The Finance Bill 2015 among other aspects has attempted to give more clarity on the allowance of the balance additional depreciation. In this article I have discussed in brief about the same.
Relevant Sections of Income-tax Act, 1961
- Section 32(1) (ii)
- Section 32(1)(iia)
Situation Prior to Finance Bill 2015
The additional depreciation in applicable cases would be restricted to 50% (i.e 10%) when
- the new Plant and Machinery acquired by an assessee engaged in the business of manufacture or production of any article or thing or in the business of generation or generation and distribution of power and
- is put to use for less than 180 days in the Previous Year.
The balance part of the additional depreciation that got restricted above on account of usage for less than 180 days in the previous year was not being considered/ allowed as the case may be in the subsequent Assessment Years.
Reference to the Legislative Intent
Section 32(1)(iia) was inserted by Finance Act, 2002 with effect from 01.04.2003.This provision was directed towards encouraging industrialization by allowing additional benefit to the setting up new industrial undertakings or for expansion of the industrial undertaking by way of making more investment in capital goods. Thus, these are incentives aimed to boost new investments in setting up and expanding the units. The second proviso to section 32(1)(ii) restricts the allowance only to 50% where the assets have been acquired and put to use for a period less than 180 days in the year of acquisition. However, this restriction is only on the basis of period of use. There is no restriction that balance of this one time incentive in the form of additional depreciation shall not be available in the subsequent year. The assessee became entitled to additional depreciation as soon as the acquisition was done but restriction was done based on period of usage. Such restrictions can never curtail the statutory right. The above view was held by the Hon’ble Delhi ITAT in Cosmo Films Limited.
Situation Post the Amendment – Clarifying the legislative intent and giving relief
The Finance Bill, 2015 has proposed to provide allowance for the balance 50% of additional depreciation which has not been allowed in the year of acquisition, in the immediately succeeding previous year. This will apply from AY 2016-17 and subsequent Assessment Year’s.
This is planned to be done by inserting a proviso after second proviso in Sec 32(1)(ii). The said proviso is as under
“Provided also that where an asset referred to in clause (iia) or the first proviso to clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business for a period of less than one hundred and eighty days in that previous year, and the deduction under this sub-section in respect of such asset is restricted to fifty per cent. of the amount calculated at the percentage prescribed for an asset under clause (iia) for that previous year, then, the deduction for the balance fifty per cent. of the amount calculated at the percentage prescribed for such asset under clause (iia) shall be allowed under this sub-section in the immediately succeeding previous year in respect of such asset”.
The Finance Bill 2015 has arrived with a welcome change that will surely ensure that what was intended has indeed been extended. The monetary value of this benefit can scale up the tax savings to a considerable extent. This proposed amendment coupled with the other depreciation related amendments ( for e.g 32AD proposed by Finance Bill 2015, Section 32AC given by Finance Act, 2014) will surely increase the tax savings of the eligible undertakings and will also foster the “Make in India” campaign.
Disclaimer: This article is based on provisions of Finance Bill 2015 and existing Income-tax Act, 1961 and is purely for knowledge sharing. Every effort has been made to avoid errors or omissions in this article. In spite of this errors may creep in, which are unintentional. The readers are requested by the writer, to bring to his notice any mistake or error for which act, the writer shall be ever grateful. The writer is a Chennai based Chartered Accountant and can be reached at firstname.lastname@example.org.