Section 32AC- An Aid to Prosper the Manufacturing Sector

Riddhi Vasistha

Section 32AC – There are several policies which affect the culture of investment in manufacturing sector. The union finance minister has proposed to extend the scope of section 32 AC. The inviting feature is the additional Incentive for acquisition and installation of new plant & machinery by manufacturing company as investment allowance of 15% on capital investment of over Rs 100 crore or 25 crore (Finance act 2014) as case may be.

ELIGIBLE ASSESSEE:

• Deduction is available only to COMPANY (Indian as well as Foreign) and
• Company must be engaged in MANUFACTURE or PRODUCTION of any article or thing.

Section says:

Sec 32AC deduction is available to manufacturing companies for investment made in plant and machinery and is now extended for investment made up to previous year March 31, 2017. Further, the investment limit of Rs. 100 crores relaxed to Rs. 25 crores to encourage medium sized investments too. The assessee who is eligible to claim deduction under the existing combined threshold limit of exceeding Rs.100 crore for investment made in FY 2013-14 and   2014-15   shall   continue   to   be   eligible   to   claim   deduction   under the existing provisions contained in sub-section (1) of section 32AC even if its investment in the year 2014-15 is the proposed new threshold limit of investment below Rs 100 crore but exceeding Rs. 25 crore during the previous year.

The Finance Act 2013 further amended by finance bill 2014, provides one time investment allowance of 15% on the actual cost of the asset.

 Section 32AC as summarized below –

AMOUNT OF DEDUCTION:

• For the Assessment year 2014-2015: 15% of the actual cost of new plant and machinery acquired and installed during previous year 2013-2014, if actual cost exceeds Rs 100 crores.
• For the Assessment year 2015-2016: 15% of the actual cost of new plant and machinery acquired and installed during previous year 2013-2014 and 2014-2015, if actual cost exceeds Rs 100 crores, as reduced by deduction already allowed in Assessment year 2014-2015 under this section (if any).

Illustration: 1

Admissible investment allowance under section 32 AC for A.Y 2014-15 and A.Y 2015-16 in each of the following cases:-

Company	Investment in Plant & Machinery (inCrores)
	2014-2015	2015-2016
A Ltd.	95	45
B Ltd.	110	20
C Ltd.	100	50

 Answer:

Company	Investment Allowance(in Crores)
	2014-2015	2015-2016
A Ltd.	NIL	21((95+45)*15%0)
B Ltd.	16.5(110*15%)	03((110+20)*15%16.5)
C Ltd.	NIL	22.5(150*15%-0)

 Newly inserted Sub-section by finance bill 2014, as reproduced below:-

(1A) Where an assessee, being a company, engaged in the business of manufacture or production of any article or thing, acquires and installs new assets and the amount of actual cost of such new assets acquired and installed during any previous year exceeds twenty-five crore rupees, then, there shall be allowed a deduction of a sum equal to fifteen percent of the actual cost of such new assets for the assessment year relevant to that previous year.

Provided that no deduction under this sub-section shall be allowed for the assessment year commencing on the 1st day of April, 2015 to the assessee, which is eligible to claim deduction under sub-section (1) for the said assessment year.

(1B) No deduction under sub-section (1A) shall be allowed for any assessment year commencing on or after the 1st day of April, 2018.”

Analysis of amendment:

Amount of Deduction:

• For the Assessment year 2015-2018: 15% of the actual cost of new plant and machinery acquired and installed during previous year 2014-2017, if actual cost exceeds Rs 25 crores.

Illustration: 2

Admissible investment allowance under section 32 AC for A.Y. 2015-16 and A.Y. 2016-17 & A.Y. 2017-2018 in each of the following cases:-

Company	Investment in Plant & Machinery(in Crores)
	2015-2016	2016-2017	2017-2018
A Ltd.	18	30	25
B Ltd.	26	20	35
C Ltd.	28	55	15

 Answer:

Company	Investment Allowance(in Crores)
	2015-2016	2016-2017	2017-2018
A Ltd.	NIL	4.5(30*15%)	NIL
B Ltd.	3.9(26*15%)	NIL	5.25
C Ltd.	4.2(28*15%)	8.25(55*15%)	NIL

 Illustration: 3

Admissible investment allowance under section 32 AC for A.Y. 2014-15, A.Y. 2015-16 and A.Y. 2016-17 & A.Y. 2017-2018 in each of the following cases:-

