ADDITIONAL DEPRECIATION UNDER INCOME TAX ACT, 1961

[Mr. M. GOVINDARAJAN]

Depreciation

Depreciation is claimed by business enterprises for two purposes one for accounting purpose and the other for taxation purposes.  In accountancy depreciation refers to decrease in value of assets and allocation of cost of assets to the useful life of assets.   In taxation, depreciation refers to reduction in net taxable income to reduce the amount of tax payable.  The Institute of Chartered Accountants of India defines the term ‘depreciation’ as a measure of wearing out, consumption or other loss of value of depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes.  Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset.  Depreciation includes amortization of assets whose useful life is pre-determined.

Section 32 of the Income Tax Act, 1961 (‘Act’ for short) deals with the method of calculating depreciation for the purpose of income tax.  Section 32(1) provides that in respect of depreciation of-

•  buildings, machinery, plant or furniture, being tangible assets;
• know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998,

owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed-

• in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed;
• in the case of any block of assets, such percentage on the written down value thereof as may be prescribed.

Additional depreciation

Section 32(1)(iia) provides for additional depreciation for new machinery or plant, other than ship and aircraft.  Section 32(1)(iia) was originally inserted by the Finance Act, 1980, which came into effect from 01.04.1981.  The said section was omitted by Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 with effect from 01.04.1988.  The said section was against inserted by Finance Act, 2002 that came into effect from 01.04.2003.  The said section was newly substituted vide Finance Act, 2005 which came into effect from 01.04.2006.

Section 32(1)(iia) provides that in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing,   or in the business of generation, transmission or distribution of power a further sum equal to 20% of the actual cost of such machinery or plant shall be allowed as deduction under clause section 32(1) (ii).

The additional depreciation is allowed only once and that too in the previous year in which the eligible asset is acquired and installed.

Non eligibility

The following assets are not eligible for additional depreciation-

• ships and aircrafts; or
• any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person; or
• any machinery or plant which is installed in any office or premises or any residential accommodation, including accommodation in the nature of a guest house; or
• any office appliances on road transport vehicles; or
• any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head ‘Profits and gains of business or profession’ of any one previous year. 

Enhanced depreciation for backward areas

The first proviso to section 32(1)(iia) which has been inserted vide Finance Act, 2015 which came into effect from 01.04.2016 provides additional depreciation to the backward areas.   The said proviso provides that where an assessee sets up an undertaking or enterprise for manufacture or production of any article or things, on or after 01.04.2015 in any backward area notified by the Central Government in this behalf-

• in the State of Andhra Pradesh; or
• in the State of Bihar; or
• in the State of Telengana; or
• in the State of West Bengal

and acquires and installs new machinery, other than ships and aircraft, then the additional depreciation is eligible to such undertaking or enterprise for the period from 01.04.2015 to 31.03.2020 @ 35% instead of 20%.

The second proviso to section 32(1)(iia) provides the list of non eligibility assets for the above said enhanced depreciation as detailed below-

• any machinery or plant which, before its installation by the assessee was used either within or outside India by any other person; or
• any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house; or
•  any office appliances or road transport vehicles; or
•  any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head "Profits and gains of business or profession" of any one previous year.

Additional depreciation for printing

In THE COMMISSIONER OF INCOME TAX, KOZHIKODE VERSUS M/S. MATHRUBHUMI PRINTING AND PUBLISHING COMPANY LTD. [2015 (2) TMI 1168 - KERALA HIGH COURT], the Kerala High Court held that printing and publishing activity is a manufacturing activity and therefore the assessee is eligible for grant of additional depreciation under section 32(1)(iia).  Accepting the said judgment the Department vide their circular No. 15/2016, dated 19.05.2016 clarified that the business of printing or printing and publishing amounts to manufacture or production or an article or thing and therefore additional depreciation under section 32(1)(iia) is eligible for these industries.

Additional depreciation for power

An assessee engaged in the business of transmission of power shall be allowed additional depreciation @ 20% of actual cost of new machinery or plant acquired and installed in a previous year with effect from the assessment year 2017-18.

Case laws

In ‘Commissioner of Income Tax (LTU) and another v. Rittal India Private Limited’ – 2015 (1) TMI 1248 - KARNATAKA HIGH COURT the assessee is a private limited company being a member of the Rittal Group of Germany.  It is engaged in the manufacture and sale of enclosures, heat exchanges and other electrical appliances.  The assessee filed a return declaring a total income of ₹ 4.26 crores.  The Assessing Officer disallowed the additional depreciation claimed by the assessee under section 32(1)(iia) of the Act to the tune of ₹ 3.53 crores.  The Dispute Resolution Panel held that the claim of additional depreciation on assets installed during the period 01.10.2008 was allowable.  The Tribunal allowed the claim which has also been upheld by the High Court.

In ‘Brakes India Limited v. Deputy Commissioner of Income Tax’ – 2016 (8) TMI 745 (ITAT Chennai) the assessee has claimed additional depreciation in respect of second half addition made to plant and machinery during the preceding assessment year 2007 – 2008.  The assessee claimed depreciation @ 10% (50% of 20%) to the tune of ₹ 6.08 crores under section 32(1)(iia).  The assessee claimed the balance 10% of depreciation in the next assessment year.  The Assessing Officer held that there is no provision in the Act permitting the balance depreciation to be allowed in the succeeding year.

The Commissioner (Appeals) held that the requirement for being eligible for such a claim is that it should be on a new machinery or plant.  Once it is used, it is no longer new machinery.  In the present case the machinery, on which carried forward depreciation has been claimed, was already used in the preceding financial year though for a period of less than 180 days.  Therefore for the impugned assessment year, it is no more a new machinery or plant.  Once it is not a new machinery or plant, additional depreciation under section 32(1)(iia) cannot be claimed.  Hence carry forward of any deficit additional depreciation is not allowed.  The intention of the legislature is to give such additional depreciation for the year in which the assets were put to use and not for any succeeding year.  There is nothing in the statute which allows carry forward for any succeeding year.  The Tribunal dismissed the appeal.  The High Court also dismissed the appeal filed by the assessee.

But in another case the Karnataka High Court held that the balance depreciation can be carried forwarded.  In ‘Commissioner of Income Tax and another v. Rittal India Private Limited’ – 2016 (1) TMI 81 (Kar) the assessee was an existing industrial undertaking when it had acquired and installed new plant and machinery in the financial year 2006 -07.  The assessee claimed depreciation 50% of additional 20% depreciation under section 32(1)(iia) in the corresponding assessment year 2007 – 08 since the machinery was acquired after 01.10.2016 and before 31.03.2007 thereby it was put to use for the purpose of business for a period of less than 180 days.  The assessing officer as well as the Commissioner (Appeals) disallowed the carry forwarding the balance depreciation to the next assessment year.  The Tribunal allowed the appeal.  Therefore the Revenue filed appeal before the High Court. 

The High Court held that the language used in section 32(1)(iia) clearly provides that a further sum equal to 20% of the actual cost of such machinery or plant shall be allowed as deduction under section 32(1)(ii).  The word ‘shall’ used in the said clause is very significant.  The benefit which is to be granted is 20% additional depreciation.  By the virtue of the proviso, only 10% can be claimed on one year, if plant and machinery is put to use for less than 180 days in the said financial year.  Therefore the balance 10% additional can be availed in the succeeding financial year.  The High Court further held that additional depreciation allowed under section 32(1)(iia) of the Act is a onetime benefit to encourage industrialization and the provisions related to it have to be construed reasonably, liberally and purposively to make the provision meaningful while granting the additional allowance.  The High Court dismissed the appeal filed by the Revenue.