MANNER OF DEPRECIATION FOR NEW CLASSES OF COMPANY ASSESSEE – S.115BA, 115BAA AND 115BAB- casual approach in drafting provisions is not good.

[CA DEV KUMAR KOTHARI]

Three new categories of companies are briefly described as follows:

S.115BA- Tax @25% on income of certain domestic manufacturing companies (w.e.f.01.04.2017)

S.115BAA [Tax @22% on income of certain domestic companies (w.e.f. 01.04.2020)

S. 115BAB - Tax @15% on income of certain new domestic manufacturing companies. (w.e.f. 01.04.2020)

The above classes of companies are described as new category. Although S.115BA became effective from assessment year 2017-18. The reason for treating them new is that many of conditions applicable to them are similar with certain necessary modifications of related provisions inserted in clauses.

In this write up scope of discussion is about manner to be prescribed for allowing depreciation in case of such companies.

As per language used, it appears that new manner and rates are intended to be provided. And for each new category of company separate manner and rates can be prescribed keeping in mind purpose of lower rate of tax at varying rates.

In case of all three new categories one of common condition is that company shall not claim incentive by way of initial depreciation u/s 32.1.iia. And that carried forward portion of depreciation which relates to such incentive u/s 32.1. iia shall also not be claimed and shall be deemed to have been allowed.

Language used about depreciation:

From S.115BA sub-section 2 (1) (c) sub clauses (i) and (iii):

 (c) the total income of the company has been computed,-

 (i) without any deduction under the provisions of section 10AA or clause (iia) of sub-section (1) of section 32 …..

And

(iii) depreciation under section 32, other than clause (iia) of sub-section (1) of the said section, is determined in the manner as may be prescribed.

From Section "115BAA subsection (2) clauses (i) and (iii):

(2) For the purposes of sub-section (1), the following conditions shall apply subject to the condition that the total income of the company has been computed, -

(i) without any deduction under the provisions of section 10AA or clause (iia) of sub-section (1) of section 32 or section 32AD or section 33AB or section 33ABA or sub-clause (ii) or sub-clause (iia) or sub-clause (iii) of sub-section (1)

(iii) by claiming the depreciation, if any, under section 32, other than clause (iia) of sub-section (1) of the said section, determined in such manner as may be prescribed.

From S. 115BAB sub-section (2) clause (c) and sub-clauses (i) and (iii):

(2) For the purposes of sub-section (1), the following conditions shall apply, namely:

(c) the total income of the company has been computed, -

(i) without any deduction under the provisions of section 10AA or clause (iia) of sub-section (1) of section 32

(iii) by claiming the depreciation under section 32, other than clause (iia) of sub-section (1) of the said section, determined in such manner as may be prescribed.

Observations:

On reading of these clauses it appears that it is intended to prescribe manner for claiming depreciation by such companies.

There seems no amendment in this regard in S.32 and new Appendix I in Income Tax Rules which prescribe rate of depreciation on basis of WDV and also in Appendix IA which prescribes depreciation on basis of actual cost of assets and any new appendix has also not been provided for special cases.

However, in Rule 5 (1) a proviso has been inserted to the effect that in case of assets for which depreciation at a rate higher than 40% is prescribed, in case companies to which S.115BA apply, depreciation shall be restricted to 40% on such assets also. This means that all other rates and manner shall apply as are normally applicable. The proviso reads as follows:

¹[ Provided that in case of a domestic company which has exercised option under sub-section (4) of section 115BA, the allowance under clause (ii) of sub-section (1) of section 32 in respect of depreciation of any block of assets entitled to more than forty per cent. shall be restricted to forty per cent. on the written down value of such block of assets. ]

Note 1. Inserted vide Not. 103/2016 - Dated 7-11-2016 w.e.f. 1st day of April, 2016

On review of Appendix I as amended and as applicable from 01.04.217 we find that maximum rate of depreciation provided is 40%. All higher rates were reduced to 40% w.e.f 01.04.2017.

Therefore, if we consider amendment in manner of depreciation for S.115BA companies, we find that the condition in this regard as found in S.15BA and Rule 5 are superfluous. It is likely that for S.115BAA and S.115BAB also similar conditions may be prescribed by amending the above proviso to Rule 5, which seems to have not been notified as per reported amendments.

In view of above discussions it appears that the conditions about depreciation to be claimed in a manner as may be prescribed as found in three new sections and as per amendment of Rule 5 by insertion of proviso are superfluous.

Even if some other rates are prescribed, these will not have much impact this is because rate of depreciation prevailing now are very low and it cannot be said that there are any accelerated rate of depreciation. In fact situation is that depreciation under Income-tax Act is lower than that as per Companies Act in case of many assets.

As discussed in other articles on these new provisions it appears that there is casual approach in drafting provisions of the Income Tax Act and income tax Rules. More seriousness and care is required while drafting provisions of law.