Understanding Depreciation Methods under Income Tax Act

The question asks about the specific methods of depreciation that are prescribed by Section 32 of the Income Tax Act, 1961. Section 32 is a crucial part of the Income Tax Act that deals with the allowance for depreciation on assets used for the purpose of business or profession.

Analyzing Section 32 of Income Tax Act, 1961

Section 32 of the Income Tax Act, 1961, primarily allows for depreciation on tangible assets (like buildings, machinery, plant, furniture) and intangible assets (like know-how, patents, copyrights, trade marks, licenses, franchises) owned, wholly or partly, by the assessee and used for the purpose of their business or profession.

The Income Tax rules, particularly the Income Tax Rules, 1962, read along with Section 32, specify how depreciation is to be calculated. For most assets, the primary method prescribed is the Written Down Value (WDV) method. However, for certain specific assets, such as those used in a power generating unit, the assessee has the option to claim depreciation on the Straight Line Method (SLM).

Evaluating the Given Depreciation Methods

Let's examine each method listed in the question in the context of Section 32:

1. Units of production method: This method depreciates an asset based on its usage, measured in units produced. While it is a valid accounting method for depreciation, it is generally not the method prescribed by Section 32 of the Income Tax Act for calculating depreciation for tax purposes.
2. Written down value method: Under this method, depreciation is charged on the book value (or written down value) of the asset each year. The depreciation rate is applied to the remaining value, resulting in a higher depreciation charge in earlier years and lower in later years. This is the primary method prescribed by Section 32 for most assets.
3. Sum of years' digits method: This is an accelerated depreciation method where a fraction is applied to the depreciable cost of the asset each year. The numerator of the fraction is the number of years remaining in the asset's useful life, and the denominator is the sum of the years' digits of the asset's useful life. This method is not prescribed by Section 32 of the Income Tax Act.

Conclusion on Prescribed Depreciation Methods

Based on the provisions of Section 32 of the Income Tax Act, 1961, and the associated rules, the Written Down Value (WDV) method is the main method prescribed for calculating depreciation for tax purposes for most assets. While the Straight Line Method (SLM) is allowed for specific cases (like power generating units) under Section 32, it is not listed among the options. Out of the methods provided in the question, only the Written Down Value method is a prescribed method under Section 32 for general application.

Detailed Analysis of Options

• Only (i) and (ii): This is incorrect because the Units of production method (i) is not generally prescribed by Section 32.
• Only (ii): This option suggests only the Written down value method (ii) is prescribed. This aligns with our understanding that WDV is the primary method under Section 32 from the given list.
• Only (i): This is incorrect because the Units of production method (i) is not generally prescribed by Section 32, while WDV (ii) is.
• (i), (ii) and (iii): This is incorrect because neither the Units of production method (i) nor the Sum of years' digits method (iii) are generally prescribed by Section 32.

Therefore, among the methods listed, only the Written Down Value method is prescribed by Section 32 for general application.

Revision Table: Depreciation Methods under Income Tax Act

Additional Information on Income Tax Depreciation

It is important to note that the Income Tax Act specifies depreciation rates for different blocks of assets under the WDV method. A 'block of assets' is a group of assets falling within a class of assets (like buildings, machinery, etc.) for which the same percentage of depreciation is prescribed. Depreciation is calculated on the WDV of the entire block, not on individual assets, except in specific cases like power generating units where SLM might be opted.

Depreciation is a mandatory deduction for tax purposes if the conditions under Section 32 are met, regardless of whether the assessee claims it or not.