Company Taxation

Capital Assets

According to the ITA, capital assets have been defined to mean the property of any kind including, business assets but excluding stock-in-trade and movable personal effects, such as wearing apparel, personal furniture, personal car, etc.

Thus, broadly, ‘capital assets’ can be classified as business-related assets and personal capital assets, excluding the ones specified above. Business-related capital assets can be further classified as ‘depreciable capital assets’ and ‘non- depreciable capital assets.’ The tax treatment of personal capital assets and non-depreciable assets has been dealt with separately in the Capital Gains Tax section. The tax treatment of depreciable capital assets is explained here. According to the ITA, depreciation for tax purposes has to be calculated on the Written Down Value (WDV) of the block of assets at the prescribed rates (except for undertakings engaged in the generation or generation and distribution of power, and which have the option of claiming depreciation on a straight-line basis). A block of assets has been defined as a group of assets falling within a class of assets comprising of tangible and intangible assets for which the same percentage of depreciation is prescribed.

The rates of depreciation are given in the table below:

Asset Class Rate of depreciation (%)
General plant and machinery 15
Cars other than those used in the business of running them on hire 15
Computers (including software) 40
Purely temporary erections 100
Residential buildings 5
Buildings other than the above 10
Furniture and fittings including electrical fittings 10
Ships 20
Intangible assets: Any know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial right of a similar nature 25

The WDV of a block of assets is calculated as under :

First Year: XXX
Cost of the asset at the time of acquisition of assets XXX
Less: Depreciation as calculated based on the above rates XXX
Closing WDV of the block of assets XXX
Subsequent year:
Opening WDV of the block at the beginning of the next year XXX
Add: Actual cost of assets acquired during the year XXX
Less: Sale proceeds from the disposal of any asset during the year XXX
WDV for the purpose of calculating depreciation XXX

With effect from 1 April 2017, the highest rate of depreciation on assets will be reduced to 40% (whether for new or existing assets).

The actual cost of a depreciable asset comprises its purchase price (including import duties and other non-refundable taxes or levies) and any directly attributable cost of bringing the asset to its working condition for its intended use.

The sale of an individual depreciable asset does not result in any capital gains as long as the sales proceeds of those individual assets are less than the WDV of that particular ‘block of assets.’ If the sales proceeds are more than the WDV of the ‘block of assets,’ the resultant gain is regarded as a ‘deemed short-term capital gain’ irrespective of the holding period of the individual assets and would be chargeable to tax at the normal corporate tax rate. The concepts of short-term and long-term capital gains are explained in the section on Capital Gains Tax. This concept of taxation differentiates capital gains on depreciable assets as compared to capital gains on non-depreciable assets and personal assets. Furthermore, an additional or accelerated depreciation at the rate of 20% is allowed to taxpayers engaged in the manufacture or production of any article or product, or in the business of generation, distribution or transmission of power, in the year in which the new plant and machinery acquired is first put to use. If the new plant and machinery is put to use for less than 180 days in the said financial year, half of the additional depreciation would be allowed in the first year of putting the asset to use, and the remaining half will be allowed in the immediately succeeding financial year.

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Maulik Doshi
Senior Executive Director
Transfer Pricing and Transaction Advisory Services

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