# Section 32 - Depreciation

## Methods of Depreciation

Method	Applicability
WDV (Written Down Value)	Applicable to everyone by default
SLM (Straight Line Method)	Only available to undertakings engaged in Generation of Power OR Generation & Distribution of Power

One-time Option: Power undertakings can choose between SLM and WDV. This is a once-in-a-lifetime option which must be exercised before the due date of filing the first return.

## Block of Assets - Classification

### Tangible Assets

Building
Furniture
Plant & Machinery

### Intangible Assets

Includes: Know-how, patents, copyrights, licenses, franchises, non-compete fees.

Does NOT include: Goodwill of business or profession (excluded by amendment).

## Conditions for Claiming Depreciation

### 1. Mandatory Claim

Depreciation is compulsory — cannot be skipped to manipulate income.

### 2. Asset Must Be USED for Business

Active use → Allowed
Passive use (ready to use but not actually used) → Generally NOT allowed
Exception: Standby machines, emergency spares, fire extinguishers, etc., are eligible even if not actively used.

### 3. Ownership Requirement

Assessee must be the owner (wholly or partly).
Registered ownership is NOT mandatory — even beneficial owner can claim depreciation.
Partial ownership → Proportionate depreciation allowed.

### 4. Lease vs Hire Purchase

Arrangement	Who Claims Depreciation?
Lease	Lessor always claims (he is the owner)
Hire Purchase	Hire Purchaser claims from the beginning of the HP arrangement, even though ownership transfers only on last installment

## Set-off Rules

### Unabsorbed Depreciation

Can be set off against any head of income, except salary.
Can be carried forward indefinitely.

### Order of Set-off

1. Current Year Depreciation (first)

2. B/F Business Loss (next)

3. Unabsorbed Depreciation (last)

Worked example

### Example 1

Example: A company purchases a lathe machine on hire purchase. EMI is paid over 5 years; ownership transfers on last EMI in year 5.

Treatment: Despite ownership transferring only in year 5, the hire purchaser claims depreciation from year 1 itself.

### Example 2

Example: Mr. P uses his factory for business. He has unabsorbed depreciation of ₹3,00,000, current year salary income of ₹5,00,000, and house property income of ₹2,00,000.

Treatment: Unabsorbed depreciation can be set off against house property income (₹2,00,000) but NOT against salary income.

⚠️ Common exam mistakes

Including goodwill of business in 'intangible assets block' — explicitly excluded.
Allowing lessee to claim depreciation in a lease arrangement — only the lessor (owner) can.
Allowing set-off of unabsorbed depreciation against salary income — prohibited.
Treating the order of set-off wrongly — current year depreciation must be set off first, then b/f business loss, then unabsorbed depreciation.
Denying depreciation just because the asset is in the name of someone else — beneficial ownership is sufficient.

Bare-Act text Section 32(1) and 32(2) · Income-tax Act, 1961 · click to expand

Section 32(1): In respect of depreciation of — (i) buildings, machinery, plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets but not including goodwill, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed. Section 32(2): Where, in the assessment of the assessee, full effect cannot be given to depreciation allowance, the unabsorbed depreciation shall be added to the depreciation of the following previous year and shall be deemed to be part of that allowance.

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Section 32 - Depreciation: Methods, Block of Assets and Conditions

Worked example

⚠️ Common exam mistakes