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Whether engine purchased for vehicle is capex?

Raj Prakash (Accounts) (144 Points)

25 April 2016

Dear Expert,

A logistic company, wants to purchase Engine for its existing Heavy vehicle. Whether this is a capital expenditure? If so what is the treament of depreciation (method of depreciation, percentage of depreciation etc).

Thank you in advance

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5 Replies

Raghuveer (Executive) (167 Points)
Replied 25 April 2016

Dear Raj,

The engine being an integral component of the Vehicle used for the business of the assessee should be capitalised as a fixed asset in the books of accounts as per Accounting Standard 10.

The Central Government had issued Income Computation and Disclosure Standards (ICDS) under section 145

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Raghuveer (Executive) (167 Points)
Replied 25 April 2016

of the Income Tax Act, 1956. Under these standards, Standard V on 'Tangible Fixed Assets' provides the same treatment. Therefore the engine should be capitalised as a Tangible Fixed Asset and depreciated as per the provisions of section 32 of the Act.

Under this section, Motor lorries and buses used in the business of running them on hire are depreciable at the rate of 30% under WDV method. Any other vehicles are depreciable at the rate of 15% under WDV.

If the asset was used for less than 180 days during the previous year in which the asset was purchased and put to use, the rate of depreciation allowed shall be half the prescribed rate i.e. 15% or 7.50% as the case may be.

Raj Prakash (Accounts) (144 Points)
Replied 25 April 2016

Sir,

Thanks for your reply.

Further, please let me know whether an engine purchased and used as float assembly (float assembly means - which is used as replacment engine and will be used when an engine fails and again removed from it when the actual engine is reconditioned).

whether need to be shown separately in the block of asset ?

Thank you

Rajprakash

Raghuveer (Executive) (167 Points)
Replied 25 April 2016

For Income Tax purposes, the value of the engine would be added to the block of assets in which the Vehicle was capitalised. It would become a part of that block. However, as stated, depreciation on the value of engine would be half the prescribed rate, if it was put to use for less than 180 days during the previous year.

PS: *Income Tax Act, 1961. #Sorry, the year got changed to 1956 in autocorrect when typing.