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Treatment of Depreciation

For taxation purposes, depreciation is charged (on the basis

of written down value method) on a block of assets and not
on an individual asset.

A block of assets is a group of assets (say, of plant and

machinery) in respect of which the same rate of depreciation
is prescribed by the Income-Tax Act.
 Block of assets as per the Income Tax Act
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Buildings 3 Blocks

5% Depreciation
10% Depreciation
100% Depreciation
For the 4 Classes
Furniture 1 Block
of Assets ,
15% Depreciation
we have
Plant & Machinery 7 Blocks
12 Block of
20% Depreciation
25% Depreciation Assets
40% Depreciation
50% Depreciation
60% Depreciation
80% Depreciation
100% Depreciation

Intangible assets 1 Block

25% Depreciation
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Capital Gain arises in the following

situations

(i) When the sale proceeds exceeds the WDV ( Written Down Value)
of the whole block
(ii) When the entire block is sold out.
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Asset Rate of Depreciation WDV as on 1-4-2008

Plant P 25% 80,000 P,Q,R,S form a

single Block of
Plant Q 25% 60,000 Assets having
25%
Plant R 25% 40,000 Depreciation.

Plant S 25% 20,000

2,00,000

Written Down Value of the Block of

assets
BHEL owns the following assets as on 31.3.09
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Asset Rate of Depreciation WDV as on 1-4-2008

Plant P 25% 80,000

Plant Q 25% 60,000

Plant R 25% 40,000

Plant S 25% 20,000

2,00,000

(a) Plant P is sold on 15-3-2009 for Rs. 2,20,000. Compute the Capital Gain/Loss
(b) Plant P is sold on 15-3-2009 for Rs. 1,80,000. Compute the Capital Gain/Loss
(c) Plant P,Q,R,S are together sold for Rs. 1,90,000. Compute the Capital Gain/Loss
(d) Plant P,Q,R,S are together sold for Rs. 2,50,000. Compute the Capital Gain/Loss
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Case (a)

Sale Proceeds 2,20,000

Less : WDV of the Block 2,00,000

Capital Gain 20,000
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Case (b)

There will be no Capital Gain, in this case, because the sale

consideration is less than the value of the block.
WDV , on which depreciation is allowable is Rs.20,000
(2,00,000 1,80,000)
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Case (c)

Sale Proceeds 1,90,000

Less : WDV of the Block 2,00,000

Capital Loss 10,000

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Case (d)

Sale Proceeds 2,50,000

Less : WDV of the Block 2,00,000

Capital Gain 50,000

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Depreciation is charged on the year-end balance of the block which

is equal to

Opening balance of the Block of assets

+ purchases of assets made during the year
(in the block considered)
- sale proceeds of the assets during the year.
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In case the entire block of assets is sold during the year (the block
ceases to exist at year-end), no depreciation is charged at the year-
end.

If the sale proceeds of the block sold is higher than the

opening balance, the difference represents short-term capital
gain which is subject to tax.

Where the sale proceeds are less than the opening balance,
the firm is entitled to tax shield on short-term capital loss.

In case an asset falling in a block of assets is sold out ( for an amount that is
less than the WDV of the whole Block), there is no Capital Gain. The sale
proceeds of the asset are reduced from the WDV (Written down Value) of the
block.
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Treatment of Working Capital in

Project Evaluation
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Almost every Investment proposal requires an additional investment

in Working Capital (in some form or the other).

The proposal, if accepted would require increase in minimum Cash

Balance , higher inventory levels or more receivables.

Any additional investment in working capital cannot be used

elsewhere and is similar to an investment made in building, plant.
Machinery etc. It has to be viewed as a cash outflow, when it is
made.

At the end of the proposal , this additional working capital being

invested now will be released . Thus, any decrease in working
capital can be treated as a release of working capital or cash inflow.
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Hence, Cash needs for working capital should be treated as a cash

outflow at the time of commencement of a project and should be
treated as inflow when that cash is released at the time of closure or
termination of projects.