Avoid frequent amendments in I.T.Rules by applying foresight: Higher Deprecation on commercial vehicles- eligible period for acquisition has been extended up to 30th September 2009 vide notification dated 21st April, 2009 as against up to 31st march 2009 fixed by earlier notification dated 19.01.2009 issued by CBDT.

[C.A. DEV KUMAR KOTHARI]

Relevant links:

Notification No.37/2009/F.No.142/01/2009-TPL dated 21.04.2009

Rates of Depreciation (Annexure 1 to the Income Tax Rules, 1962)

Depreciation avoid last moment rush- part III:

DELAYED ANNOUNCEMENT OF INCENTIVE TO COMMERCIAL VEHICLE MANUFACTURERS AND /OR OPERATORS by way of higher rate of depreciation.

Further amendment of recent amendment:

Vide notification dated 19.01.2009 a special benefit was conferred to allow higher depreciation on commercial vehicles purchased and put to use on or after 01.01.2009 and before 01.04.2009. At that time in an article displayed on this website the author has expressed that the period fixed is too short to allow intended benefit. Now the benefit of enhanced depreciation on commercial vehicles has been extended to allow acquisition till 30th September 2009 instead on 31.03.2009. Therefore now, commercial vehicles acquired on or after 1st January 2009 and put to use before the 1st October 2009 will be eligible for depreciation at the rate of 50 percent. The Central Board of Direct Taxes have issued a notification vide S.O. 989(E) dated 21st April 2009 (Notification No.37/2009/F.No.142/01/2009-TPL) to this effect, substituting the words "1st day of April 2009" with the words "1st day of October 2009".

The notification reads as follows:

NOTIFICATION NO 37/2009, Dated: April 21, 2009

In exercise of the powers conferred by section 295 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962,
namely:-

1. (1) These rules may be called the Income-tax (Eleventh Amendment) Rules, 2009.

(2) They shall come into force with effect from the 1st day of April, 2010.

2. In the Income-tax Rules 1962, in the Table to New Appendix I, in Part-A relating to TANGIBLE ASSETS, under the heading III, MACHINERY AND PLANT, in sub-item (via) of item (3), for the words and figures
"1st day of April, 2009", the words and figures "1st day of October, 2009" shall be substituted at both the places.

F.No.142/01/2009-TPL

(Anand Kumar Kedia)
Director to the Government of India

Public transport and commercial vehicles:

Commercial vehicles are mainly used for public and mass transportation. Therefore, to keep cost of such transportation the government provide different type of incentives and subsidies. To provide an incentive for investment in new commercial vehicles rates of  higher depreciation have been provided from time to time. We find  existing higher rates  in new Appendix I to the Income Tax Rules 1962 vide  entry no. III (3) (iii), (iv),(v) and (vi). The last one was for commercial vehicles acquired during F.Y. 2001-02 and put to use before end of FY 2001-02 for which rate was 50% In other existing entries  applicable rates are 30% , 40% and 60% for commercial vehicles according to period of acquisition. New entry read follows:

The amended  new entry (via) will read as follows:

"(via) New commercial vehicle which is acquired on or after the 1st day of  January, 2009 but before the 1st day of October, 2009 and is put to use before the 1st day of October, 2009 for the purposes of business or profession

[See paragraph 6 of the Notes below this Table]                                                               50".

As explained in earlier article the above entry is similar to some of existing entries e.g. entry (vi).

Gestation period:

In the earlier article the author had pointed out that the gestation period for acquiring and putting to use a commercial vehicle is  usually long but the  period of  01.01.2009 to 31.03.2009 is very short because gestation period for purchasing, readying and putting to use is long. The period is further shortened as announcement itself is made on 19.01.2009 and people will come to know it afterwards. Considering time taken in planning, and arranging finance, procuring vehicles some days say 30 days are required, Body is also required to be built upon the chassis before registration is granted. The registration of vehicle also takes about 10-15 days. Therefore, factually time available to a person who want to acquire such vehicles and put to use  is very short -  hardly about two months for all steps to be taken and completed till actual put to use latest by 31.03.2009. After this amendment the time allowed has been increased by six months.

Put to use should be before end of 31^st march 2009:

For claiming depreciation in AY 2009-10 the vehicle should have been  put to use before end of 24 hours of 31.03.2009. However, for AY 2010-11, in view of amendment the new vehicle can be purchased and put to use before 30.09.2009. In case the vehicle is purchased but not put to use before 30.09.2009 then higher rate will not be allowed, and even lower rate, will be allowed for half of the year. Therefore, one should be very careful to clearly establish that the vehicle has really been put to use before 31.03.09 or 30.09.09 as the cas may be.

