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.

[C.A. DEV KUMAR KOTHARI]

Earlier two articles of the same author  have been published on this website suggesting to avoid last moment rush for purchasing  depreciable assets just before two cut off dates. This is very significantly applicable to recent amendment to the New Appendix I to the I.T.Rules to provide for higher deprecation on commercial vehicles because the vehicle should be purchased and put to use before 31.03.2009. if that is not done and satisfactorily explained, then the new vehicle will not be entitled for higher depreciation for the assessment year 2009-10 and future also.

"CHAKA JAM" (TRANSPORTERS STRIKE):

In the recent strike by  goods transporters (particularly by road) there were several demands raised before the  government. However, apparently there was no demand for higher depreciation on commercial vehicles. Some demands relating to services tax have been accepted and some  actions are pending. Recently GOI has announced higher rate of depreciation on commercial vehicles for a limited period of acquisition and putting to use. It appears that in view of slow down of economy, poor off take of commercial vehicles and accumulation of inventory, the GOI has announced  by way  of notification an amendment of Depreciation Schedule in I.T.Rules for higher rate of depreciation on new commercial vehicles purchased and put to use between 01.01.2009 -31.03.2009. Incidentally the transporters/ vehicle owners  will also be benefitted by availing higher depreciation.

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 new entry (via)

"(via) New commercial vehicle which is acquired on or after the 1st day of

January, 2009 but before the 1st day of April, 2009 and is put to use before

 the 1st day of April, 2009 for the purposes of business or profession

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

The above entry is similar to some of existing entries e.g. entry (vi).

Several block of assets:

On perusal of the relevant part of the  new Appendix I we find that there are different block of assets for commercial vehicles for which rates are 15%, 30%, 40% 50% and 60%. Vehicles are 'plant' within the meaning u/s 43(3) therefore, commercial vehicles will fall into the block of asset, for which the same rate is applicable. Therefore, suppose any person has only commercial vehicles and he use them for own business as well as for running them on hire, then commercial vehicles will have to be divided and grouped under different blocks. In case of sale of any vehicle, the sale value will have to be deducted from the relevant block and any new acquisition will have to be added in the relevant block only. This require care, because if the vehicle being sold and being acquired falls in different block of assets then there can be taxable short-term capital gains because the purchase price / actual cost of new vehicle will not be set off against sale price of old vehicle falling under other block of asset.   

Analysis of new notification:

Applicable  rate will be 50%. However,  in first year as the vehicle purchased during January to March 2009 will be used for less than 180 days,  allowable depreciation shall be 25% only. From next year only this will be effectively be 50% as against 15 % or 30% of such vehicles acquired after 30.03.2002 till 31.12.2008.

This entry is similar to some of  existing entries, except that the period of acquisition is different - it is short duration of 90 days in totality but effectively only about 71 days.

The vehicle should be used in business or profession. It is not necessary that it shluld be used in business of hiring.

Gestation period is usually long but short time is allowed:

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.  

In planning, and arranging finance and procuring vehicles some days say 30 days are required, Body is also required to be built upon the chasis 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.

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

The vehicle should be put to use before end of 24 hours of 31.03.2009. this will be a difficult task. Because after purchasing chassis one has to put on suitable body on the vehicle as per intended use. The body building will also take minimum 20 -25 days at crash cost project basis. As there will be heavy rush, it will be a difficult task to get vehicle completed in all respect to place it on road and put to use for the intended purpose.

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

Commercial vehicle purchased and put to use  during 01.01.09 to 31.03.09 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 March 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.

Care required to establish aspect to put to use:

As discussed above, the time available is very short for the  purpose of acquisition, body building, and registration and then put to use, therefore, utmost care is required to take timely actions and put to use the vehicle and establish the fact that the vehicle was actually put to use before end of 31.03.2009. If this condition fails, then the commercial vehicle shall fall in block of assets @ 30% if run on hire and 15% in other cases instead of rate of 50% announced for new entry in the Appendix. Therefore, if it is not established that the commercial vehicle was actually put to use before 31.03.09, then there will be lower rate for future also.      

Cut off last date:

In this case we find that the cutoff last  date to put to use is 31.03.2009. 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. In fact it is a very difficult task also, therefore, only such persons who have money with them and were already in process to purchase such  vehicles  earlier are likely to avail benefit. In case of late planners it is really very difficult.

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% ,a s 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:

It appears 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 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. 

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 90 days will cause lot of litigation because if the A.O. find that the vehicle was not put to use before end of the 31^st day of March, 2009 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- 31.03.2009. This will lead to litigation on assessment as well as penalty proceedings.

Therefore, the following suggestions are given:

The period of eligibility should be extended and it can be made fifteen months from 01.01.2009 to 31.03.2010.

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.