INTRODUCTION TO DEPRECIATION
The term ‘depreciation’ refers to the fall or reduction in the value of an asset over time due to wear and tear or obsolescence. In other terms, depreciation is the systematic distribution of a capital asset’s cost over its useful life. Depreciation is a non-cash expenditure that is charged at the finalization of accounts to reflect a genuine and fair perspective of the organization’s financial result and position. In this article, we’ll explore two key aspects of depreciation:
- How depreciation is considered when calculating income for tax purposes.
- How depreciation is treated as an application of income.
√Charging section for Depreciation:
- Charitable or religious organizations can take advantage of depreciation under sections 11(1) and 11(6) of the Income Tax Act.
- The Finance (No. 2) Act 2014, effective 1-4-2015, disallows duplicate deductions. This clause clearly indicates that depreciation shall not be recognized for computing income for any asset acquired and claimed as an income application in the same or preceding year.
√Important points about Depreciation:-
- Charitable organizations are not required to follow depreciation rates outlined in tax regulations. As a result, they can commercially establish their depreciation rates, given that sections 14 and 32 do not apply to them.
- Claiming depreciation above 85% of the application criterion is academic and does not result in additional funds for asset replacement.All assets created from sources other than income are eligible for depreciation, including those created via restricted grants or legal obligations that are not classified as income under sections 2(24)(iia) or 2(24)(xviii).
- The Finance Act of 2022 has added a new explanation after section 11(7); as a result, the application will be authorized only on a cash basis, raising the question of whether depreciation (a non-cash expenditure) will be permitted going forward. However, this argument does not impact the legality of depreciation, as income is subject to section 11(6).
DISCLAIMER: The information provided in this article is intended for general informational purposes only and is based on the latest guidelines and regulations. While we strive to ensure the accuracy and completeness of the information, it may not reflect the most current legal or regulatory changes. Taxpayers are advised to consult with a qualified tax professional or you may contact to our tax advisor team through call +91-9871990888 or info@semantictaxgen.in the appropriate government authority to verify the accuracy of the information and to obtain advice on their specific tax situations.