FEBRUARY 09, 2016

By Ashit Kr. Chatterji

ON a plain reading of Section 32AC (1A) of the Income Tax Act, 1961, few practical questions come in mind. Before coming to the questions, let us have a look at the relevant portions of Section 32AC of the Income Tax Act, 1961

The Section reads as follows:-

32AC. (1) Where an assessee, being a company, engaged in the business of manufacture or production of any article or thing, acquires and installs new asset after the 31st day of March, 2013 but before the 1st day of April, 2015 and the aggregate amount of actual cost of such new assets exceeds one hundred crore rupees, then, there shall be allowed a deduction,-

(a)  for the assessment year commencing on the 1st day of April, 2014, of a sum equal to fifteen per cent of the actual cost of new assets acquired and installed after the 31st day of March, 2013 but before the 1st day of April, 2014, if the aggregate amount of actual cost of such new assets exceeds one hundred crore rupees; and

(b)  for the assessment year commencing on the 1st day of April, 2015, of a sum equal to fifteen per cent of the actual cost of new assets acquired and installed after the 31st day of March, 2013 but before the 1st day of April, 2015, as reduced by the amount of deduction allowed, if any, under clause (a).

17[(1A) Where an assessee, being a company, engaged in the business of manufacture or production of any article or thing, acquires and installs new assets and the amount of actual cost of such new assets acquired and installed during any previous year exceeds twenty-five crore rupees, then, there shall be allowed a deduction of a sum equal to fifteen per cent of the actual cost of such new assets for the assessment year relevant to that previous year:

Provided that no deduction under this sub-section shall be allowed for the assessment year commencing on the 1st day of April, 2015 to the assessee, which is eligible to claim deduction under sub-section (1) for the said assessment year.

(1B) No deduction under sub-section (1A) shall be allowed for any assessment year commencing on or after the 1st day of April, 2018.]

................

Needless to mention that sub-section (1) above is applicable for Previous Year 2013-14 and 2014-15 jointly and severally as per the conditions stipulated therein and sub-section (1A) is applicable for 3 years from Previous Year 2014-15, 2015-16 and 2016-17. It is also mentioned in Section 32AC that both the sub-sections (1) and (1A) can run parallel as per the threshold amounts. The allowance stipulated in the above Section (1A) is 15% of 'cost of new assets acquired and installed during any previous year (emphasis supplied) exceeds twenty five crore rupees ...........

Controversial Scenario

The question which arises in the mind of the assessees are as follows:-

a) Acquired and Installed – in the phrase shaded above there are broadly two activities involved ... acquisition and installation. These two activities are joined with the word "and". Does it mean that both the activities have to be performed together or within a given period of time? Probably, it is very difficult and/or impossible. Both acquisition and installation is a process and there is a timing difference. This process involves acquiring couple of assets ............ start installation ..... simultaneously keep on acquiring other components, tools, gauges etc and complete the installation.

So long the above two activities fall within the same previous year, there is no problem. But in most of the cases this would not happen and the acquisition and installation falls in two different Previous Years.

Under the normal Accounting practice, whenever an asset is purchased/acquired it is parked in Capital Work in Progress (CWIP) till the time it is installed. After installation the same is formally capitalised and brought into the Asset Register. Depreciation also starts from the date, the asset is installed/used/put to use.

Let us try and analyse further to see what is the correct intent of the legislature since Sub-section 32AC (1A) is yet to be tested before any judicial forum.

I would first re-produce the following, for our easy reference:-

+ Section 32 of the Income Tax Act which is by now a tested section by various forums of the judiciary,

+ Budget Speech 2014 of the Hon'ble Finance Minister,

+ Provisions of Finance (N0.2) Bill, 2014

Depreciation.

32. (1) In respect of depreciation of-

+ (i)  buildings, machinery, plant or furniture, being tangible assets;

+ (ii) know-how, patents, copyrights, trade marks, 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-

...........................................................

Second Proviso…. Provided further that where an asset referred to in clause (i) or clause (ii) or clause (iia) [or the first proviso to clause (iia)], as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this sub-section in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (i) or clause (ii) or clause (iia), as the case may be :

(iia) 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 or generation and distribution of power, a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii)

Budget Speech 2014

198. The manufacturing sector is of paramount importance for the growth of our economy. This sector has multiplier effect on creation of jobs. Last year, an incentive in the form of investment allowance to a manufacturing company that invests more than Rs. 100 crore in plant and machinery during the period from 01.04.2013 to 31.03.2015 was announced. Considering the need to incentivize smaller entrepreneurs, I propose to provide investment allowance at the rate of 15 percent to a manufacturing company that invests more than Rs. 25 crore in any year in new plant and machinery. This benefit will be available for three years i.e. for investments upto 31.03.2017. The Scheme announced last year will continue to operate in parallel till 31.03.2015.

