CA Pankaj Kumar Agrawal
With a view to give a boost to the manufacturing sector, an additional depreciation shall be allowed to an industrial undertaking, subject to the provision given below. Such additional depreciation shall be in addition to the normal depreciation which is being allowed to all assessee.
An assessee, in addition to the claim of the normal depreciation, is entitled to a claim of depreciation u/s. 32(1)(iia) (‘additional depreciation’), on purchase of new plant and machinery and installation thereof, at the rate of 20% of the actual cost of such plant and machinery that is used by the assessee in his business of manufacture or production of articles or things.
Under the second proviso to section 32(1), the depreciation allowed to an assessee is reduced to 50% of the depreciation otherwise allowable, in cases where the asset is put to use for less than 180 days in a year.
Depreciation remaining to be absorbed is carried forward to the following year and is allowed to be set off against the income of such year in accordance with the provisions of section 32(2) of the Income-tax Act.
Legal Provision & Background
Section 32(iia) in the case of any new machinery or plant
Analysis of Provision :-
a) Assessee eligible for additional deprecation
An assessee who in engaged in the business of;
Shall only be eligible for such additional depreciation.
i) Additional deprecation is available to a new assessee as well as old assessee.
b) Assets for which additional deprecation is allowed
Any new machinery or plant (other than ship and aircraft) which has been acquired and installed by the above assessee after 31-03-2005.
Provided that no deduction shall be allowed under clause 32(1)(iia) in respect of,-
i) Additional deprecation is available on new imported plant and machinery.
ii) It is also available on the new plant and machinery assembled by the assessee.
c) Rate of additional depreciation
Besides the normal deprecation, additional depreciation shall be allowed @ 20% of the actual cost of the eligible assets in the previous year in which such assets is acquired and installed.
However, if such assets is acquired and put to use for less than 180 days in the previous year, then, the rate of depreciation shall be 50% of 20% i.e. 10%. (till AY 2015-16)
i) Additional deprecation is allowed only once and that too in the previous year in which the eligible asset is acquired and installed.
ii) Therefore, mere acquisition is not sufficient, the plant and machinery should be installed to be eligible for additional depreciation.
a) The moot question which arose for consideration is whether the balance of 50% of the additional depreciation would lapse [because of the restriction provided in second proviso to section 32(1)(ii)] or whether the assessee would be justified in claiming the balance of 50% of additional depreciation in the subsequent financial year?
An interesting issue has arisen, in the context of the above provisions, specifically for additional depreciation, in cases where the new plant and machinery is used for less than 180 days. The issue is about whether, in the circumstances narrated above, an assessee has the right to set off the balance 50% of additional depreciation in the year subsequent to the year of purchase and installation of new plant and machinery. While the Delhi, Mumbai and Cochin benches of tribunal have held that the balance additional depreciation can be set-off in the subsequent year, the Chennai bench of tribunal has taken a contrary view, leading us to take notice of this controversy.
The issue first came up for consideration and that case The Hon’ble ITAT allowed the claim of assessee by giving the following findings:
In this case, the assessee claimed additional depreciation @7.5%, being 50% of the additional depreciation of 15%, in respect of new plant and machinery installed at the new eligible industrial undertaking of the company which was allowed. Therefore, it was held that the eligibility of additional depreciation stands admitted and balance 50% of the depreciation is allowable in the current year.
Similar decision was rendered by the Mumbai Tribunal in the case of MITC Rolling Mills P. Ltd. Vs. ACIT and Cochin Tribunal in case of C Ltd.  have also held that balance 50% additional depreciation could be claimed by the assessee in the immediately subsequent year.
Brakes India Ltd. Vs. (2013) DCIT 96 DTR 281 (Chennai) (Trib.)
The Hon’ble ITAT did not allow the balance additional depreciation in subsequent F.Y. by giving the following findings:
Clause (iia) to section 32(1) was introduced in the Act with a specific purpose/object of providing relief to the assessees who make investment in new plant and machinery. The section therefore has to be interpreted keeping in view the intent and purpose for which it was introduced. It is a cardinal rule of interpretation that a beneficial provision should be given a liberal and purposive interpretation so as to fulfil the object of the legislation and comply with the legislative intent.
The above mentioned conflicting views of the Tribunals had created an ambiguity on whether the balance 50% additional depreciation could be claimed in the immediately subsequent year. In light of this background of litigation, the amendment proposed by the Budget is a welcome move as it will put to rest the ambiguity in this matter.
