assessee.25

Non-claiming of depreciation :

Non-claiming of depreciation may at times be more beneficial rather than claiming it.
Accordingly one may plan not to claim depreciation in a particular year and to claim the same
in a subsequent year, in which depreciation can be claimed at a higher written down value
due to non-claiming of depreciation in the earlier year. In this process the benefit of
depreciation is not lost but it is deferred only.26

In the following situations it is advisable not to claim the depreciation-

i) In case where certain deductions and allowances like brought forward investment
allowance may lapse for insufficiency of profits, in a particular year, if the depreciation is
claimed.

ii) In case of non-corporate assessees expecting higher profit in the subsequent year or years,
if their present income is falling in lower tax bracket, as claim of depreciation in the
subsequent years will help them reducing the taxable profits and thereby saving tax, which
would have been payable at a higher rate considering the slab rates.27

Non-claiming of depreciation may be used for avoiding the provisions of section 50. It may
be noted that profit on sale of depreciable asset is treated as Short Term Capital Gain under
section 50. Therefore, if any person desires to hold an asset for the purpose of re-sale at a
future date, particularly in cases where such asset is retained for such period which may
entitle him to claim it as a long term asset, then it is advisable not to claim depreciation on the
same. In such a process, the profit on sale of the asset will be beyond the mischief of sec. 50
and shall be treated as Long Term Capital Gain (LTCG). As a result such assessee will be
entitled to the benefit of cost inflation index as well as the concessional rate of tax on
LTCG.28

25
Rakesh Bhargava, Tax Laws, (Taxmann eds.,15th ed.,2014)
26
Vikram Khanna, Taxation In India And Its Implications , Eastern Book Company (2014)
27
Id
28
D.P. Mittal, Interpretation Of Statutes (Tax), (ed. 2nd 2012)
 12

Further w.e.f. assessment year 1997-98 depreciation can be carried forward for 8 assessment
years only, as such it has become more important to claim it only in the year in which taxable
profit arises.29

Claim of depreciation only when an asset is used for business :

One of the stipulation for claiming depreciation under section 32(1) is that the assessee had
used the asset for the purpose of business or profession. When an asset will be considered to
have been used, has been a matter of controversy. Some important Judicial views are as under

Punjab National Bank Ltd. v. CIT30 That depreciation had to be allowed in full on the lifts
and the air-conditioning plant since they were being used by the assessee for the purpose of
its business, the fact that they might also be utilised by the tenant of one of the floors or
customers or visitors did not make any difference. Plant or machinery could be said to be
used by somebody else if such other person has control over the same. It is the control which
determines who is using it. “User” means not only getting benefit, but also controlling,
running, stopping, repairing, replacing, etc.

Whittle Anderson Ltd. v. CIT31 The word “used” should be understood in a wide sense so as
to embrace passive as well as active user ; when machinery is kept ready for use at any
moment in a particular factory under an express agreement from which taxable profits are
earned, the machinery can be said to be “used” for the purposes of the business which earned
the profits although it was not actually worked. Western India Vegetable Products Ltd. v.
CIT32 When a business is established and is ready to commence then it can be said of that
business that it is set up; but before it is ready to commence business it is not set up. There
may however be an interval between the setting up of the business and the commencement of
the business and all expenses incurred during that interval would be permissible deductions.

CWT v. Ramaraju Surgical Cotton Mills Ltd33. A unit cannot be said to have been set up
unless it is ready to discharge the function for which it is being set up. It is only when the unit
has been put into such a shape that it can start functioning as a business or a manufacturing
organisation that it can be said that the unit has been set up.

29
Anirudh Bhatia, Principles Of Taxations , 4th edn., Central Law Publications, (2011)
30
141 ITR 886 (Del.)–
31
79 ITR 613 (Bom.)- 
32
26 ITR 151 (Bom.)-
33
63 ITR 478 (SC)- 
 13

CIT v. Industrial Solvents and Chemicals (P) Ltd.34 Even if the finished product obtained by
the assessee could be termed as sub-standard, it cannot be contended that because the end
product then obtained was not of proper standard, the business of the assessee cannot be said
to have been set up though the plant was being worked.

