Tax Management India. Com
Law and Practice  :  Digital eBook
Research is most exciting & rewarding


  TMI - Tax Management India. Com
Follow us:
  Facebook   Twitter   Linkedin   Telegram
Article Section

Home Articles Income Tax DEV KUMAR KOTHARI Experts This

RATE OF DEPRECIATION WHEN ANY ASSET IS ELIGIBLE FOR TWO OR MORE DIFFERENT RATES BASED ON USE DURING THE PREVIOUS YEAR.

Submit New Article
RATE OF DEPRECIATION WHEN ANY ASSET IS ELIGIBLE FOR TWO OR MORE DIFFERENT RATES BASED ON USE DURING THE PREVIOUS YEAR.
DEV KUMAR KOTHARI By: DEV KUMAR KOTHARI
July 10, 2008
All Articles by: DEV KUMAR KOTHARI       View Profile
  • Contents

Deprecation allowance:

Depreciation allowance is allowed at specified rates, subject to fulfillment of other conditions. The scope of this write-up is only about applicable rate when an assets is put to use in different manners for which different rates of depreciation are allowable. Depreciation is allowed with a view that over a period of time (which may be one or more years) the income is computed in a real manner. In case of few assets rate of deprecation is allowable at different rates when assets is put to use in different manner.

Entitled for depreciation allowance only for a part of the year

Another situation can be that for some time the asset was put to use in a manner that it was not entitled to depreciation allowance, and on some days asset was put to use in a manner that it is entitled to deprecation allowance. For example, suppose a medical student while pursuing his course of MD purchased a car and could use it for personal purposes, while studying and appearing for MD examination during April to August. From September he started his medical practice and used car for his professional purposes. Thus during April to August the use was such that the car was not eligible for deprecation allowance, however, from September the car became eligible for depreciation allowance. In such a case based on use from September, the car will be eligible for deprecation allowance.

Rates of depreciation:

1. In case of eligible asset owned and used for the purpose of business or profession of the assessee normal depreciation is allowed under section 32 of the Income Tax Act, 1961 (The Act) read with Rule 5 of the Income Tax Rules, 1962  (The Rules) at the rates prescribed in Appendix I or Appendix IA to the Rules, as may be applicable.  Some time additional depreciation / initial depreciation or weighted depreciation is also allowed on eligible assets as provide in section 32 and Rule 5.

Scope of this write-up is to undertake a study about certain assets, which may be eligible for two or more rates depending on two or more type of actual use of the asset during the previous year by the assessee.

Example of assets, which may be eligible for different rates:

2. Generally single rate is applicable to a particular type of asset irrespective of the use to which it has been put. However, from time to time some classification of assets is such which may be used differently attracting depreciation at different rates.  Few examples are given below:

I. Buildings:

1. Buildings, which are used   mainly for residential purposes except hotels and boarding houses - 5%

2. Buildings other than those used mainly for residential purposes and not covered by sub-item (1) above and special category provides in sub-item (3) in the appendix 10%.

Machinery and plant:

Motorcars, other than those used in a business of running them on hire, acquired or put to use on or after the 1st day of April 1990 - 15%

Motorbuses, motor lorries and motor taxis used in a business of running them on hire- 30%

Other motor buses*, motor lorries* and motor taxis (that is those not used in a business of running them on hire) will be eligible for depreciation at general rate applicable to plant and machinery - at present the rate is 15%

(* Not being some commercial vehicles falling in to special category eligible for 40,50,or 60% rate).

Books owned by assessees carrying on a profession -

(a) Books, being annual publications          100%

(b) Books, other than annual publications    60%

Books owned by assessees carrying on business in running lending libraries - 100%

Rates when asset is put to single use:

3. There will be no dispute when the asset is put to a single use. For example, a flat used for residential purpose for staff accommodation will be eligible for 5% depreciation. Another flat used as office will be eligible for 10% depreciation.

A Truck used in own business will be eligible for depreciation @ 15%. If the same truck is used in business of running it oh hire, it will be eligible for depreciation @ 30%.

Circumstances when asset is put to different uses:  

4. Some times assets may be put to more than one type of use. The multi pal functional use may be also be different ways, for example:

(A) Same asset is used for two different purpose daily or simultaneously for example a flat may be used as office in the office hours and as residential accommodation at other times.

(B) A flat might have been used as residential flat during a part of the year and as office in other part of the year.

(C) A truck may be used within and for the purpose of assessee's own factory as well as for running it on hire for some hours for other parties.

(D) A truck might have been used in own business for some days and on other days to earn freight it may be hired out to other parties.

(E) A professional may use his library for own professional requirement and he may also allow it to other persons for reading and lending books in consideration of some hire.

In the above-mentioned circumstances it is found that the same asset is used in such way that two rates are applicable.

'Main use' in case of buildings:

5. A. In case of buildings we find that the words used are 'mainly used', whereas for other assets there is no such wording. Thus, in case of buildings if the building is mainly used as residence lower rate will be admissible. If it is not mainly used as residence but as an office higher rate will be admissible but this will be applicable when there is simultaneous use as residence and office.

