HIGHER DEPRECIATION ON SOME MOTOR VEHICLES - IS JUST TO HELP STOCK CLEARANCE UP TO 31.03.2020 – effective date need to be changed or clarified to avoid disputes.

[CA DEV KUMAR KOTHARI]

News Reports for announcements:

From news reports we find that on Aug 23, 2019 honourable  FM Announced some measures for the auto sector to create demand of motor vehicles. The major measures announced included:

1. Announcement for allowing higher depreciation on vehicles purchased within current FY that is before 01.04.2020.
2.  Improving liquidity for purchase of vehicles.
3.  Deferring increased registration fees of vehicles to 01.07.2020.
4. Lifting ban on purchase of vehicles, including replacement of old vehicles by Government. 
5. Allowing vehicles purchased before 01.04.2020 to run their full life cycle ( validity of registration)  without compulsory scrapping. From 2020 BS-IV will not  be off the roads and will be allowed to ply during validity of registration.

These announcements were welcomed by the industry. However, author feel that relaxation should be for some longer duration so that it could be to boost production over a longer period. Auto industry is a major indicator of health of economy. There should also be some relaxation in GST and lower rate of interest for vehicle loans.

Short period of relaxation shall force people to purchase such vehicles in a hurry and there can be some point of disputes as discussed later on in respect of depreciation.

Higher depreciation is only for some motor vehicles and not all:

In view of above announcement, Income Tax Rules have been amended with retrospective effect (in the sense that new rates will apply to motor vehicles purchased on or after 23.08.2019 and up to 31.03.2020)

The notification is reproduced below with highlights added by author for easy analysis and understanding:

Quote ( with highlights by underlining):

MINISTRY OF FINANCE

(Department of Revenue)

(CENTRAL BOARD OF DIRECT TAXES)

NOTIFICATION NO. 69/2019

New Delhi, the 20th September, 2019

(Income-tax)

G.S.R. 679 (E).-In exercise of the powers conferred by section 32 read with section 295 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes, hereby, makes the following rules to further amend the Income-tax Rules, 1962, namely:-

1. Short title and commencement.-

(1) These rules may be called the Income-tax (9th Amendment) Rules, 2019.

(2) They shall be deemed to have come into force with effect from the 23rd day of August, 2019.

2. In the Income-tax Rules, 1962, in the NEW APPENDIX I, in the Table, in PART A relating to TANGIBLE ASSETS, in item III relating to MACHINERY AND PLANT, -

(a) for sub-item (2) and entries relating thereto, the following shall be substituted, namely:-

Block of Assets	Depreciation allowed as per percentage of written down value
1	2
“(2) (i) Motor cars, other than those used in a business of running them on hire, acquired or put to use on or after the 1st day of April, 1990 except those covered under entry (ii);	15
(ii) Motor cars, other than those used in a business of running them on hire, acquired on or after the 23rd day of August, 2019 but before the 1st day of April, 2020 and is put to use before the 1st day of April, 2020.	30”;

(b) in sub-item (3), for paragraph (ii) and entries relating thereto, the following shall be substituted, namely:-

Block of Assets	Depreciation allowed as per percentage of written down value
1	2
“(ii) (a) Motor buses, motor lorries and motor taxis used in a business of running them on hire other than those covered under entry (b).	30
(b) Motor buses, motor lorries and motor taxis used in a business of running them on hire, acquired on or after the 23rd day of August, 2019 but before the 1st day of April, 2020 and is put to use before the 1st day of April, 2020.	45”.

[F.No. 370142/17/2019-TPL]

SAURABH GUPTA, Under Secy. (Tax Policy & Legislation Division)

Explanatory Memorandum: It is certified that no person is being adversely affected by giving retrospective effect to this notification.

Note : The principal rules were published in the Gazette of India vide notification number S.O. 969(E), dated the 26th March, 1962 and last amended vide notification number G.S.R. 662(E) dated the 17th September, 2019.

Unquote:

About language and drafting of circular:

Any purpose and satisfaction about need for amendment has not been mentioned.

The notification inter alia states: quote

  “ They shall be deemed to have come into force with effect from the 23rd day of August, 2019”.

Explanatory Memorandum: It is certified that no person is being adversely affected by giving retrospective effect to this notification.”

Unquote:

- a clarification for effective date is required:

It is stated that the amendment shall be deemed come into force on 23.08.2019. This means that it is not w.e.f. 01.04.2019, the day on which previous year, relevant to assessment year 2020-21 begun. Therefore, as usual tax authorities are likely to raise dispute that higher rates will not be allowed for PYE 31.03.2020, relevant to Asst. Year 2020-21 but will apply only from AY 2021-22. If that view be taken it is further likely that tax authorities shall deny depreciation on eligible vehicles at higher rates (and even at lower rates) for assessment year 2020-21. This means there can be total denial of depreciation on intended eligible vehicles for assessment year 2020-21.

