Depreciation - Reduction of higher rates of 100, 80, 60 and 50% to 40% in a single stroke –amendment is not justified

[CA DEV KUMAR KOTHARI]

Links and references:

NOTIFICATION No. 103/2016  of  7th November, 2016

Section 32, 115BA, 295 and Income tax  Rules 1962 – Rule 5 and appendix to Rules for depreciation rates.

Higher rate of depreciation has some purpose:

Higher rate of depreciation is allowed with a view of specific purpose as an incentive which may be to serve different purposes related to particular machinery or other asset, industry in which it is used, area in which it is used, product which are manufactured etc.

Higher rates of 100, 80, 60,50%

Such rates cannot be considered with the same view so as to reduce them at a time and also to apply reduced rate equally to all such assets. This is because varying rates were provided for different purposes.

Reduction of 60%, 40%, 20% and 10%  in rates of :

Varying reduction in rate is not justified. For example, reduction from 100% to 40% means reduction by 60% and reduction from 50% to 40% means reduction by 10% only. This cannot be considered rational and justified, particularly so when any purpose to reduce rates has also not been given in the notification.

Such differently rated reduction cannot be with valid purposes in mind. In any case any purpose or objective has not been mentioned also.

The purposes and objective to be served by prescribing rate of  100, 80,60 and 50 % were different. These rates for different items. They were prescribed at different times, and for different purposes.

There is no indication that such purpose and objectives have been achieved, and now there is no such purpose existing so as to warrant to reduce rates to 40%. There is no reason given for such reduction of different degree or proportions.

One can ask, why rates are is reduced to  40% why not increased 100%.

New section 115BA is also effected by reduction of rates by specific mention also :

A new section S.115BA was inserted by the FA , 2016 wef 01.04.2017 that means first assessment year will be 2017-18 in which this section shall be applied. The new provision is applicable only to newly formed companies (on or after 1^st Day of March 2016) and who full fill other conditions. Therefore, in case of a company incorporated say on 01.03.2016 the previous year ending on 31.03.2016  will be first year relevant to assessment year 2016-17 and PYE 31032017 will be second previous year relevant to assessment  year 2017 to which the amendment in rate of depreciation shall also  be applicable.  Therefore, advantage announced and inserted in form of S.115BA is being reduced in first or second year itself that too by an amendment in IT Rules. This is not justified.

A company newly formed to avail benefit of S.115BA will suffer from the first year of benefit of S.115BA due to reduced rate of depreciation. This also shows that the reduction in rate of depreciation is without application of mind.

This goes against long-term fiscal policies which need to be adopted for consistency and stability about net rate of tax after taking into account benefits.

Are Rules amended due to whims and prejudices?

This amendment which at a stroke reduces rates of depreciation and apply such reduction even  in relation to newly formed companies who were entitled to higher depreciation and lower rate of tax as announced by amendment in the Act by insertion of S. 115BA, clearly shows that Rules are amended without any purpose and many times to satisfy prejudices and authority exercised in whimsical manner.

Effective date:

As per notification the amendment is w.e.f. 01.04.2017. The notification is issued after the commencement of the previous year ended on 31.03.2017 relevant to assessment year 2017-18. Therefore, amendment  should be applicable from assessment year 2018-19 for which previous year will begin  on 01.04.2017. This will also be in tune with provisions of S.115BA which came into effect from assessment year 2017-18. Still the amendment of reduced rate will affect them from second year.  

In some ready reckoner also authors have stated that the reduced rate will be applicable from assessment year 2018-19.