Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion

of time or obsolescence through technology and market changes. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortization of assets whose useful life is predetermined. Depreciable assets are assets which (i) Are expected to be used during more than one accounting period; and (ii) Have a limited useful life; and (iii) Are held by an enterprise for use in the production or supply of goods and services, for rental to others, or for administrative purposes and not for the purpose of sale in the ordinary course of business. Useful life is either (i) the period over which a depreciable asset is expected to be used by the enterprise; or (ii) the number of production or similar units expected to be obtained from the use of the asset by the enterprise. Depreciable amount of a depreciable asset is its historical cost, or other amount substituted for historical cost2 in the financial statements, less the estimated residual value.

Provision of Depreciation : Provision is an amount kept aside out of income/profit for the known liabilities. Provision of depreciation, renewals, or diminution in the value of any assets is to be deducted from the gross value of the respective assets. Disclosure of depreciation: The amount provided for depreciation, renewals, or diminution in the value of fixed assets is to be disclosed separately. In case such a provision is not made by means of a depreciation charge , the method adopted for making such provision should be disclosed. In case no provision is made for depreciation , the fact that no provision has been made should be stated and the quantum of arrears of depreciation computed in accordance with section 205(2) of the act should be disclosed in a note.

Provision of schedule XIV Rates: schedule XIV which has been inserted by the companies act, 1988, specifies the rates of depreciation for various categories of assets. The schedule prescribes depreciation rates on both the written down value basis and the straight line basis. Type of Assets: Schedule XIV divides the various depreciable assets into four broad categories. a) buildings, b) plant and machinery, c) furniture and fittings, and 4) ships. Pro-rata on Additions/ Sales: It has been specifically provided that in case any addition is made to any asset during the financial year, depreciation should be calculated on a pro-rata basis from the date of such addition. Similarly, where any asset is sold, discarded, demolished or destroyed during the financial year, depreciation should provided only up to the date on which the asset is sold, disordered, demolished or destroyed. Shifts: Schedule XIV also provides separate depreciation rate for single shift, double shift and triple shift working. Disclosure: Schedule XIV requires the disclosure of the following information in accounts: a) depreciation methods used, and b) depreciation rates or useful lives of the assets, if they are different from the principal rates specified in the schedule.

Provision according to Income Tax Act Accounting profit arrived as per the Income statement prepared according to provisions of Indian Companies Act, Accounting Standards and Generally Accepted Accounting Principles. The profit disclosed by the income statement may not be accepted by the income tax officer for taxation purpose because accounting profit shown by the Income statement is not arrived at as peer the provision of Income Tx law.

Example while deciding accounting profit depreciation is provided as per the Indian company law where as for determination of taxable profit, depreciation is provided as per Income tax Act. Enhancement of the rate of additional depreciation on new machinery and plant and withdrawal of certain conditions Under the existing provisions of clause (iia) of sub-section (1) of section 32, additional depreciation is allowed at the rate of fifteen per cent of the actual cost of the new machinery and plant (other than ships and aircraft) acquired and installed after the 31st day of March, 2002. Additional depreciation is allowed in the case of a new industrial undertaking during any previous year in which it begins to manufacture or produce any article or thing on or after the 1st day of April, 2002 or to any industrial undertaking existing before that date if it achieves substantial expansion during the previous year by way of increase in its installed capacity by not less than ten per cent. In order to encourage investment, the Finance Act, 2005 has amended section 32 to increase the rate of additional depreciation to twenty per cent on new machinery and plant other than ships and aircraft, acquired and installed after the 31st day of March, 2005, and dispensed with the condition of additional depreciation to be allowed to a new industrial undertaking and the condition of expansion in installed capacity. Depreciation rates have been modified through a Notification dated 28th February, 2005. The modified depreciation rates are effective from Assessment Year 2006-07. Among other things, the rate of depreciation on plant and machinery has been reduced from 25 % to 15 %. Applicability: From A.Y. 2006-07 onwards.