Grasim Industries Ltd. v. CIT 35A company need not have actually commenced production to
claim depreciation. It was enough if it was merely ready to produce. The bench ruled that the
plant was “ready for” business in fiscal 1992-93, and hence eligible for claiming
depreciation.

Treatment Of Repairs

It is more or less an age old tradition to treat only small repairs to an asset as revenue
expenditure. However, there are occasions when heavy repairs are undertaken and/or one
whole item of Plant & Machinery may require replacement. The taxing authority tends to
immediately jump to the conclusion that the same is on capital account. The assessee also
succumbs to the assertion of the authorities under ignorance of law. The result, no appeal
thereby inviting heavy taxation.

Some situations when repairs/replacement may be treated as Revenue expenditure and

Capital expenditure  are given below –

1. A factory has got 2 or 3 electric motors. If one of them is worn out and replaced by a new
motor of similar capacity involving a heavy cost, in such case, the expenses would be treated
as revenue expenditure. The entirety of Plant & Machinery in a factory is to be treated as one
unit capable of carrying on the business. If any one part of that unit, say an electric motor in
this instance, is replaced by another motor of similar capacity, it is a repair to the whole
gamut of Plant & Machinery and therefore allowable as revenue expenditure.

2.If the same factory is reconstructed by replacing the old Plant & Machinery by new ones of
bigger capacity then it will be a clear case of reconstruction and the cost of new Plant &
Machinery will be treated as capital expenditure.36

3.If a wall is constructed as covered by the obligation of a tenant as per conditions of a

leasehold property, such cost incurred for reconstruction of the wall will be treated as revenue

34
119 ITR 608 (Bom.)–
35
32 TTJ 329 (Bom-Trib.)- 
36
CIT vs. Metalman Auto P. Ltd. 52 DTR 385
 14

expenditure. It is a case similar to the replacement of a few units of worn out railway track by
a company out of its entire long track, which was held as revenue expenditure by the courts.

4.Cost of replacement of petrol engine of a bus by a diesel engine to continue to run it will
also be treated as revenue expenditure.37

 5.A fleet owner purchases a second hand car with a view to use its parts to repair his own
other cars. It is a simple case of revenue expenditure as the car was purchased for using its
parts to repair the other cars and not to run it as a car.38

 6.A company undertook extensive repairs to its own building by repairing/replacing some
columns and beams and plastering with cement with the process of guniting which involves
heavy expenses. As in such case no structural alteration was made to the building and the
assessee carried out only those repairs which were absolutely necessary to preserve and
maintain the building, the expenditure was not capital expenditure. The magnitude of the
repair was in consonance with the magnitude of the wear and tear the building had suffered.

7.A Company doing business in automobile parts takes lease of an old building, the owner of
which is incapable of repairing/reconstructing the same. The lessee company wants to
reconstruct the building at its own cost to run its business.  In such a case, it may be stated
that expenditure was incurred to relieve the assessee from a series of future revenue
outgoings and therefore the expenditure would be on revenue account and therefore allowable
as such.

8.Expenses incurred on arrear repairs to restore the property to usable state are treated as
revenue expenditure.

9.In case heavy expenses are incurred for extensive repairs to a lease property without
bringing into existence a new asset, the cost incurred had to be allowed as general revenue
expenditure, even if not as current repairs.39

10.In case of a cinema hall premises taken on monthly rent with no long term lease if
expenses are incurred to remove defects in cinema building pursuant to direction of an order
of the District Magistrate in order to get a renewal of the cinema hall license, the entirety of

37
EDS Electronic Data Systems (India) (P) Ltd. (2009) 23 DTR 10 (Del)(Trib).
38
Rakesh Bhargava, Tax Laws, (Taxmann eds.,15th ed.,2014)
39
CIT v E.I.H. Ltd. 54 DTR 249
 15

such expenses partakes the nature of repairs under a statutory direction. The same are
therefore allowable as general revenue expenditure.

11.Magnitude of an expenditure on repairs is immaterial consideration in deciding whether it

is on a revenue account or capital account. It is the nature of alteration, renovation, repairs
etc. which is relevant.40

12.Due to fire in factory and office premises, as also residential quarters of the Managing
Director, if expenses are incurred for repairs and reconstruction, such expenditure incurred
for putting the original building in proper working shape does not bring into existence a new
building. As such the same is considered as revenue expenditure

13.An assessee manufacturing cars contributed an amount necessary to improve nearby

approach roads belonging to the Government. The money spent was not to bring about any
asset or advantage of enduring benefit to the assessee, but to run the business effectively and
conveniently and hence, in such case the amount is deductible as revenue expenditure, though
it was spent voluntarily by the assessee in view of business interest.

