Depreciation as per law of lexicon is defined as positive decline in the real value of a tangible asset because of consumption, wear and tear or obsolescence. The concept of depreciation is widely used for the purpose of writing off the cost of an asset against profit over an extended period (its depreciable life), irrespective of the real value of the asset. Depreciation is charged against income or the profit and loss account, and there are different methods of calculating it like straight line method or written down value method. The Income-tax Act save and except for undertaking engaged in generation and/or distribution of power the method of computing the depreciation is WDV method.

Prior to the 1986, the Income-tax Act required the calculation of depreciation in respect of each capital asset separately. Due to differences in depreciation rates depending on the date of purchase, the type of asset, the intensity of use etc., computation of depreciation allowance involved a detailed exercise on the part of the assessee and AO. Moreover, the system of granting the terminal allowance or taxing the balancing charge at the time an asset was sold, demolished, discarded, etc., necessitated the maintenance of records of depreciation already allowed in respect of each asset.

The amendments sought to simplify the system to a great extent by introducing the concept of "block of assets". Sec. 2(11) defines the term block of assets as "a group of assets falling within a class of assets, being building, machinery, plant & furniture, in respect of which the same percentage of depreciation is prescribed."

Section 32(1) provides that depreciation is to be computed at the prescribed percentage on the written down value of the asset which in turn is calculated with reference to actual cost of the assets. In the context of computing depreciation, it is important to understand the meaning of the term ‘WDV’ & ‘Actual Cost’

WDV under the Income-tax Act, means

1. where the asset is acquired in the previous year the actual cost of asset shall be treated as WDV

2. where the asset is acquired in earlier year WDV shall be equal to the actual cost incurred less depreciation allowed under The Income Tax Act.

In case of Block of assets WDV is computed as under:

Sr. No.	Particulars	Amount	Amount
1	In case of assets acquired prior to 31.03.1988
	a. The aggregate WDV of all assets falling within the same block in the beginning of PY relating to AY commencing from 01.04.1988	XXX
	b. Add : Assets acquired during the previous year	XXX
	c. Lees: Moneys payable (including the scrap value) on assets sold, discarded or demolished or destroyed during the previous year to the extent it does not exceed (a+b)	(XXX)	XXX
2	In case of slum sale
	a. Actual cost of assets falling in the same block	XXX
	b. Less : Depreciation actually allowed prior A.Y.s 1988-1989	(XXX)
	c. Less : Depreciation allowable after 1.4.1988 However deduction under b & c shall not exceed the total WDV	(XXX)	XXX

Note : In case of PY relevant to AY commencing on 01.04.1989 the WDV would be the amount of WDV of block of asset in immediately preceding PY as reduced by depreciation actually allowed in respect of said preceding PY and as adjusted by clauses b & c of 1 above.

Actual Cost as per Income Tax Act, means

Sr. No.	In case where	Actual Cost would mean
1.	Asset is acquired by the assessee in previous year	Actual cost of asset to the assessee as reduced by cost met by any other person or authority (in the form of subsidy or grant or reimbursement) If such amount of subsidy or grant or reimbursement is of such nature that it cannot be directly related to asset acquired, then the cost of the asset would be reduced on proportionate basis In case of Motor car acquired before 01.03.1975 but after 31.3.1967 and not used for run it on hire the actual cost shall be restricted to Rs. 25000/-.
2.	Asset acquired and used for scientific research when ceases to be so used	The amount of actual cost of asset to the assessee less any deduction allowed u/s. 35(1)(iv) or similar deductions allowed under the Income-tax Act,1922
3.	An asset is acquired by way of gift or inheritance	Actual cost to the previous owner as reduced by a. the depreciation actually allowed under the Income-tax Act,1922 or this Act in respect of previous years prior to 01.04.1988 and b. the amount that would have been allowed to the assessee for assessment year starting from 01.04.1988 (taking the asset as individual asset in the block)
4.	The assets which were previously used by any other person and in the opinion of AO they are acquired to reduced the liability of Income Tax	If the AO is satisfied that the main purpose of transfer of assets is to reduce the tax liability the actual cost shall be an amount as determined by the AO with prior approval of JCIT.
5.	An asset once belonging to the assessee and was used by him for the purpose of his business or profession and thereafter it ceased to be his property which is reacquired by him	Actual cost when he first acquired it, as reduced by the depreciation actually allowed in respect of previous year prior to 01.04.1988 and the amount that would have been allowed to the assessee for assessment year starting from 01.04.1988 (taking the asset as individual asset in the block) OR The actual price for which the asset is reacquired WHICHEVER IS LESS
6.	Where the assessee acquires the assets which were previously used at any time by any other person for the purpose of his business or profession & depreciation was allowed to such other person and such other person acquires the same assets on lease, hire or otherwise from the assessee	The written down value of such assets at the time of transfer by the other person to the assessee in his books of account.
7.	A building previously the property of the assessee is brought into use for the purpose of the business or profession after 28.02.1946	Actual cost of building to the assessee as reduced by an amount equal to the depreciation calculated at the rate in force on that date that would have been allowable had the building been used for the business or profession since the date of its acquisition by the assessee.
8.	Any asset is transferred by a holding company to its subsidiary company or vice versa, and if conditions of clause (iv) or (v) of sec 47 are satisfied	The actual cost shall be the same as if the transferor company continued to hold the asset.
9.	In a scheme of amalgamation, asset transferred by amalgamating company to amalgamated Indian company	The actual cost shall be the same as if the amalgamating company had continued to hold the asset for the purpose of its own business.
10.	In a scheme of demerger, asset transferred by demerged company to resulting Indian company	The actual cost shall be the same as if the demerged company had continued to hold the asset for the purpose of its own business.
11.	Asset is acquired outside India by a non-resident assessee and is brought into India for the use in business or profession	Actual cost to the assessee as reduced by an amount equal to the depreciation calculated at the rate in force that would have been allowable had the asset been used in India for the business or profession since the date of its acquisition by the assessee.
12.	Any asset is acquired under a scheme of Corporatisation of a recognized stock exchange in India, approved by SEBI	The amount which would have been regarded as actual cost had there been no such Corporatisation