Issue at Hand
Where a new plant or machinery is used for less than 180 days in the year of purchase and installation, and hence only 50% of the additional depreciation u/s 32(1)(iia) of the Income Tax Act, 1961 is allowed in that year, whether the balance 50% of additional depreciation will be allowed in subsequent year ?
History of Section 32(1)(iia) pertaining to Additional Depreciation
An Assessee claims depreciation on plant and machinery under Section 32(1) as business expenditure. The concept of additional depreciation was introduced in the Finance Act, 2002 through section 32(1)(iia) to incentivize the promotion of the capital goods industry, wherein additional depreciation of 15% was allowable to the assessee on purchase of new plant or machinery, subject to certain conditions. Later, this section 32(1)(iia) was substituted by Finance Act, 2005 wherein, amongst other changes, the rate of additional depreciation was increased from 15% to 20%.
Understanding the Issue and Section 32(1)(iia)
While calculating the income from Business and Profession, an assessee is allowed deduction of additional depreciation of 20% on purchase and installation of new plant and machinery under section 32(1)(iia).
However, under the second proviso to Sec 32(1), only 50% of such additional depreciation is allowed as deduction where the asset is put to use for less than 180 days.
The issue that has arisen is whether the balance 50% of the additional depreciation, which could not be claimed in the year of purchase and installation of the new plant and machinery, will be allowable as expenditure in the year subsequent to the year of purchase and installation.
The Delhi, Mumbai and Cochin benches of tribunal have held that the additional depreciation can be set-off in the subsequent year, whereas the Chennai Tribunal has taken a contrary view.
The Chennai Tribunal in the case of Brakes India Ltd vs DCIT (LTU) 144 ITD 0403 relied on the fact that an assessee becomes eligible for additional depreciation only on new plant & machinery. However in the subsequent year where the balance of the additional depreciation is claimed as expenditure, the plant or machinery is no longer new. It ruled that “the intention of the Legislature was to give such additional depreciation for the year in which assets were put to use and not for any succeeding year. There is nothing in the statute which allows carry forward of such depreciation. There cannot be any presumption that unless it is specifically denied, carried forward has to be allowed.”
In the section 32(1)(iia), though there is no enabling provision that expressly allows such claim, there also isn’t any restriction or prohibition for claiming the balance additional depreciation in the subsequent year. The benefit u/s 32(1)(iia) of 20% additional depreciation is earned when the following conditions are fulfilled:
- The Assessee is 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
- New plant or machinery is purchased and installed after 31st March, 2005.
Since, only 50% of such earned benefit could be utilized in the year of purchase and utilization, the claiming of the balance 50% is nothing but utilization of the benefit that had already been earned in the previous year.
Also, if we study the Section 32(1)(iia) before its substitution by Finance Act, 2005, in the clause (A) and (B) of the first proviso it is specifically mentioned that the deduction of 15% shall be allowed in the previous year in which a new industrial undertaking begins manufacturing or substantial expansion is done. Such restriction has not been placed in the new clause. This specific exclusion of the provision restricting allowance of additional depreciation to a particular previous year, talks about the intent of the Ministry to let the law be interpreted liberally so as to allow balance additional depreciation in the year subsequent to the year of purchase and installation.
Moreover, when the section 32(1)(iia) was first introduced in the Finance Act, 2002, it was introduced with the intent of incentivizing the promotion of the capital goods industry. The decision of the Supreme Court in the case of Bajaj Tempo Ltd v/s CIT 196 ITR 188 reiterates the fact that a provision for promoting economic growth has to be interpreted liberally. A construction of the section which frustrates the basic purpose of the proviso should be avoided in preference of a construction which achieves the legislative intent, which is encouraging industrialisation in this case.
By disallowing benefit of the balance 50% additional depreciation which had already been earned by the assessee in the previous year u/s 32(1)(iia), the purpose of the section to incentivize expansion of capital goods industry is frustrated.
The Delhi Tribunal in the case of DCIT vs Cosmo Films Ltd. 13 ITR(T) 340 ruled in favour of the assesse stating that “In section 32(1)(iia ), the expression used is ‘shall be allowed’. Thus, the assessee had earned the benefit as soon as he had purchased the new plant and machinery in full but it is restricted to 50 per cent in that particular year on account of period of usages. Such restrictions cannot divest the statutory right.” The Mumbai and Cochin Tribunal have also ruled in favour of the assesse allowing deduction of the 50% of additional depreciation in the year subsequent to the year of purchase & installation.
The controversy seems unwarranted considering the fact that the Revenue is not at loss since in no case the assesse can claim a deduction higher than the actual cost of the asset.
The additional depreciation is linked to investment in new plant and machinery. Hence on establishment of the fact that new plant & machinery is purchased and installed, 20% of additional depreciation earned should be allowed in full, whether fully in the year of purchase or partly in the year of purchase and partly in the subsequent year. Hence in our opinion, the balance 50% of the additional depreciation should be allowed as deduction in the year subsequent to the year of purchase and installation, where the plant and machinery is used for less than 180 days in the year of installation and hence only 50% of the benefit of additional depreciation could be claimed in the year of purchase.