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Trying to understand depreciation?

Jayesh (Proprietor) (141 Points)

14 March 2012

In depreciation, do you also expense the fixed asset in the year of purchase? I am a little confused regarding how depreciation helps in saving taxes.

If i buy a machine for Rs. 1 lakh and expense it entirely in year-1, i would reduce my taxes by let's say Rs. 33K. However, it seems to me that with depreciation, instead of saving 33K in year-1, I would save the same Rs. 33K but it will be distributed over the next N years - am not saving any extra taxes.

Sorry, for such a silly question - I am not CA or B.Com.

Thanks.

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3 Replies

Anumanchipalli Sathikonda (Tax Consultant) (1559 Points)
Replied 14 March 2012

Mr.Jayesh

Expenses are two types (1) Revenue Expenses and (2) Capital Expenses.

Payment of salaries to staff, conveyance, rent for the business premises, fees paid to chartered accountant, advocate and staff welfare expenses fall under the category of Revenue Expenses. You will have the benefit on these expenses for the period you have spent.

The expenditure incurred for acquiring fixed assets such as buildings, machinery etc., fall under the category of Capital Expenses. The benefit incurred on capital expenditure is not limited to the period in which the capital asset is acquired. You can avail the benefit out of that capital expenditure (machinery, building etc., ) in the future also.

Keeping this fact in mind and to have a correct picture of profit or loss for a particular period the depreciation is being claimed on the expected life of the asset.

By doing so you are claiming matching expenses for matching income.

If you claim the entire cost of acquisition of the asset i.e. the cost of machinery or building you have claimed the expenditure of the future years' also in the current year. This method is not accepted.

Best Wishes

Sathikonda

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Jayesh (Proprietor) (141 Points)
Replied 15 March 2012

Okay, Thanks for the reply.

So, if I understand it correctly, revenue expenses are expensed in the same year that they are incurred whereas capital expenses are expensed over the life of the fixed asset.

These are two different accounting methods - Rs. 1 lakh expensed as capital expense DOES NOT save taxes over Rs. 1 lakh expensed as revenue expense.

Thanks,

Jayesh

Sonam Bidasaria (CA) (770 Points)
Replied 15 March 2012

By no means, assessee can claim capital expenditure from thhe profit and gains from business and profession. In case, any asset is eligible for 100% depreciation in the year 1 itself, then only, it can be allowed.