Treatment of Depreciation

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Rajen Pandya (Querist)
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29 November 2007 Hi,

Wanted to understand the provisions of INCOME TAX ACT for depreciation in following situation:

If we have purchased any asset, and it is ready to use, but it is not put to use, whether the depreciation should be charged on the same?

For eg., our company has purchased a licenced software to be used in new product. The software cost will be depreciated in the due course.

The product in which it is to be used is under developement, and not yet ready. Hence, the software can also not be used till the time the product is ready.

In such a situation, what is the depreciation treatement for the software licence cost?

Regards,
Rajen

Chinmay

Chinmay (Expert)
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29 November 2007 Generally, the date of ready to use and put to use doesnt differ much. But if there is a difference between these dates then we consider ready to use date.

But in this case depreciation will not be charged till the product in which the licensed software is to be used is fully developed.

Late CA Sampat Jain

Late CA Sampat Jain (Expert)
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29 November 2007 ‘Use’ means ‘kept ready for use’ and not ‘actual use’ - Allowance for normal depreciation allowance does not depend upon the actual working of the machinery. It is sufficient if the machinery in question is employed by the assessee for the purposes of the business and for no other business and it is kept by him ready for actual use in the profit-making apparatus the moment a need arises - Capital Bus Service (P.) Ltd. v. CIT [1980] 123 ITR 404 (Delhi)/Forest Industries Travancore Ltd. v. CIT [1964] 51 ITR 329 (Ker.).

Even passive use will suffice - The expression ‘used’ for the purposes of section 32 should have a wider meaning so as to include not only actual but passive user - CIT v. India Tea & Timber Trading Co. [1996] 221 ITR 857 (Gauhati).

Steps taken to set building into gear are ‘putting it to use’ - After arranging for the building, any steps taken by the entrepreneur to set the building into gear for running the unit, would be nothing but putting it to ‘use’ - CIT v. O.P. Khanna & Sons [1983] 140 ITR 558 (Punj. & Har.).

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o.velavan

o.velavan (Expert)
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03 December 2007 Though I agreed with the above views i would like to add furthe points

1.Pl.see the agreement between software vendor and assessee.If the license period of software expired within certain period it would also be considered it means you have to claim the depn .immediately
Another view

Before you purchase the software you must know the situation that the product is not ready for to employ the software,and it may be informed to the vendor.If so I feel that you can defer the depn.claim from the date of actual use.Because software is not like machinery.If it does not work you get another copy from them.But in case of machineries,whether you use it or not it 's value, working condition ,output result and all other benefits will get diminised.

kartik_somu

kartik_somu (Expert)
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19 March 2008 Unlike Companies Act, Depreciation under Income Tax Act is very different. Here the concept is ready for use.
You will have to stop depreciation only when the assets is sold.
Even if it cannot be used further it will have to be depreciated bcoz from the bokk value only the sale proceeds will get reduced.