The term "Depreciation" has not been defined on the INcome Tax Act. For practical purpose depreciation means decrease in the value of property through wear and tear or obsolescence. Depreciation allowance is allowed in respect of building, machinery, plant or furniture owned by the assessee and used for the purpose of business or profession. In orde to claim depreciation on assests, the following conditions must be satisfied by the assessee.

1. Asset must be owned by assessee

2. Asset must be actually used for the purpose of business or profession and

3. Asset should be used during the relevant previous year.

Method of Computation of Depreciation :

To understand the method of computation of depreciation, one must know the meaning of following terms :-

1. Block of Assets

2. Actual Cost and

3. Written Down Value.

1. Block of Assets :

"Block of Assets" maens a group of assets falling within a class of assets comprising -

i. tangible assets like being building, machinery, plant or furniture.

ii. intangible assests like being know-how, patents, copy rights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed. In simple words, assets falling within a class of assets in respect of which the same rate of depreciation is admissible will form "Block of Assets".

2. Actual Cost :

Section 43(1) of the Act defines the term "Actual Cost". Actual Cost of an asset means its actual cost to the assessee including the expenses on installation, etc., If the part of the cost is met directly or indirectly by the third person, the cost to the assessee will be reduced by such amount borne by that person.

Moreover -

i . If an asset is acqiured by the assessee by way of gift or inheritance, its actual cost to the assessee shall be its actual cost to the previous owner as reduced by a depreciation actually  allowed in respect of this asset for any assessment year up to the assessment year 1988-89. The depreciation that would be allowable as if that asset was the only asset in the relevant block of assets.

ii. If any amount if paid or payable as interest in connection with the acquisition of any asset, the ampunt of interest related to the period after the asset has been first put to use, shall not be included in the cost of the assets.

3. Written Down Value :

Written Down Value means, in the case of assets acquired in the previous year the actual cost of the assessee.In the case of assets acquired before the previous year the actual cost to the assessee less depreciation actually allowed to him.

In the case of any block of assets the written down value shall be computed in the following manner:

i) The aggregate of the written down value of all the assets falling within a block at the beginning of the year shall be calculated.

ii) The aggregate of written down value of assets shall be increased by actual cost of assets falling in block which was acquired during the previous year.

iii) The sum so arrived, shall be reduced by the money payable in regard to any asset which is sold, discarded or destroyed during the previous year.

iv) In case, if the Written down value, of any block shall be reduced to 'Nil', then no depreciation will be allowed.