Finally, to avoid proliferation of litigation, the CBDT has clarified this matter in the Budget of 2015.
Amendment in The Finance Act, 2015
The allowance of balance 50% of the additional depreciation on new plant or machinery acquired and used for less than 180 days which has not been allowed in the year of acquisition and installation of such plant or machinery, shall be allowed in the immediately succeeding previous year.
|Memorandum Explaining Finance Bill, 2015|
To encourage investment in plant or machinery by the manufacturing and power sector, additional depreciation of 20% of the cost of new plant or machinery acquired and installed is allowed under the existing provisions of section 32(1)(iia) of the Act over and above the general depreciation allowance. On the lines of allowability of general depreciation allowance, the second proviso to section 32(1) inter alia provides that the additional depreciation would be restricted to 50% when the new plant or machinery acquired and installed by the assessee, is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in the previous year. Non-availability of full 100% of additional depreciation for acquisition and installation of new plant or machinery in the second half of the year may motivate the assessee to defer such investment to the next year for availing full 100% of additional depreciation in the next year.
To remove the discrimination in the matter of allowing additional depreciation on plant or machinery used for less than 180 days and used for 180 days or more, it is proposed to provide that the balance 50% of the additional depreciation on new plant or machinery acquired and used for less than 180 days which has not been allowed in the year of acquisition and installation of such plant or machinery, shall be allowed in the immediately succeeding previous year.
|Applicability of above amendment
This amendment will take effect from 1st April, 2016 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent assessment years
Analysis of Amendment made in the Finance Act, 2015:-
It is interesting to note that the language used in the Memorandum to Finance Bill, 2015 while introducing this amendment may create a controversy which may perhaps be unintended.
“Non-availability of full 100% of additional depreciation for acquisition and installation of new plant or machinery in the second half of the year may motivate the assessee to defer such investment to the next year for availing full 100% of additional depreciation in the next year. To remove the discrimination in the matter of allowing additional depreciation on plant or machinery used for less than 180 days and used for 180 days or more”
The memorandum starts with the assumption that as of today if the assets are used for less than 180 days, it is not eligible for full 100% of additional depreciation. Accordingly, the amendment can be said to more for the future years rather than an amendment as applicable even to earlier years prior to financial year 2015-16.
Accordingly, this language may lead to the tax authorities taking a view that it was never the intention of the legislature to allow the claim of balance 50% additional depreciation in the immediately subsequent year in case of financial years prior to 2015-16.
Such an interpretation, which is highly possible, may not only unsettle the matters which have already been decided in favour of the assessees on basis of various favourable Tribunal decisions but may also negatively impact the cases of assessees which are currently under litigation. The same may lead to a rise in litigation on this issue for the earlier financial years.
Although the intention of the amendment is to acquire assets without checking the calendar and thereby speedup industrial growth.
Other Important case laws
a) Mobile crane used in quarrying operations is not a road transport vehicle but an item of machinery and thus would be eligible for depreciation. [CIT v Shriram Transport Finace Co. Ltd. (2003) 128 Taxman (Mad.)]
b) The following activities shall not be regarded as manufacture or production and thus not eligible for additional depreciation
c) Additional depreciation shall be available on computers installed for data processing, system designing and software development and supply for its industrial activities though installed in the office and such office premises are used as industrial premises. [CIT v Statronics and Enterprise Pvt Ltd. (2007) 165 Taxman 153 (Guj)].
d) Wireless sets are not office appliances. [CIT v Punjab Wireless Systems Ltd. (2007) 160 Taxman 118 (P&H)]
e) Assessee-company was enganged in etraction of iron ore and its processing, and had installed new plant and machinery, additional depreciation was to be allowed on same. [Sesa Goa Ltd. v JCIT (2013) 60 SOT 121 (URO) (Panji) (Trib)].
f) Production of ready mixed concrete amounts to manufacture or production of goods and the assessee is entitled to claim additional depreciation under section 31(1)(iia) on RMC machinery. [YFC Projects (P) Ltd. v Dy. CIT (2010) 46 DTR 496 (Del)(Trib)].
g) Computer installed in supervisory offices of factory compound was not eligible additional depreciation as the assessee could not prove that the computer was dedicated to supervision of manufacturing activity and constituted integral part of factory. Additional depreciation was held to be not allowable. [Hero Moto Corp Ltd. v ACIT (2013) 60 SOT 25 (URO): 36 taxmann.com 103 (Del) (Trib)].
(Author can be reached at email@example.com)