Additional Depreciation Under Income Tax Act

As per the Income Tax Act, depreciation is allowed as an expense for the computation of income. There are two methods of calculating depreciation, i.e. Written Down Value (WDV) method and Straight Line Method (SLM). Income tax allows WDV method of depreciation. Also, income tax allows additional depreciation as a deduction. 

What is Additional Depreciation in Income Tax?

In case of any new machinery or plant (excluding ships and aircraft) acquired and installed after March 31, 2005 by a taxpayer who is engaged in the business of manufacturing or production of any article or thing – additional depreciation of 20% of actual cost shall be allowed.

From AY 2013 - 14 the same is also allowed to taxpayers engaged in the business of generation or generation and distribution of power, where the depreciation is provided under the WDV method as per Appendix I.

From AY 2017 - 18 the same is also allowed to the taxpayers engaged in the business of transmission of power.

Where the asset is used for less than 180 days then 50% depreciation i.e, 1/2 of 20% (i.e. 10%) is available (Balance 50% of Additional Depreciation can be claimed in next year)

No such additional deduction will be allowed in respect of machinery or plant—

• Used by any other person in India or outside India before its installation.
• Installed in any office premises or any residential accommodation,
• including a guest house.
• Any office appliances or road transport vehicles.
• The whole of actual cost of which is allowed as a deduction in computing income for tax purposes in any one previous year.

The Provision inserted vide Finance Act, 2015 with effect from 01.04.2016 provides for enhanced depreciation to the backward areas. A taxpayer who sets up an undertaking or enterprise for manufacturing or production purposes, on or after 1st April 2015 in any backward area notified by the Central Government on this behalf-

• in the State of Andhra Pradesh; or
• in the State of Bihar; or
• in the State of Telangana; or
• in the State of West Bengal

Such taxpayer acquires and installs new machinery, other than ships and aircraft, then the additional depreciation is available to such undertaking or enterprise for the period from 01.04.2015 to 31.03.2020 at 35% (instead of 20%).

Non-Applicability of Additional Depreciation

On the following Plant and Machinery (P&M) no Additional Depreciation can be claimed-

• Additional Depreciation is only on Plant and Machinery and not other assets like Furniture and Buildings.
• Ships and Aircrafts
• Second hand or used P & M
• P & M used in office/Home/Guesthouse
• Office Appliances
• Road Transport Vehicles(Car etc)
• 100% Depreciable Assets (like Pollution Control Equipments)

Additional Depreciation is only for factories or power generation units, not for a dealer or service provider.

Computation 

For Machinery, the general rate of depreciation is 15%. In addition, 20% depreciation will be available in the first year for industrial undertaking and power generation distribution business. 
Hence, a total of 15%+20%=35% Depreciation will be available in the first year.

However, if assets are used for less than 180 days, then ½ of 35% (15%Normal Dep + 20% Additional Dep) will be available. 
Balance half of both Normal and Additional Depreciation can be claimed in next year.

Case- ABC Ltd., a manufacturing concern, furnishes the following particulars: 

• Opening Written Down Value (WDV) of plant and machinery as on 1.4.2017 is Rs. 30,00,000
• New plant and machinery purchased and put to use on 08.06.2017 – Rs. 20,00,000
• New plant and machinery acquired and put to use on 15.12.2017 – Rs. 8,00,000
• Computer acquired and installed in the office premises on 2.1.2018  – Rs. 3,00,000

The amount of depreciation and additional depreciation under the Income Tax Act for the A.Y. 2018-19 is computed as follows-

There are 2 blocks namely,

• Plant and Machinery: Depreciation Rate 15%
• Computer: Depreciation Rate 60%

However, Additional depreciation is available only on Plant and Machinery Full 20% Additional Depreciation on P&M acquired on 08.06.2017 will be available and 10% Depreciation on P&M acquired on 15.12.2017 
*It is not available on computers as it is used in an office.