Care is required to deal with block of asset so as to avoid unnecessary STCG tax:

After amendment commercial vehicle purchased and put to use during 01.01.09 to 30.09.09 shall fall in a new block vide entry no. III (3)(via). However, it can be said that Commercial Vehicles falling under existing entry (vi) which pertain to such vehicles acquired during 01.04.2001- 30.03.2002 and the vehicles purchased under new entry will form one and the same block, because the rate is same that is 50%. Therefore, adjustment of purchase price of new vehicles under new entry and old vehicles in entry (vi) will be permissible for determining WDV, and short term capital gain if any commercial vehicle from this block is sold.

Short term capital gains on sale of old commercial vehicles:

Any other commercial vehicle which are not covered by existing entry (vi), shall be in different block, because applicable rate is different.

Therefore, if a  commercial vehicle which is not acquired and put to use  during F.Y.2001-02 is sold, care should be taken that there can be taxable capital gain because the cost of new vehicle acquired between January to September 2009 will not fall in the same block and the benefit of inclusion in block of asset will not be allowed. Therefore, if the sale value exceeds WDV b/f  plus cost of new vehicle purchased before 01.01.2009, then the same will be taxable as benefit of cost of new vehicle will not be allowed due to a new block of asset.

For example suppose a Bus operator has only one vehicle acquired after 31.03.2002 say on 01.06.2002. This bus falls in block of asset eligible for 30% depreciation under entry III (3) (ii). Suppose WDV b/f is Rs. one lakh and the sale value is Rs.two lakh, then there will be short term capital gain u/s 50 amounting to Rs. one lakh.

Though the operator may purchase a new bus for Rs. eight lakh during January to march 2009, yet he will have to pay STCG tax on Rs. one lakh on sale of old bus because addition of Rs. eight lakh is not in the same block of asset from which old bus is sold.

Cut off last date:

In this case we find that the cutoff last  date to put to use is 31.03.2009 to claim depreciation for AY 2009-10 and 30.09.2009 to claim depreciation for AY 2010-11. Therefore, it is very likely that the Assessing Officers will try to establish that the commercial vehicle was not put to use on or before 31.03.2009 / 30.09.2009.

Late announcement and Unlucky fellows:

Persons who acquired new commercial vehicle before 01.01.2009 are unlucky fellows. This is because they will be entitled to depreciation only @ 30 or 15%, as the case may be even if the vehicle is actually put to use between 01.01.2009 and 31.03.2009. Because, for availing higher rate the conditions are cumulative. If one can cancel the purchase made before 01.01.2009 and purchase vehicle on or after 01.01.2009 then he can take a chance of higher depreciation. Suppose a vehicle was purchased on 29.12.08, it is in process of body building, that means it has not been put to use. Therefore the vehicle is still new. If the vehicle is returned to vendor and another vehicle is purchased, the buyer can claim higher deprecation.

Similarly the another person who purchased vehicle and is in process of body building, sells the same to another person and such another person complete the work, then put to use it before 31.03.2009, then  such new person can claim higher depreciation as he has purchased  a new commercial vehicle and put to use the same during eligible period.      

Suggestions:

In the earlier article it was pointed out that there is no consistency in the thinking of the GOI. There is no apparent reason for restricting period of acquisition and putting to use of commercial vehicles for only 90 days. We find that in other entries for higher depreciation, relating to commercial vehicles, the period of acquisition and putting to use was one year. Therefore, at this time restricted period of 90 days (now extended by another six month) is not at all justified. Considering the normal gestation period of acquiring and putting to use of such vehicles, period of 90 days is very short. This shows that the notification has been issued without appreciating ground realities and practical; difficulties etc. 

After amendment a further period of six months has been allowed but this is still short period and is not reflective of real intention of GOI. It appears that amendments are made at whims of bureaucrats.

It can be observed that one of reason for the higher rate provision is to boost sale of commercial vehicles, to provide an impetus and to avoid crisis in heavy commercial vehicle manufacturers. However, as the banking sector is not willing to provide adequate finance, the efforts may not be fully fruitful.

A short duration of nine month  with two cut off dates 31.03.09 and 30.09.09 will cause lot of litigation because if the A.O. find that the vehicle was not put to use before cut off dates then depreciation at higher rate will not be allowable for assessment year 2009-10 as well as for subsequent years on the new vehicles purchased during 01.01.2009- 30.09.2009. This will lead to litigation on assessment as well as penalty proceedings.

Therefore, the following suggestions  were  given:

The period of eligibility should be extended and it can be made fifteen months from 01.01.2009 to 31.03.2010. - this has been partly accepted by extending the date to 30.09.2009

The condition to put to use should be relaxed

There should not be condition to put to use vehicle for business by using it on road for carrying goods or passengers. The activity of carrying vehicle from vendor to buyers place or to work shop for body building  or to the Road Transport Authorities should be considered as sufficient to satisfy the test of putting to use. In view of the author, such activities clearly amount to putt to use, however, to avoid litigation clarity is desired.