Depreciation - Definition / Legal Terminology - Income Tax

Define depreciation Depreciation is the monetary equivalent of the wear and tear suffered by a capital asset that is set aside to facilitate its replacement when the asset becomes dysfunctional. In P.K. Badiani Vs. Commissioner of Income Tax, Bombay - 1976 (9) TMI 3 - SUPREME COURT , this Court has observed that allowance for depreciation is to replace the value of an asset to the extent it has depreciated during the period of accounting relevant to the assessment year and as the value has, to that extent, been lost, the corresponding allowance for depreciation takes place. Black s Law Dictionary (5th Edn.) defines depreciation to mean, inter alia: A fall in value; reduction of worth. The deterioration or the loss or lessening in value, arising from age, use, and improvements, due to better methods. A decline in value of property caused by wear or obsolescence and is usually measured by a set formula which reflects these elements over a given period of useful life of property.... Consistent gradual process of estimating and allocating cost of capital investments over estimated useful life of asset in order to match cost against earnings... The 6th Edition defines it, inter alia, in the following ways: In accounting, spreading out the cost of a capital asset over its estimated useful life. A decline in the value of property caused by wear or obsolescence and is usually measured by a set formula which reflects these elements over a given period of useful life of property. Parks in Principles Practice of Valuation (Fifth Edn., at page 323) states: As for building, depreciation is the measurement of wearing out through consumption, or use, or effluxion of time. Paton has in his Account s Handbook (3rd Edn.) observed that depreciation is an out-of- pocket cost as any other costs. He has further observed-the depreciation charge is merely the periodic operating aspect of fixed asset costs. The provision on depreciation in the Act reads that the asset must be owned, wholly or partly, by the assessee and used for the purposes of the business . Therefore, it imposes a twin requirement of ownership and usage for business for a successful claim under Section 32 of the Act. M/S ICDS. LTD. VERSUS COMMISSIONER OF INCOME TAX. MYSORE ANR. - 2013 (1) TMI 344 - SUPREME COURT