Therefore, if the same flat is used simultaneously for the residential purposes as well as office use, one will have to find out the main use. The main use can be ascertained based on number of days or hours for which different use is made. 

However, if the same flat is exclusively used as office at any time during the year, the assessee may claim higher depreciation by classifying the flat in to the category of block of asset eligible for 10% depreciation.

Suppose a flat is used exclusively for office purposes at the beginning of the previous year, thereafter it is kept ready for office use but no actual use was made. In that case depreciation for the full year shall be eligible at the rates applicable for office building. If the same flat is used as residence for some part of the year, the assessee can still claim depreciation at higher rate because on some days he used it exclusively for office. Here the beneficial provision can be applied.

In case the flat is used both as residence and as office equally, the assessee may choose to apply higher rate based on rule of application of beneficial rate / classification.

Use in case of other assets:

6. In case of assets other than buildings there is no use of phrase "mainly used". Therefore, if at any time of the previous year the asset is put to such use, which entitles the assessee higher depreciation, the assessee may claim higher depreciation.

For example:

First situation one: suppose a truck is used in the business of running on hire every day for three- four hours or say for some days only and it could not be used for rest of the period / other days. The truck will be eligible for higher depreciation of 40%.

Second situation: Now suppose if the same truck is also used for own production business of the assessee (not for running on hire) for some hours daily or some days during the year.

In this case also the assessee can rightly claim depreciation at higher rate because he also used the truck in the business of running it on hire.

It would be incorrect to say that he will be entitled to lower depreciation when truck was used more - in business of hiring and in other business merely because he used it not exclusively for hiring.

Used even on a single day entitles for depreciation:

If an asset is used at any time (theoretically say on a single day), it will be eligible for depreciation allowance at applicable rate. Therefore, when an asset is used for some days in a use which entitles for higher depreciation and suppose if the asset is not used in another purpose, still it will be entitled to higher depreciation, therefore, there would be no justification to allow depreciation at lower rate merely because the asset was used on some days in a manner that entitles for lower depreciation allowance. 

Two rates can be claimed, but it will not be reasonable:

One may also argue that the truck was used as a 'vehicle on hire', so it falls in to 30% category and as it was also used in own business so it is also covered in other category so 15% depreciation can be allowed. However, it will means that the truck can appear in two block of assets simultaneously, apparently there is no prohibition for such claim in view of the definition of block of asset in section 2 (11) of the Act. Which reads as follows:

2(11) "block of assets" means a group of assets falling within a class of assets comprising—

(a) Tangible assets, being buildings, machinery, plant or furniture;

(b) intangible assets, being know-how, patents, copyrights, trade marks, licenses, franchises or any other business or commercial rights of similar nature,

in respect of which the same rate percentage of depreciation is prescribed.

Thus, it can be said that when the truck was used in the business of running it on hire it was falling in to the block of assets of 30% and when it was used in own business it was falling in the general category eligible for 15% depreciation. Therefore, depreciation can be claimed separately of two businesses to compute income of two business carried by the assessee.    

However, it may not appear to be logical and justified for the reason that if the truck was fully used for hiring it would be eligible for only 30% depreciation. The truck was not fully used so it could be used for other business. Therefore, taking a reasonable, rational and realistic view and also liberal and beneficial classification 30% depreciation can be claimed on such truck for the full period.

Cases before Rajasthan High Court:

In case of CIT V Bansiwala Iron & Steel RE-Rolling Mills (2004) 134 Taxman 124 (Raj.) The assessee used a truck trailer in its own business as well as in business of running on hire. As per claim of the assessee the Tribunal allowed higher depreciation taking in to note of the fact that the assessee had substantial earnings from hire. The reference applications under section 256 (1) and 256 (2) preferred by the CIT were rejected by the ITAT and the Rajasthan High court for the reason that truck trailor was used for the business of running on hire and hire income was also substantial.

In CIT V Manjeet Stone Co. (1991) 55 Taxman /190 ITR 183 (Raj.) it was held that the vehicles were used mainly in assessees own business and not in business of running on hire. Though the vehicle was registered, as a public transport vehicle the earning of hire charges was nominal, therefore, assessee was not in the business of hiring of vehicles thus not entitled to higher depreciation allowance.

In the above cases it appears that the Court has taken view on the basis of main use of vehicle by way of earnings made and also the business of the assessee.

The logical view:

In view of the above discussion on a logical view it can be said that higher depreciation may be allowable if the asset is used in a business or put to such use for which higher rate is eligible even if the asset is used in other business for which lower rate is applicable. Provided that first type of business should also be a business carried on by the assessee.

Thus, where a flat is used as office and residence of employees, it will be eligible for depreciation @ 10%. Because if it is not used as residence still depreciation @ 10% will be allowable.

When the library is used for own profession as well as for lending books to others the books will be eligible for depreciation @ 100%.

Where a motorcar is also used in business of running for hire as a motor taxi, besides use for transportation of own staff for some time of the day, the motorcar will be eligible for higher depreciation.

Where a building is used as residential accommodation for staff in a seasonal factory and as a hotel or boarding house in off-season, the building will be eligible for higher depreciation.

 

By: DEV KUMAR KOTHARI - July 10, 2008

 

 

 

Quick Updates:Latest Updates