Analysis of claim of Additional Depreciation

Exordium 

Like most other laws tax law is also an ever evolving subject. Tax laws, every now and then result into difference of opinion between the revenue authorities and tax payers on various issues. Indian Income-tax law has many such issues one of which is benefit of Additional Depreciation.

Claim of Additional Depreciation under clause (iia) of Section 32(1) of the Income-tax Act, 1961 (“the Act”) is allowed with respect to new machinery or plant. 

Section 32(1)(iia) of the Act provides as under:- 

“32(1)(iia) 

in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing or in the business of generation, transmission, or distribution of power, a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii): 

Provided that …………………………………….. 

Provided further that no deduction shall be allowed in respect of—

(A)  any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person; or

(B)  any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house; or

(C)  any office appliances or road transport vehicles; or

(D)  any machinery or plant, the whole of the actual cost of which is allowed as a 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 one previous year.

1. On perusal of section 32(1)(iia), it appears that following conditions needs to be fulfilled to obtain the benefit of additional depreciation:

Conditions to be fulfilled 

Section 32(1)(iia)

Additional Depreciation is allowed in the case of any new machinery or plant acquired and installed by an assessee engaged in the business of manufacture or production of any article or thing.

Inter-alia, this provision contains the following conditions:

1.  The asset eligible for additional depreciation must be machinery or plant;

If on any machinery or plant tax officer himself allows normal depreciation at the specified rate then for said assets (machinery or plant) it cannot be doubted that they are not machinery or plant for the purpose of granting additional depreciation.

If the tax officer has nowhere disputed the nature / category of the assets (machinery or plant) while granting the normal depreciation, this in itself establishes that these assets are machinery or plant. Therefore, if an asset is treated as machinery or plant while allowing normal depreciation then how it cannot be treated as machinery or plant for allowing additional depreciation.

In this regard, reliance may be placed on the ruling of Hon’ble Delhi ITAT in the case of Bikanervala Foods Pvt. Ltd. (‘BFPL’) ITA No. 4139/Del./2014. In the said order, Hon’ble Delhi ITAT inter-alia held as under:

“………On each of the outlet, it manufactures sweets and other food products. ………………No material is brought on record by the AO that the outlets do not manufacture sweets. It is of paramount importance that the AO has granted normal depreciation on all those items holding them to be plant and machinery. In view of this, we are of the view that assessee has satisfied the conditions for additional depreciation. ………………..”

Aforesaid ruling in the case of BFPL was followed in the case of Bikanervala Foods Pvt. Ltd. vs. DCIT (ITA No.6357/Del/2015).

2.  The machinery or plant must be new;

3.  Eligible asset could be any machinery or plant;

Section 32(1)(iia) allows additional depreciation on any plant or machinery (i.e. on all plant or machinery) subject to fulfillment of other conditions specified therein. Thus, there is no condition that additional depreciation will be allowed only on specific plant or machinery.

4.  Machinery or plant must be acquired and installed by an assessee engaged in manufacture of any article.

This condition stipulates that the machinery or plant must be acquired and installed by an assessee who is engaged in manufacture of any article. This condition nowhere stipulates that the plant or machinery on which additional depreciation is claimed must be directly used for manufacture or that the manufacture must be done by using these plant or machineries. This condition only stipulates that the assessee must be engaged in manufacture or production of any article or thing and plant or machinery must be acquired and installed by said assessee.

In this regard, reliance can be placed on the following judicial precedents:

> Texas Instruments (India) (P.) Ltd. vs. Addl. CIT – [2020] 115 taxmann.com 154 (Bangalore – Trib.) 

As per proviso to section 32(iia) new machinery or plant should be used by an assessee, engaged in business of manufacture or production of any article or thing, and it is not necessary that new machinery or plant should be used in manufacturing or production of any article or thing; therefore, assessee, engaged in business of software development, could not be denied additional depreciation on its asset for reason that plant and machinery on which additional depreciation was claimed should mandatorily be used in manufacture of article or thing. 

>Hon’ble Madras High Court in the case of CIT vs. VTM Ltd (2010) 187 Taxman 319 (Mad.),  has gone even one step forward and held that “for claiming additional depreciation u/s 32(1)(iia), what is required to be satisfied is only that a new machinery or plant has been acquired and installed after 31-03-2002. The provision does not state that the said new machinery / plant should have any operational connectivity to the article or thing manufactured or produced by the assessee. Thus, where an assessee engage in the manufacture of textile goods, acquired and installed a wind mill for generation of power, additional depreciation cannot be denied on the ground that a wind mill has absolutely no connection with the manufacture of textile goods.”

> DCIT v. Bengal Beverages (P.) Ltd. – [2017] 87 taxmann.com 103 (Kolkata – Trib.) 

