Depreciation for Power Generating Undertakings - Section 32(1)(i) - Income Tax - Ready Reckoner - Income Tax

Depreciation for Power Generating Undertakings - Section 32(1)(i) Assessees in the business of generation or generation and distribution of power, have the option to claim depreciation on- i. Straight Line method on each asset or ii. Written Down value method on block of assets When a depreciable asset (on which depreciation is claimed on straight line basis) of a power generating unit is sold, discarded, demolished or destroyed in a previous year, then TERMINAL DEPRECIATION (in case of loss) is deductible or BALANCING CHARGE (in case of gain) is taxable. Terminal Depreciation or Balancing Charge is calculated as follows Step I Find out the written down value of the depreciable asset on the first day of the previous year in which such asset is sold, discarded, demolished or destroyed. Step II Find out the sale consideration. It is the actual money and it does not include any other thing or benefit which can be converted in terms of money. Terminal Depreciation If the amount calculated under Step II is less than the amount of Step I, then the deficiency is deductible as terminal depreciation. The following points should be noted: When asset is sold, discarded etc. in the previous year in which it is first put to use, any loss arising therefrom is not allowed as terminal depreciation but is treated as capital loss. Terminal Depreciation is allowed only if it is actually written off in the books of the assessee. Balancing Charge u/s 41(2) and capital gain u/s 50A If the amount calculated under Step II is more than the amount of Step I, then tax treatment of such surplus is as follows: So much of the surplus which is equal to the amount of depreciation already claimed, is taxable as balancing charge u/s 41(2) as business income. The remaining surplus (if any) is taxable under the head Capital Gains Where an asset is sold, discarded etc. in the previous year in which it is first put to use, any profit arising therefrom will not be chargeable to tax as balancing charge but will be treated as Capital Gains.