Clause 17 & Clause 18 of Form 3CD: Depreciation Allowable under Section 32, Additional Depreciation & Carve-Outs for Concessional Regimes
Updated: Sep 28
In the statutory architecture of the Tax Audit Report (Form 3CD) under Section 44AB of the Income-tax Act, 1961, depreciation verification under Clause 18 represents one of the most litigated and scrutinized schedules.
Update — 28 September 2026: CBDT changed the specified ordinary AY 2026–27 tax-audit report deadline from 30 September to 21 October 2026 and the related audited return deadline from 31 October to 21 November 2026. Section 92E / Form 3CEB cases retain a separate timeline. Official Income Tax Department announcement.
Unlike financial accounting under the Companies Act, 2013 (where depreciation is computed on a component-wise, single-asset basis based on estimated useful lives under Schedule II), tax depreciation in India is governed strictly by the concept of "Block of Assets" under Section 32. A single reporting error in the classification of an asset, miscalculation of the 180-day "put-to-use" rule, or improper claim of additional depreciation under Section 32(1)(iia) triggers automatic prima facie adjustments under Section 143(1)(a) by the Centralized Processing Centre (CPC).
Furthermore, with the widespread adoption of concessional corporate tax regimes under Section 115BAA and individual/HUF concessional regimes under Section 115BAC, tax auditors must navigate complex statutory carve-outs—most notably the total forfeiture of additional depreciation and the mandatory adjustment to the opening Written Down Value (WDV).
At PGT & Associates, our direct tax and corporate audit practice manages statutory and tax audit assurance for enterprise boards, manufacturing conglomerates, mid-market corporates, and technology firms. Below is an exhaustive forensic masterclass detailing the sub-clause architecture of Clause 18, the statutory interaction with Clause 17, the 180-day verification protocol, and audit workpaper documentation for Assessment Year 2026-27.
1. Statutory Architecture of Clause 18: Sub-Clause Breakdown
Clause 18 of Form 3CD requires a granular, block-by-block breakdown of all tangible and intangible assets. The reporting matrix is divided into eight statutory sub-clauses:
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2. The 180-Day "Put-to-Use" Rule: Section 32(1) Proviso
Under the second proviso to Section 32(1), where an asset is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than 180 days in that previous year, the depreciation deduction allowable in respect of such asset is restricted to 50% of the amount calculated at the prescribed rates.
Audit Verification Protocol
Acquisition Date vs. Installation Date vs. Put-to-Use Date:
Critical Distinction: Merely purchasing or receiving an asset at the factory gate prior to October 3 (or October 2 in a leap year) does NOT entitle the assessee to full depreciation. The statutory test is when the asset was actually put to commercial use or trial production.
Required Documentation: Material Inward Register, Goods Receipt Notes (GRN), Installation & Commissioning Certificates signed by technical engineers, trial run logs, and statutory power consumption spikes.
Passive Use vs. Active Use:
The judiciary (including the Delhi High Court in CIT v. Insilco Ltd.) has recognized that "ready for use" (passive use) satisfies Section 32 for standby or emergency equipment (such as fire-fighting systems or backup generators installed and ready). However, for core production machinery, active commercial deployment must be substantiated.
Carry-Forward of Balance 50% Additional Depreciation:
Under the third proviso to Section 32(1)(iia) (inserted by the Finance Act, 2015), where an asset is put to use for less than 180 days in the year of acquisition and only 50% of the additional depreciation (i.e., 10%) is claimed, the balance 50% (i.e., 10%) is mandatorily allowable in the immediately succeeding previous year.
Auditor Duty: Cross-verify that the balance 10% claimed in the current year corresponds precisely to assets acquired in the preceding year with < 180 days usage.
3. Concessional Tax Regimes: Section 115BAA & Section 115BAC Interplay
The introduction of concessional corporate tax (Section 115BAA @ 22% plus 10% surcharge) and individual/HUF concessional tax (Section 115BAC) fundamentally altered depreciation schedules:
[!IMPORTANT]
Reporting in Clause 8a vs. Clause 18:
When an assessee exercises the option for Section 115BAA in Form 10-IC (reported in Clause 8a of Form 3CD), the auditor must ensure that NO claim is entered in Clause 18(g). Claiming additional depreciation while simultaneously opting for Section 115BAA triggers immediate CPC demand notices and audit defect citations.
