Depreciation - section 32 - initial depreciation allowance - Income Tax - 871/CBDT

INSTRUCTION NO. 871/CBDT Dated : August 24, 1975 Section(s) Referred: 32(1)(iii) ,41(2) Statute: Income - Tax Act, 1961 he Direct Taxes (Amendment) Act, 1974, has inserted a new clause (vi) in sub-section (1) of section 32 of the Income-tax Act, 1961. providing for initial depreciation allowance in respect of machinery or plant installed in certain selected industries after 31st May, 1974. The initial depreciation allowance will be available in respect of the following categories of machinery and plant:- (i) New ships and aircraft acquired by a taxpayer engaged in the business of operation of ships or aircraft. It should be noted that new ships or aircraft will qualify for initial depreciation allowance only in the hands of taxpayers carrying on the business of operating ships or aircraft acquired by other taxpayers; (ii) New machinery or plant (other than office appliances or road transport vehicles) installed for the purposes of business of generation or distribution of electricity or any other form of power. (iii) New machinery or plant (other than office appliances or road transport vehicles) installed for the purposes of business of construction, manufacture or production of any one or more of the articles or things specified in new Ninth Schedule to the Income-tax Act; (iv) New machinery or plant (other than office appliances or road transport vehicles) installed in a small-scale industrial undertaking for the purpose of business of manufacture or production of any other article or things. In other words, new machinery or plant installed industrial undertakings will qualify for initial depreciation allowance irrespective of whether or not the new machinery or plant is used for the manufacture or production of articles or things specified in the new Ninth Schedule. An industrial undertaking, will be regarded as a small-scale industrial undertaking, if the aggregate value of machinery and plant installed therein, as on the last day of the relevant previous year, does not exceed Rs. 7.5 lakhs. For this purpose, the value of machinery or plant owned by the taxpayer shall be the actual cost thereof to the taxpayer and the value of machinery or plant hired by the taxpayer shall be the actual to the owner thereof. 2. The initial depreciation allowance in respect of the aforesaid ships, aircraft, machinery or plant will be allowed at the rate of 20 per cent of their actual cost. The initial depreciation allowance will not be deductible in computing written down value of the asset in subsequent years. The amount of initial depreciation allowance will, however, be taken into account in the year in which the asset is sold or demolished or in the year in which the normal depreciation tends to exceed 80 per cent of the cost. In other words, the aggregate of the initial depreciation and normal depreciation including multiple shift, over the years will not exceed the actual cost of the ship, aircraft, machinery or plant. Initial depreciation allowance will also be taken into account in calculating the balancing charge u/s 41(2) or determining the loss u/s 32(1)(iii) of the Income-tax Act, 1961 (for detailed instructions, explaining the provisions of clause (vi) of section 32(1), please see explanatory notes on the provisions of the Direct Taxes (Amendment) Act, 1974). 3. With a view to ensuring that initial depreciation allowance is not lost sight of in the year in which provisions of section 41(2) or 32(1)(iii) are to be applied, the amount of initial depreciation allowed in respect of each aspect should be clearly indicated below the written down value of that asset in the assessment order for subsequent assessment years. 4. Necessary instruction on the lines indicated above may kindly be issued to the Income-tax Officers working in your charge.