14.If expenses are incurred by a cotton mill towards remodelling of furniture in its own retail
depots, such expenditure is deductible on revenue account.41

15.If an assessee has taken three buildings on a short term lease and effected improvement to
those by construction of partition walls, wall panelling, show windows etc. the expenses so
incurred will be treated on revenue account in view of the facts that the assessee was not the
owner of the premises and there was no longer term lease in favour of the assessee.

Factors relevant to determine the nature of expenses on repairs :

 1.If the repair is not resulting into a new asset or any additional asset, it will be revenue
expenses otherwise it will be capital expenditure.42

2.If the expenses are incurred on ground of commercial expediency, the same may be
considered as revenue expenditure.

3.If any expenses are essentially incurred for reconstruction or modification as per direction
of any statutory authority, it may be treated as revenue expenditure.43
40
Vikram Khanna, Taxation In India And Its Implications , Eastern Book Company (2014)
41
CIT vs. Mentha & Allied Products 47 DTR 284 (All)
42
CIT vs. Manappuram Central Finance & Leasing Ltd. (2010) 46 DTR 323 (Ker.)
43
D.P. Mittal, Interpretation Of Statutes (Tax), (ed. 2nd 2012)
 16

4.In determining the nature of expenditure, the nature of assessee’s business and overall
circumstances have to be considered. No uniform test can be applied to all situations.44

CONCLUSION

The concept of depreciation is used for the purpose of writing off the cost of an asset over its
useful life. Depreciation is a mandatory deduction in the profit and loss statements of an
entity and the Act allows deduction either in Straight-Line method or Written Down Value
(WDV) method.The calculation for depreciation under the WDV method is widely used
except for undertaking engaged in generation or generation and distribution of power. The
Act also allows a deduction for additional depreciation in the year of purchase in certain
circumstances

Section 32 of the Income Tax Act, 1961 allows compulsory deduction on account of
depreciation. However for claiming the deduction under section 32 of the Income Tax Act,
1961 an assessee has to fulfill some conditions. The written down method is one of the best
ways of calculating depreciation under the Income Tax Act. As per Section 32(1)(iia) of the
Income Tax Act, 1961, an assessee can claim the additional depreciation. Depreciation helps
the assessee in many ways, sometimes it helps in financial management and sometimes this
serves as a tax saving option.

Depreciation – a non-cash expenditure allowed under Income Tax Act, 1961 following block
concept. Under the block concept, all the assets falling within the same class and subject to
same rate of depreciation are clubbed together and considered as single asset. Any alterations
to the value of the block have to be strictly in accordance with the provisions of Chapter IV D
of Income Tax Act, 1961.

As per section 32 of Income Tax Act, 1961, a assessee is entitled to claim depreciation on
fixed assets only if the following conditions are satisfied:

1. Assessee must be owner of the asset – registered owner need not be necessary.

2. The asset must be used for the purposes of business or profession.

3. The asset must be used during the previous year.

As per Section 32(1) of the IT Act depreciation should be computed at the prescribed
percentage on the WDV of the asset, which in turn is calculated with reference to the actual
44
Swati Synthetics Ltd. vs. ITO  38 SOT 208 (Mum.)
 17

cost of the assets. In the context of computing depreciation, it is important to understand the
meaning of the term ‘WDV’ & ‘Actual Cost’.

REFERENCE

 D.P. Mittal, Interpretation Of Statutes (Tax), (ed. 2nd 2012)

 Rakesh Bhargava, Tax Laws, (Taxmann eds.,15th ed.,2014)
 Vikram Khanna, Taxation In India And Its Implications , Eastern Book Company
(2014)
 Anirudh Bhatia, Principles Of Taxations , 4th edn., Central Law Publications, (2011)
 C R Datta, Tax Laws & Procedures, (ed. 6th ,2008)
 SCC Online, http://www.scconline.co.in
 Lexis Nexis Academica, http://www.lexisnexis.com/academica