Company	Investment in Plant & Machinery(in Crores)
	2014-2015	2015-2016	2016-2017	2017-2018
A Ltd.	60	41	30	25
B Ltd.	70	30^	20	35
C Ltd.	110	18	55	15

 Answer:

Company	Investment Allowance(in Crores)
	2014-2015	2015-2016	2016-2017	2017-2018
A Ltd.	NIL	15.15(101*15)	4.5(30*15%)	NIL
B Ltd.	NIL	4.5(30*15%)	NIL	5.25(35*15%)
C Ltd.	16.5(110*15%)	2.7((128*15%)-16.5)	8.25(55*15%)	NIL

 ^Before Amendment the 15%deduction was not allowed to B ltd in Assessment year 2015-16, since the amount of investment in plant & machinery does not exceed Rs. 100 crore. Further vide finance act 2014, 15% deduction is extended for assesse Company investing more than Rs. 25 crore with effect from assessment year 2015-2018.

Therefore the B ltd. will now, get deduction of 15% on Rs.30 crore by virtue of section 32 AC (1A).

LOCK IN PERIOD

• There shall be lock in period of 5 years from the date of installation.
• If new plant & machinery on which investment allowance deduction has been availed, has been sold or transferred within 5 years from the date of installation, then deduction allowed under section 32AC shall be deemed to be the income under the head PGBP of the year in which plant & machinery is sold. This will be in addition to gains arising from transfer of plant & machinery. This shall however not apply of plant & machinery is transferred in a scheme of amalgamation or demerger.
• In case of amalgamation or demerger, the amalgamated/ resulting company should not sell/ transfer the plant & machinery for a period of 5 years from the date it was installed by amalgamating/ demerged company. If it is sold/ transferred by amalgamated/ resulting company in the above said lock in period of 5 years, the deduction allowed to amalgamating/ demerged company shall be deemed to be the income under the head PGBP of amalgamated/ resulting company of the previous year in which plant & machinery is sold/ transferred. This will be in addition to gains arising from transfer of plant & machinery.

Illustration :4

If X ltd. Acquire & installs an asset on 25^thjune2013 worth of Rs 110 crores and avail a deduction worth of Rs.16.5 crores(110*15%) and consequently sold the asset on 28^thseptember 2015.

Answer:

X ltd. needs to offer Rs.16.5 crores of deduction as income under the head profits &gains from business & profession by crediting it in to profit & loss A/c. This will be in addition to gains arising from transfer of plant & machinery. This shall however not apply of plant & machinery is transferred in a scheme of amalgamation or demerger.

Extracts Beneficial to the assessee:

• Thisdeduction is In Addition to the depreciation and additional depreciation.
• Deduction under section 32AC shall not to be reduced from WDV of Block of asset.
• To claim deduction under section 32AC, there is no condition that plant & machinery should be actually put to use.
• This deduction is not available to Power generating units.
• This deduction will not be restricted to 50% if plant & machinery purchased and installed is used for less than 180 days during the previous year.

For the purposes of this section, “new asset” means any new plant or machinery, but Other than:-

• any plant or machinery which before its installation by the assessee was used either within or outside India by any other person;
• any plant or machinery installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house;
• any office appliances including computers or computer software;
• any vehicle; or
• any plant or machinery, the whole of the actual cost of which is allowed as deduction(whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of business or profession” of any previous year.’.
• Ship or aircraft

Effect on Leasing company: The section provides impetus to leasing business to generate more leasing business in the plant & machinery segment as additional investment allowance shall have implications on the economics of leasing as well. The lessor can claim 15% deduction if he satisfies the condition mentioned above. However, in leases of less than five years, this benefit will not be available.

There are several case laws where the leasing companies were allowed additional depreciation u/s 32(1) (iia) of the I-T Act.

In case of Shaan Finance, the Supreme Court held that notwithstanding the fact that the assessee is a leasing company and the plant and machinery leased out by it are not used by the assessee in any industry the assessee is entitled to investment allowance of 32AC.

Conclusion:

This Section has given in abundance to the company engaged in the business of manufacture or production of any article or thing.

• Acquirer is free to take allowance of 15% at the time of acquisition and can claim depreciation for the entire life of the asset.
• The said amount is also not deductible from WDV of the assets
• It’s a kind of double benefit which will surely help the business of manufacturing & production sector to recover from recession.