Recognition by Income Tax Law

The Income Tax Act does not accept the Straight Line Method for computing depreciation on fixed assets. For tax purposes, only the Written Down Value Method is recognised. This means that when a business calculates its taxable profit, it must use the WDV rate prescribed by the Income Tax Rules, regardless of the method it uses in its own books of account.

This creates a permanent difference between the depreciation shown in the financial statements (book depreciation) and the depreciation allowed as a deduction for tax purposes (tax depreciation). If a company uses SLM in its books, the book depreciation will be a fixed amount each year, while the tax depreciation under WDV will be higher in the early years and lower in later years. …