FINANCE (No. 2) BILL, 2014
PROVISIONS RELATING TO DIRECT TAXES

Investment Allowance to a Manufacturing Company

In order to encourage the companies engaged in the business of manufacture or production of an article or thing to invest substantial amount in acquisition and installation of new plant and machinery, Finance Act, 2013 inserted section 32AC in the Act to provide that where an assessee, being a company, is engaged in the business of manufacture of an article or thing and invests a sum of more than Rs.100 crore in new assets (plant and machinery) during the period beginning from 1st April, 2013and ending on 31st March, 2015, then the assessee shall be allowed a deduction of 15% of cost of new assets for assessment years 2014-15 and 2015-16.

As growth of the manufacturing sector is crucial for employment generation and development of an economy, it is proposed to extend the deduction available under section 32AC of the Act for investment made in plant and machinery up to 31.03.2017. Further, in order to simplify the existing provisions of section 32AC of the Act and also to make medium size investments in plant and machinery eligible for deduction, it is also proposed that the deduction under section 32AC of the Act shall be allowed if the company on or after 1st April, 2014 invests more than Rs.25 crore in plant and machinery in a previous year. It is also proposed that the assessee who is eligible to claim deduction under the existing combined threshold limit of Rs.100 crore for investment made in previous years 2013-14 and 2014-15 shall continue to be eligible to claim deduction under the existing provisions contained in sub-section (1) of section 32AC even if its investment in the year 2014-15 is below the proposed new threshold limit of investment of Rs. 25 crore during the previous year.

These amendments will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years.
[Clause 11]

Analysis (Intent of the Legislature)

1) In Section 32 it is mentioned as owned wholly or partly and used for the purposes of the business which means that the ownership in the property has already passed on to the assessee and the asset is put to use. In the second and third proviso and thereafter also the phrase 'acquired and put to use' is used very frequently.

2) In section 32 (iia) it has been mentioned as 'acquired and installed' (closely resembling to Section 32AC). In practise (as mentioned earlier), the point of determination for depreciation/additional depreciation has always been the date, the assets are installed/put to use and not the acquisition of the same. There is no iota of doubt about this practice since it is very well tested under various judiciary forums and has more or less become the law. Even the Tax Officers are also referring and/or comfortable in accepting this point of determination. Just to clarify, the word(s) 'owned', 'acquired' appearing as a mandatory requirement in various places was only to ensure that any assessee who wants to avail depreciation must have the ownership of the asset and the asset should not have been acquired otherwise i.e. hire, lease etc.

3) The Hon'ble Finance Minister in his Budget Speech 2014 re-iterated that manufacturing sector is of paramount importance and he was pleased to reduce the threshold investment from Rs 100 crores to Rs 25 crores. It may also be mentioned here that the sunset clause was also extended to 31st March, 2017. I would like to emphasise here that 'manufacturing' can start only after installation and the Hon'ble FM never hinted about the date of acquisition.

4) Next is the Finance (No 2) Bill, 2014. Finance Bill normally explains the reasons and/or intent behind the proposed change/introduction of any law. Here also the Bill explains that investment in plant and machinery more than Rs 25 crores on or after 1st April, 2014. So the intent of The Hon'ble Finance Minister was new investment on or after 1st April, 2014. An amount spent or expended on an asset is converted to Investment only when the same starts earning or giving returns. For Plant and Machinery also we mean the same as an investment only when the plant and machinery starts producing/manufacturing after its installation.

Conclusion

The Hon'ble Finance Minister expressed that such Investment should be considered for the purpose of incentive under Section 32AC where the investment has been done on (emphasis supplied) 1st April, 2014 or afterwards but within 31st March, 2017. A plant & machinery cannot be compared with a sofa set or a dining table that you go to the market, buy the same, get delivered and start using. A plant and machinery is generally a composition of a host of assets. I have already explained the difference between acquisition and investment where, investment is complete only when the installation is complete.

I would, therefore, conclude

i) that whatever plant & machinery or its components were lying in CWIP and/or were in the process of installation and got installed and capitalised in Books on 1st April 2014 or thereafter, should be considered as 'acquired and installed' and the installation date should be considered as the 'point of determination' for the purposes of this section. Such 'point of determination' is also aligned with the widely tested Section 32. Or,

ii) in an worse scenario any components of plant and machinery acquired after 31st March, 2013 and installed on and after 1st April, 2014 should be considered for the purpose of incentive under Section 32AC(1A) since sub-section (1A) clearly states 'acquired and installed during any previous year'. Since no starting date has been specifically mentioned, it may be illogical to think that any plant and machinery acquired 10/15 years ago and installed after 1st April, 2014 would be eligible. The intent of The Hon'ble FM was to state that where the thinking process has initiated on or from 1st April, 2013 then the same should be considered for incentive under Section 32AC (1A). Therefore taking a cue from sub-section (1) of Section 32AC we can say that any plant & machinery acquired after 31st March, 2013 and installed and formally capitalised in the Books on or after 1st April, 2014 would be eligible to be considered for the purposes of Section 32AC (1A) provided the total plant & machinery (as defined) is more than Rs 25 crores.

It was been already decided in many judicial pronouncements that if there is any incentive offered to the assessee, then the same should be looked at and applied liberally instead of taking a stringent view to debar the assessee from the incentives.

It is requested that the law-makers issue a suitable clarification to avoid any future litigation. What better opportunity than the Union Budget to set this conundrum at rest.

(The author is Head, Taxation, Timken India Ltd.)