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Depreciation as per it act

Siddharth (Student) (128 Points)

19 August 2013

Dear Friends,

Please explain why depreciation as per IT Act is not allowed on sale of an asset during the year.

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3 Replies

Pradeep Kamath (Chartered Accountant) (134 Points)
Replied 19 August 2013

Dear Sidharth,

Under the block of asset concept, the method of computation of depreciation is by making following adjustments to written down value of the block at the beginning of the year:

a) Add - cost of addition of assets in the block

b) Less - sale value of assets sold from the block

If the resultant figure is negative there would be a short term capital gain. If the resultant figure is positive, there is no short term capital gain.

Yes, therefore as you rightly mentioned, no depreciation is computed and allowed on assets sold during the year, upto the date of sale. However, if you look at it wholistically, there is no loss as such. As depreciation is not allowed, the WDV is higher. Consequently, resultant (or potential) capital gain would be lower.

Overall, over a period of years, you would get deduction for whole cost of asset either through depreciation or through WDV (which is not yet depreciated).

Regards,

Pradeep.

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Siddharth (Student) (128 Points)
Replied 20 August 2013

Originally posted by : Pradeep Kamath
	Dear Sidharth, Under the block of asset concept, the method of computation of depreciation is by making following adjustments to written down value of the block at the beginning of the year: a) Add - cost of addition of assets in the block b) Less - sale value of assets sold from the block If the resultant figure is negative there would be a short term capital gain. If the resultant figure is positive, there is no short term capital gain.

Dear Pradeep,

For example lets assume opening WDV of block is Rs.10 then

Opening WDV	10
Additions	2
sale value(opening WDV of 4)	(6)
Net	6

Here i sold an asset of WDV Rs.4 for Rs.6 thereby getting Rs.2 Capital gain...

but you said if the net value is positive....there would be no capital gain...

Can you please explain.

Regards

Siddharth

Pradeep Kamath (Chartered Accountant) (134 Points)
Replied 20 August 2013

Dear Siddharth,

You are right. There would not be capital gain in this case.

Capital gain would arise only in the year when the resultant WDV of the block becomes negative.

If the block of assets is depleted but sale value is lesser than opening WDV plus additions, the resultant figure would be positive even though there are no assets in the block. In such a case the resultant figure would be capital loss for that year.

Regards,

Pradeep.