4. Companies Act Schedule II vs. Income Tax Section 32 Reconciliation
One of the primary sources of deferred tax adjustments and tax audit discrepancies is the variance between book depreciation and tax depreciation:
5. Form 3CD Clause 17 Interplay: Specific Disallowances
While Clause 18 deals with the allowable depreciation schedule, Clause 17 reports specific amounts debited to the Profit and Loss account of a capital nature or other statutory disallowances that intersect with the asset base:
Expenditure of Capital Nature (Clause 17(a)):
When an expenditure debited to the P&L account (e.g., major overhaul, software license fees, factory restructuring) is recharacterized by the auditor as capital in nature, it must be reported in Clause 17.
Critical Alignment: If an item is treated as capital expenditure in Clause 17, ensure it is simultaneously capitalized and added to the respective block of assets in Clause 18(d) to claim eligible Section 32 depreciation. Failing to synchronize Clause 17 and Clause 18 creates double taxation for the client.
Capital Expenditure on Scientific Research (Section 35):
Where an asset is acquired for scientific research related to business and 100% deduction is claimed under Section 35(1)(iv), the actual cost of such asset for Section 32 is deemed to be NIL. No depreciation can be claimed under Clause 18.
6. Audit Workpaper Architecture & Verification Checklist
To defend Clause 18 reporting before the National Faceless Assessment Centre (NFAC), tax auditors must maintain the following structured workpapers:
Fixed Asset Register (FAR) Reconciliation: Reconciling the physical FAR with both the General Ledger and the tax block schedules.
Vouching of Capital Invoices: Verifying that GST input tax credit (ITC) has NOT been capitalized if claimed in GSTR-3B (Section 16(9) of CGST Act restricts depreciation on the tax component of capital goods where ITC is availed).
Section 43(1) Actual Cost Verification: Ensuring that capital expenditures exceeding ₹10,000 paid in cash or through non-account payee modes are excluded from the actual cost of the asset under the second proviso to Section 43(1).
Foreign Exchange Fluctuation (Section 43A): Adjusting the WDV of imported assets for foreign exchange rate fluctuations on foreign currency loans availed for asset acquisition.
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7. Frequently Asked Questions (Technical Audit Advisory)
Q1: Can depreciation be claimed if the entire block is sold during the year?
No. Under Section 50 read with Section 32, if all the assets in a particular block are transferred during the previous year such that the block ceases to exist, no depreciation is allowable on that block, regardless of whether there is a remaining unabsorbed balance. Any remaining balance is treated as a Short-Term Capital Loss under Section 50(2), and any excess consideration over the WDV is treated as a Short-Term Capital Gain under Section 50(1).
Q2: Is additional depreciation allowable on second-hand machinery imported from overseas?
No. Under the proviso to Section 32(1)(iia), additional depreciation is strictly prohibited on any plant or machinery which, before its installation by the assessee, was used either within or outside India by any other person. Thus, even previously unused machinery imported into India cannot qualify if it was held or tested elsewhere, unless direct manufacturer certification of first-use is established.
Q3: What happens if an asset is purchased and installed on September 28 but put to commercial use on October 15?
Under the second proviso to Section 32(1), the relevant criterion is the date on which the asset is put to use, not the date of acquisition or installation. From October 15 to March 31 is 168 days (less than 180 days). Therefore, the assessee is eligible for only 50% of the normal depreciation rate for that assessment year.
Q4: How is subsidy or grant received from the government treated in Clause 18?
Under Explanation 10 to Section 43(1), where an assessee receives any grant, subsidy, or reimbursement from the Central or State Government towards the cost of an asset, the subsidy amount must be directly deducted from the actual cost of the asset. In Clause 18, this is reflected either as a reduction in the additions under Clause 18(d) or as a deduction under Clause 18(e).
Q5: Can depreciation be claimed on buildings used as residential quarters for staff?
Yes. Under the Depreciation Rules (Rule 5, Appendix I), buildings used mainly for residential purposes for staff/workers (or as welfare centers, canteens, hospitals, and dispensaries) qualify for depreciation under the specific "Residential Buildings" block at the prescribed rate of 5%.
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