Skill development projects under section 35CCD- an analysis of related provisions- a case of very late notification of Rules for guidelines, applications, notifications etc.

[CA DEV KUMAR KOTHARI]

Relevant links and references:

Section 35CCD of Income-tax Act,1961.

Rules 6AAF, 6AAG and 6AAH of Income-tax Rules 1962 {inserted in the Income-tax Rules, 1962 by Notification No. S.O.2166 (E)}

National Manufacturing Policy (NMP) 2011:

dipp.nic.in/.../policies/National_Manufacturing_Policy_25October2011.

Synopsis:

In tune with the National Manufacturing Policy (NMP) 2011, the FA 2012 inserted a new section 35CCD in the Income-tax Act, 1961 w.e.f. 01.04.2013 (that is from assessment year 2013-14) for which the previous year begun on 01.04.2012 and has already ended on 31.03.2013. The new provision requires prescription of guidelines and framing of rules for the purpose of application for approval of Skill Development Projects, appraisal of such applications and notifications of approved projects. It is only on 15^th July 2013 that the CBDT has notified new Rules for guidelines for such projects and related matters for availing benefit of the new section. Therefore, it appears that eligible companies will not be in a position to avail deduction, unless an application can be considered and project can be notified for period commencing from 1^st April,2012.

New section inserted vide FA 2012, with effect from 01.04.2013:

The new section is reproduced below with highlights, and catch words added for easy analysis and understanding:

Expenditure on skill development project.

35CCD. (1) Where a company incurs any expenditure (not being expenditure in the nature of cost of any land or building) on any skill development project notified by the Board in this behalf in accordance with the guidelines as may be prescribed, then, there shall be allowed a deduction of a sum equal to one and one-half times of such expenditure.

(2) Where a deduction under this section is claimed and allowed for any assessment year in respect of any expenditure referred to in sub-section (1), deduction shall not be allowed in respect of such expenditure under any other provisions of this Act for the same or any other assessment year.]

An analysis:

The deduction is granted only to companies and not to other assesses.

The deduction is for expenses incurred on skill development project notified by the Board in this behalf.

The notifications shall be in accordance with the guidelines as may be prescribed.

Deduction shall be allowable for any expenditure (capital or revenue) except expenditure in the nature of cost of any land or building. Therefore, even capital expenditure incurred for tangible assets like furniture, plant and machinery, vehicles, ships, boats etc. and intangible assets like software, technical and commercial information, will also be eligible for weighted deduction.

It is natural that an expenditure which is allowed and that too as a weighted deduction cannot be allowed again under other provisions. To avoid disputes the section makes it clear.

The new deduction is eligible from Assessment Year 2013-14 means the first accounting year or previous year should be PYE 31.03.2013.

National Manufacturing Policy 2011 (NPM 2011)

In the National Manufacturing Policy (NMP) 2011 (for short NPM) is aiming towards skill development for increased productivity and employment. As incentives one of incentive proposed was to provide the following direct taxes incentives to promote skill development:

   “Weighted deduction of 150% of the expenditure (other than land or building) incurred in Public Private Partnership (PPP) projects for skill development in manufacturing sector in separate facilities in coordination with National Skill Development Corporation (NSDC).”

Vide the Finance Act, 2012 a new Section 35CCD has been inserted in the Act to full fill the announcement in NPM.

3. The guidelines for approval of skill development project are prescribed in new Rules 6AAF, 6AAG and 6AAH inserted in the Income-tax Rules, 1962 by Notification No. S.O.2166 (E) dated 15^th July, 2013.  The salient features of the guidelines are as under:

Type of assessee and eligible products and services:

a)  In tune with Section 35CCD, only company engaged in the business of manufacturing any article or thing (other than alcoholic spirits and tobacco products) or engaged in providing specified services, as listed under Rule 6AAH, shall be eligible for weighted deduction of the expenditure incurred on skill development.

b)  The project should be undertaken in separate facilities in a training institute set up by the Central or State Government or a local authority or a training institute affiliated to National Council for Vocational Training (NCVT) or State Council for Vocational Training (SCVT). Private sector training institutes, through companies on affiliation with  NCVT or SCVT shall be eligible.

c)  National Skill Development Agency (NSDA) shall be the nodal agency to scrutinize the applications made by eligible companies in Form No. 3CQ. The Central Board of Direct Taxes (CBDT) shall notify the skill development project based on the recommendation of NSDA in this regard.

d)  As discussed earlier all expenses (not being expenditure in the nature of cost of any land or building), incurred wholly and exclusively for undertaking a notified skill development project shall be eligible for deduction under section 35CCD. However the expenditure which is reimbursed or reimbursable to the company by any person, whether directly or indirectly will be reduced from eligible expenses, in other words only net expenses will be eligible for weighted deduction. Suppose a company has incurred say Rs.15 lakh and get a reimbursement of Rs. 5 lakh than deduction will be restricted in respect of net expenses that is Rs.10 lakh and accordingly deduction of Rs.15 lakh will be allowed.

e)  The company claiming deduction shall have to maintain separate books of account of the project notified under section 35CCD and get such books of account audited.

f)   It is expected that the skill development project shall provide training to potential employees or newly recruited employees. Skill development of existing employees of the company shall not be eligible for notification under section 35CCD, if the training of such employees commences after six months of their recruitment.

Related Notification No. 54/2013-IT dated -15-07-2013