Finance Bill 2015: Allowance for new plant and machinery- proposed changes and suggestion.

[CA DEV KUMAR KOTHARI]

Earlier articles:

On the same subject, author had written some articles which were webhosted on this website, for example:

New eligible plant and machinery- further deduction of 20% of cost u/s 31(1)(iia)- some issues and exploration of beneficial provisions- a discussion about need to amend the provisions to avoid litigation. 20.09.2008

Initial or additional depreciation 20% need to be allowed in first year to achieve the purpose of incentive. An amendment is desirable. 21.12.2011

Incentive by way of initial or additional depreciation under section 32(1)(iia) can be allowed in two years.  01.01.2013

Incentive by way of further deduction for new plant and machinery:

There is a provision for deduction popularly called ‘initial depreciation’’, which is a one time incentive, allowed in respect to eligible new plant and machinery. As per existing provisions, there is doubt and ambiguity. As per relevant clause 20% deduction is mandatory in the first year. However, as per relevant proviso, if new eligible plant and machinery is put to use after 1 or 2^nd October (less than 180 days) then deduction is restricted to 10%. At present there is no specific provision to allow balance deduction in next year.

The proposal in the Finance Bill 2015 include enabling provision so that balance deduction can be claimed in next year.

The proposal is made prospective from 01.04.2016 means previous year ending 31.03.2016 and assessment year 2016-17.

Higher rate of deduction @ 35% is also proposed in case  an undertaking or enterprise for manufacture or production of any article or thing, is set up on or after the 1st day of April, 2015 in any backward area notified by the Central Government in this behalf, in the State of Andhra Pradesh or in the State of Telangana, and acquires and installs any new machinery or plant (other than ships and aircraft) for the purposes of the said undertaking or enterprise during the period  01.04.15 to 31.03.2020.

The provision of allowing deduction in two years if asset is put to use for less than 180 days is also extended by the proposals to amend S. 32.

Enabling provision should be made retrospective:

As per author full deduction should be allowed in the first year itself irrespective of date of putting to use of new eligible plant and machinery. However, there is conflict between two provisions. Some Tribunal Benches have already held that if deduction of 10% is allowed in first year, then balance 10% can be allowed in next year.

Therefore, in all fairness it is desirable that the amendment should be made retrospective and to introduce simplicity,

All arears of deduction should be allowed:

It is also desirable that the arrears of deduction in earlier years may be allowed in assessment year 2015-16 for which returns of income can be filed after 31.03.2015. There should also be express provision that this deduction is an incentive and is not to be deducted from the cost to determine WDV.

These amendments will serve the purpose of incentive and avoid litigation.

The proposal in the Finance Bill 2015 is reproduced below with highlights for an easy analysis:

Amendment of section 32

10. In section 32 of the Income-tax Act, in sub-section (1), with effect from the 1st day of April, 2016,-

(a) in clause (ii),-

(A) in the second proviso, after the words, brackets, figures and letter “asset referred to in clause (i) or clause (ii) or clause (iia)”, the words, brackets, figures and letter “or the first proviso to clause (iia)” shall be inserted;

(B) after the second proviso, the following proviso shall be inserted, namely:-

“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:”;

(b) in clause (iia),-

(A) in the proviso, for the word “Provided”, the words “Provided further” shall be substituted;

(B) before the proviso, the following proviso shall be inserted, namely:-

             “Provided that where an assessee, sets up an undertaking or enterprise for manufacture or production of any article or thing, on or after the 1st day of April, 2015 in any backward area notified by the Central Government in this behalf, in the State of Andhra Pradesh or in the State of Telangana, and acquires and installs any new machinery or plant (other than ships and aircraft) for the purposes of the said undertaking or enterprise during the period beginning on the 1st day of April, 2015 and ending before the 1st day of April, 2020 in the said backward area, then, the provisions of clause (iia) shall have effect, as if for the words “twenty per cent.”, the words “thirty-five per cent.” had been substituted:”.

Notes on Clauses:

Clause 10 of the Bill seeks to amend section 32 of the Income tax Act relating to depreciation.

Under the existing provisions contained in clause (iia) of subsection (1) of the aforesaid section, a further sum equal to twenty per cent. of the actual cost of new machinery or plant (other than ships and aircraft) 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 or generation and distribution of power, is allowed as deduction as further depreciation.

It is proposed to insert a proviso in clause (iia) of sub-section (1) of the aforesaid section to provide that where an assessee, sets up an undertaking or enterprise for manufacture or production of any article or thing, on or after the 1st day of April, 2015 in any backward area notified by the Central Government in this behalf, in the State of Andhra Pradesh or in the State of Telangana, and acquires and installs any new machinery or plant (other than ships and aircraft) for the purposes of the said undertaking or enterprise during the period beginning on the 1st day of April, 2015 and ending before the 1st day of April, 2020 in the said backward area, then, the provisions of clause (iia) shall have effect as if for the words “twenty per cent.”, the words “thirty-five per cent.” had been substituted:

Consequentially, it is proposed to insert the reference of newly inserted proviso in clause (iia) in the second proviso to sub-section (1) of the aforesaid section 32.

The existing provisions contained in the second proviso to subsection (1) of the aforesaid section 32 provide that where an asset referred to in clause (i) or clause (ii) or 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 or profession for a period of less than one hundred and eighty days in that previous year, the deduction under sub-section (1) in respect of such asset shall be restricted to fifty per cent. of the amount calculated at the percentage prescribed for an asset under clause (i) or clause (ii) or clause (iia), as the case may be.

It is proposed to insert a proviso after the second proviso to sub-section (1) of section 32 so as to provide 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 sub-section (1) 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 sub-section (1) in the immediately succeeding previous year in respect of such asset.

These amendments will take effect from 1st April, 2016 and will, accordingly, apply in relation to the assessment year 2016- 17 and subsequent years.