7. Having heard the rival submissions, perused the material available on record, we are of the view that a close and careful perusal of the provision shows that the benefit of additional depreciation is available to an assessee engaged in the business of manufacture of article or thing upon the actual cost of plant & machinery. It is therefore clear that the benefit is available on the plant & machinery only to those assessees who are manufacturers and it is not restricted to plant & machinery used for manufacture or which has first degree nexus with manufacture of article or thing. We note that the second condition cited by the AO in the impugned order is not borne from the provisions of Section 32(1)(iia) of the Act. The conditions laid down in Section 32(1)(iia) is that if the assessee is engaged in manufacture of article or thing then it is entitled to additional depreciation on entire additions to plant & machinery provided the items of addition does not fall under any of the exceptions provided in clauses (A) to (D) of the proviso. In the present case the assessee is engaged in the business of manufacture of cold drinks. This fact has not been disputed by the AO. The AO has categorically observed that the assessee’s nature of business is manufacture of cold drinks. We therefore find that the assessee is legally entitled to avail the benefit of additional depreciation under Section 32(1)(iia) of the Act. The “visicooler” is a “plant & machinery”. The said item falls within the category of “plant & machinery” as laid down in the IT. Rules, 1962. The “visicooler” also does not fall within the exceptions provided in clauses (A) to (D) of the proviso to Section 32(1 )(iia) of the Act. 

…………………………………………..

8. In the result, the appeal filed by the Revenue, is dismissed. 

To summarize, section 32(1)(iia) only require that the machinery or plant is to be acquired by an assessee who is engaged in business or manufacture or production of any article or thing and there is no stipulation in the provision that the machinery or plant ought to be used in manufacturing process.

Meaning of manufacture 

Section 2(29BA) of the Act, defines the term manufacture as under:

“manufacture”, with its grammatical variations, means a change in a non-living physical object or article or thing,—

(a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or

(b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure”

In view of above, manufacture means a change in a non-living physical object resulting in transformation of the said object into a new and distinct object. 

Radio programmes produced by assessee is ‘thing’, if not an ‘article’ which can have intangible characteristic and, therefore, when said programmes were produced by using plant and machinery acquired and installed after 31-3-2005, assessee’s claim for additional depreciation in respect of same was to be allowed under section 32(1)(iia) – CIT vs. Radio Today Broadcasting Ltd. – [2015] 64 taxmann.com 164 (Delhi). 

2^nd proviso to 32(1)(iia) – Conditions related to machinery or plant

Provided further that no deduction shall be allowed in respect of —

(A)  any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person; or

(B) any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house; or

Here it is noteworthy that there is no condition that plant or machinery must be installed in any factory. The only condition here is that plant or machinery must not be installed in any office premises or residential accommodation.

(C)  any office appliances or road transport vehicles; or

(D) any machinery or plant, the whole of the actual cost of which is allowed as a 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 one previous year.

2. If put to use for less than 180 days in the year in which asset is acquired, only 50% of additional depreciation can be claimed in that year, balance 50% can be availed in subsequent year – 2^nd Proviso to 32(1)

If plant and machinery eligible for additional depreciation under section 32(1)(iia) is put to use for less than 180 days in the financial year in which it is acquired, only 50% of additional depreciation can be claimed in that year, balance 50% can be availed in subsequent year

CIT vs. Rittal India (P.) Ltd. – [2016] 66 taxmann.com 4 (Karnataka)

Where assessee had claimed arrears of depreciation under section 32(1)(iia) in respect of asset under head ‘plant and machinery’ acquired in second half of financial year 2007-08 for which additional depreciation at 10 per cent was allowed for assessment year 2008-09, same was to be allowed

CIT vs. Aztec Auto (P.) Ltd. – [2020] 119 taxmann.com 215 (Madras)

3. No additional depreciation if opting for lower rate of 22% 

Domestic companies which are engaged in the business of manufacture or production of any article or thing or generation, transmission or distribution of power and who wish to obtain lower tax rate of 22%, such companies will not be allowed deduction for additional depreciation as per Section 32(1)(iia) [Section 115BAA(2)(i)].

Further, brought forward additional depreciation will also not be allowed to be adjusted while computing taxable income as per section 115BAA(1). However, if prior to AY 2020-21 any additional depreciation as per Section 32(1)(iia) has not been given full effect to, then it will be allowed to be adjusted in WDV of relevant block of assets as on 1 April 2019, if opted for section 115BAA for AY 2020-21 on or before the due date of filing ITR as specified u/s 139(1) [Proviso to Section 115BAA(3)].

Similar to section 115BAA, in view of section 115BAB(2)(c) if lower rate of 15% is claimed then deduction of additional depreciation will not be allowed.

4. Impact of section 43A adjustment 

If the actual cost of any asset, which is eligible for additional depreciation, is increased or decreased due to adjustment by application of section 43A, then it seems that the additional depreciation should accordingly be adjusted in the tax computation of said year.

Epilogue

To avoid any disallowance of additional depreciation claimed by the taxpayer and to defend its case against any disallowance made by the tax officer, inter-alia, following key ratios should be kept in mind with respect to claim of additional depreciation:

i. The asset eligible for additional depreciation must be machinery or plant;

ii. The machinery or plant must be new;

iii. Eligible asset could be any machinery or plant subject to 2^nd proviso to 32(1)(iia);

iv. Machinery or plant must be acquired and installed by an assessee engaged in manufacture of any article;

v. If put to use for less than 180 days in the year of acquisition, 50% additional depreciation can be claimed in that year and balance 50% in next year;

vi. If lower tax rate of 15%/22% is claimed, then additional depreciation not allowed;

vii. If the actual cost of any asset is adjusted by application of section 43A, then additional depreciation should accordingly be adjusted.