In this regard it is worth to mention that the NEW APPENDIX I  WAS SUBSTITUTED BY THE Income Tax  ( Sixth Amendment) Rules, 2005, w.e.f.02.04.2005. That is after commencement of PY 2004-05 on 01.04.2005. Therefore, the rate of depreciation as per  the substituted New Appendix I is with effect from assessment year 2006-07 and not from AY 2005-06)

A timely clarification will help taxpayers to be sure otherwise the purpose of amendment is likely to be defeated by tax officers.

When the last date of put to use is fixed as 31.03.2020, there was no need to mention on or before 01.04.2020 in relation to date of acquisition.

Further analysis:

In addition to analysis by way of underlining of notification and above discussions, some more important practical aspects are also discussed below:

A new category of block of asset may be created and such new block will continue for higher rate for subsequent years also.

In case of motor cars eligible for 30% they will be in block of plant and machinery for which 30% rate is applicable there will not be new block if assesse already had some plant and machinery eligible for 30% depreciation.

In case of  motor  buses, motor lorries, motor taxis running in business of plying such vehicles on hire, a new block of assets under head plant and machinery eligible for 45% depreciation shall come into blocks of assets. This is because at present there is no rate of 45% on any plant and machinery.

Higher rate is not an incentive by way of extra, weighted  or incentive allowance but is just in nature of  accelerated rate of depreciation allowable from year to year on WDV hence deductible from WDV.

Not for all vehicles: Higher rates have been prescribed only for motor cars, Motor buses, motor Lorries and motor taxis.

Higher rates are not prescribed for tractors, trailers, scooters, motor bikes, bi-cycles etc. (this is subject to interpretation).

For year of acquisition PYE 31.03.2020 (assessment year 2020-21) Depreciation at full rate will be allowed only if eligible vehicle is put to use on or before 03.10.2019. If it is put to use on or after 04.10.2019 it will be eligible for depreciation at half of rate.

Care required by buyers:

Avoid last moment rush:

Only acquisition is not enough, date of put to use is important. Therefore, care is required by buyers to avoid point of disputes as to date on which vehicle was put to use. Care is to be taken for put to use on or before 03.10.2019 if full depreciation is desired and for put to use on or before 31.03.2020 if one is satisfied with half of depreciation for the first year.

Registration, fitness certificates, filling of fuels, etc. and actual put to use thereafter must be ensured, documented and proof must be kept, to satisfy the AO and to avoid disputes about date of put to use.

In some places, vehicle can run on Dealers licence. That can be used for put to use, if registration is not completed by authority. A run on dealer’s registration from show room for business or profession purpose can be a ground for establishing date of put to use. However, why to go into controversy, taken timely steps and get vehicle inspected, approved and registered for running on account of buyer himself.

Old eligible vehicles are also eligible:

There is no condition that eligible vehicle to be purchased on or after 23.08.19 and before 01.04.2020 should be new. Therefore, old eligible vehicles are also eligible fro higher rate of depreciation,  if purchased and put to use in eligible periods.

Tax saving by changing hands:

By purchasing eligible vehicles, one can be eligible for higher rate of depreciation and can reduce tax liability. For availing maximum benefit only few days are left to take steps for selection of vehicle, dealers, arrangement for funds, purchase, registration etc. and to put to use by 03.10.2019. Time left is indeed very short.

If one miss the date of 03.10.19 then benefit will be substantially reduced.

On a motor car of say ₹ 10 lakh if purchased and put to use before 03.10.2019 ₹ 3 lakh will be allowed, if it is delayed to 04.10.19 the deduction shall be only ₹ 1.5 lakh.

One can plan his affairs in a suitable manner, for example:

1. Old eligible vehicles in hands of present owner is falling in block of assets- plant and machinery  eligible for lower rates of  15%  or 30% as the case may be  for block of assets for depreciation on plant and machinery ( inclusive of eligible vehicles). If it is sold by present owner,  sale value shall be deducted from WDV of block of assets of 15 % or 30% as the case may be. So there may not be taxable capital gains but only reduction in value of block of assets.
2. In hands of buyer, if purchased during eligible period, it will be eligible for higher rate of depreciation of 30% or 45% as the case may be.   
3. A motor car on which depreciation has not been claimed can change hands by acquisition by a family  member or other person, who will use it for business or profession and can claim depreciation.
4. A family member who has no income or low income  but has motor car can sell it to other member who has taxable income falling under higher rate of tax.
5. If an old car is a long-term capital asset capital gains will be long-term for purpose of rate of tax u/s 112  and reinvestment of capital gains, even if capital gains are computed u/s 50 and deemed as short term capital gains. 

(Author hopes that he has not missed or  misunderstood about  several  aspect in any manner, readers are requested to enlighten if there is some mistake in his understanding)