Concept of Block of Assets under Section 32 of the Income-tax Act, 1961

 

The shift from asset-wise depreciation to the “block of assets” approach marked a significant evolution in Indian tax depreciation law. Before this reform, each asset required separate computation, leading to persistent disputes about classification, extent of use, and the appropriate rate of depreciation. With the introduction of the block system, Section 2(11) read with Section 32 now groups assets into classes based on common characteristics and the prescribed depreciation rate. These blocks—covering categories such as buildings, plant and machinery, furniture, and certain specified intangible assets—form the basis on which depreciation is computed on the aggregate written down value (WDV), rather than on individual assets.

 

This system achieves a practical simplification. Once an asset enters a block, it loses its independent identity for depreciation purposes. Additions during the year enhance the WDV of the block, while disposals reduce it by the sale value, irrespective of which specific asset is sold or whether it is a new or old item. Depreciation continues to be allowable as long as the block itself exists and the WDV remains positive after adjusting for sales. Where the entire block is extinguished—either because all assets are sold or because the sale value exceeds the WDV—the resulting gain or loss is dealt with under Sections 50 and 43(6), thus ensuring a coherent tax treatment.

 

 

Actual Cost and its Role in Determining Depreciation:-

The foundation of the WDV lies in the concept of “actual cost” as defined in Section 43(1). Actual cost refers to the real expenditure incurred in acquiring an asset, inclusive of all costs necessary to bring it into working condition. Courts have consistently upheld that expenses such as freight, installation charges, trial-run expenditure, and even pre-operative interest may legitimately form part of actual cost, provided they bear a direct nexus to the acquisition or installation of the asset.

 

The statute, however, also incorporates safeguards. Explanation 1 and related provisions mandate that actual cost must be reduced to the extent it is financed through subsidies, grants, or any other form of reimbursement, thereby preventing inflation of cost and corresponding depreciation claims. In transfers by inheritance or gift, the law adopts the actual cost to the previous owner, ensuring continuity and preventing manipulation of depreciation bases in non-commercial transfers.

 

 

Conditions Governing Allowance of Depreciation:-Although depreciation is a statutory allowance under Section 32, its grant is subject to essential conditions. The asset must be owned, wholly or partly, by the assessee, and it must be used for the purposes of business or profession during the relevant year. Courts have interpreted the expression “used” with practical flexibility, recognising not only active commercial use but also situations where the asset is kept in a state of readiness for business operations.

 

Depreciation is computed on the year-end WDV of the block after accounting for additions and deletions. Additions put to use for less than 180 days qualify only for half of the normal depreciation in that year, a restriction that applies to the specific items added during the year. The block system also extends to eligible intangible assets such as know-how, patents, trademarks, copyrights, licences and franchises, reflecting the broadened ambit of modern business assets under Section 32.

 

Additional Depreciation:-Section 32(1)(iia) provides an additional deduction to stimulate capital investment in the manufacturing and power sectors. The incentive, generally at 20 per cent of the actual cost (enhanced to 35 per cent in specified backward regions), is restricted to new plant and machinery acquired and installed after 31 March 2005. The condition that the asset must be “new” excludes second-hand machinery from the benefit.

 

Where an eligible asset is used for less than 180 days in its year of acquisition, only half of the additional depreciation can be claimed in that year, with the balance permitted in the subsequent year. This treatment is now well-settled both legislatively and judicially, and ensures that short-period usage does not permanently curtail the incentive intended by the provision.

 

The rationale behind this provision is to encourage industrial expansion, modernisation and technological upgradation by offering a supplementary deduction over and above normal depreciation. For eligible undertakings, additional depreciation meaningfully reduces the effective cost of capital and promotes investment in productive capacity.