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

[C.A. DEV KUMAR KOTHARI]

Incentive allowance called as initial depreciation by the Finance Minister in his budget speech and as  additional deprecation, called as such in circulars etc. is allowable  @20% on new eligible plant and machinery in the first year as per clear and mandatory language used in section 32(1)(iia). However, due to insertion of clause (iia) also in the proviso to section 32 a conflict in two provisions have crept in and such conflict apply when new eligible plant and machinery is put to use after 2^nd October (that is when  days after putting to use are less than 180 days).

20% deduction is mandatory under section 32(1)(iib):

Additional / initial depreciation u/s 32(1)(iia) is  an incentive for investment in new eligible plant and machinery.  It is allowed once and not from year to year and it is not for normal wear and tear hence is different from normal depreciation allowance.

As per S. 32 (1) (iia) a further sum equal to 20% of actual cost of eligible new machinery or plant shall be allowed as deduction  under clause (ii).

The language used is mandatory by use of word ‘shall be allowed’. Furthermore, any clarification has not been made as to whether in case such allowance is restricted to half of amount, in case machinery or plant is used for less than 180 days, then balance 10% amount can be claimed in next year. Therefore considering the purpose of allowance u/s 32(1)(iia), full amount is allowable in the year of acquisition of machinery or plant irrespective of number of days on which such machinery or plant was put to use.

In proviso after S. 32 (1) the clauses (iia) has been inserted. Therefore there is conflict between two provisions. as per S. 32 (1) (iia) deduction equal to 20% shall be allowed in the first year. Therefore, the conflict in two provisions needs to be resolved by taking the beneficial provision as having overriding effect on the restrictions imposed by other provision, particularly when a purpose seeking approach is adopted.

In case proviso to S. 32 (1) (ii) is applied, then the purpose of S. 32(1)(iia) shall be defeated because in case an assets is not used for 180 days or more, the incentive allowance shall stand restricted to half of otherwise allowable amount and that is not the intention as appears from the memorandum explaining the provisions of S. 32 (1) (iia) and particularly when there is no explanation for insertion of clause (iia) in the proviso after section 32 (1) (ii) .

The nature of additional depreciation u/s 32(1)(iia):

For understanding the nature of initial depreciation we refer to the following:

From speech of the honorable Finance Minister for budget 2005-06

From paragraph 162 (page 29 of budget book of Bharat) we find the following from the budget speech in relation to incentive allowance:

 “… Hon’ble members may recall that, last July, I reduced the condition relating to increase in installed capacity from 25 per cent to 10 per cent.

Para 168. As a further measure of relief, I propose to remove the requirement of 10 percent increase in installed capacity for availing of the benefit of initial depreciation.

From para 166. The rate of depreciation will be 15 per cent for general machinery and plant, but the initial deprecation rate will be increased to 20 per cent.

Para 167. The corporate sector will find that the proposed tax structure is fair, gives them relief of nearly 3 per cent in the tax rate, encourages new investment and ensures equity among all sections of corporate tax payers.

From the memorandum on budget proposals and Boards circular as follows:

            3.6 Enhancement of the rate of additional depreciation on new machinery and plant and withdrawal of certain conditions - Under the existing provisions of clause (iia) of sub-section (1) of section 32, additional depreciation is allowed at the rate of fifteen per cent of the actual cost of the new machinery and plant (other than ships and aircraft) acquired and installed after the 31st day of March, 2002. Additional depreciation is allowed in the case of a new industrial undertaking during any previous year in which it begins to manufacture or produce any article or thing on or after the 1st day of April, 2002 or to any industrial undertaking existing before that date if it achieves substantial expansion during the previous year by way of increase in its installed capacity by not less than ten per cent.

In order to encourage investment, the Finance Act, 2005 has amended section 32 to increase the rate of additional depreciation to twenty per cent on new machinery and plant other than ships and aircraft, acquired and installed after the 31st day of March, 2005, and dispensed with the condition of additional depreciation to be allowed to a new industrial undertaking and the condition of expansion in installed capacity.

Depreciation rates have been modified through a Notification dated 28th February, 2005. The modified depreciation rates are effective from assessment year 2006-07. Among other things, the rate of depreciation on plant and machinery has been reduced from 25% to 15%.

Applicability : From A.Y. 2006-07 onwards.

From the above it is clear that initial depreciation (as said by the Finance Minister in his budget speech)   / additional depreciation (as said in the Boards circular etc.)  is an incentive allowed only once.

Thus keeping in mind the provisions and purpose of initial deprecation u/s 32(1) (iia) it should be allowed @ 20% in the first year itself.

Request for amendment to avoid litigation:

It is desirable that the insertion of clause (iia) in the provison to section 32 should be omitted/ withdrawn so that incentive allowance can be allowed @20% without any litigation and contingency.