‘Additional Depreciation’ where assets used for less than 180 days

Under the second proviso to section 32(1), the depreciation allowed to an assessee is reduced to 50% of the depreciation otherwise allowable, in cases where the asset is put to use for less than 180 days in a year.

Depreciation remaining to be absorbed is carried forward to the following year and is allowed to be set off against the income of such year in accordance with the provisions of section 32(2) of the Income-tax Act.

An interesting issue has arisen, in the context of the above provisions, specifically for additional depreciation, in cases where the new plant and machinery is used for less than 180 days. The issue is about whether, in the circumstances narrated above, an assessee has the right to set off the balance 50% of additional depreciation in the year subsequent to the year of purchase and installation of new plant and machinery. While the Delhi, Mumbai and Cochin benches of tribunal have held that the balance additional depreciation can be set-off in the subsequent year, the Chennai bench of tribunal has taken a contrary view, leading us to take notice of this controversy.

Cosmo Films Ltd .’s case
The issue first came up for consideration in the case of DCIT vs. Cosmo Films Ltd., 13 ITR(T) 340 (Delhi), involving the disallowance of arrears of additional depreciation of Rs. 3,34,78,825 and negating an alternate claim for deduction of additional depreciation for assessment year 2004-05.

The assessee company had purchased new plant and machinery during the financial year 2002-03 which were eligible for additional depreciation. They were put to use in that year for less than 182 days. The company had claimed additional depreciation at 50% of the total additional depreciation for assessment year 20003-04 and the balance 50% for the assessment year 2004-05. The claim of the company was disallowed by the AO for assessment year 2004-05 and his action was confirmed by the Commissioner(Appeals).

In the appeal to the Tribunal, the assessee reiterated that, as per the provisions of section 32(1)(iia), the assessee was entitled for a further sum of depreciation equal to 15% of the actual cost of new plant and machinery acquired during the year and installed; that the assessee had been granted a statutory right by provisions of section 32(1) (iia) to claim a further sum equal to 15% of the actual cost in the year of acquisition; that it had claimed additional depreciation during the year which pertained to the additions to the fixed assets during the preceding previous year; the said additions were made during the second half of the financial year 2002-03 relevant to Assessment Year 2003-04 and the additional depreciation was claimed only for 50% of the eligible additional depreciation otherwise available on all the additions made after 30th September, 2002 on account of the second proviso to section 32(1) (ii). Hence, the same was being claimed during the assessment year 2004-05 as it was the balance of the additional depreciation.

The company further explained that the expression “shall be allowed” made it clear that the assessee was entitled to claim an overall deduction equivalent to 15 % of the actual cost of the said additions to the plant and machinery. It contended that the second proviso to section 32(1)(ii) restricted the allowance to 50% in cases where the assets were used for less than 180 days based on the period of usage and such a restriction could not have abrogated the statutory right provided to the assessee by section 32 (1)(iia). It claimed that nowhere in the Act it was prohibited that remaining balance of additional depreciation on the assets added after 30th September, should not be allowed and the second proviso to section 32(1)(ii) could not overlook the one time allowance, which was a statutory right earned in the year of acquisition; had there been intention to restrict the one time allowance to 50%, then it could have been provided in the proviso to clause (iia), as provided in respect of the second hand machines and those used in office, etc. or in respect of office appliances or road transport vehicles.

It was pointed out that the scope of the additional depreciation u/s. 32(1)(iia) introduced by the Finance (No. 2) Act, 2002 w.e.f. 01-04-2003 was explained by Circular No. 8 of 2002 dated 27-08-2002 reported in 258 ITR (St.) 13 as being ‘a deduction of a further sum’ as depreciation. Therefore what was proposed to be allowed was depreciation simplicitor though it was called as additional depreciation. Therefore, any balance of the amount of additional sum of depreciation was to be considered to be available for being carried forward and set off in terms of s/s. (2) of section 32 of the Act which provided that where, in the assessment of the assessee, full effect could not be given to any allowance u/s/s. (1) of section 32 in any previous year, then the allowance should be added to the amount of allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there was no such allowance for that previous year, then it would be deemed to be the allowance for that previous year, and so on for the succeeding previous year.

The company, relying on the decision of the Supreme Court in the case of Bajaj Tempo Ltd. vs. CIT 196 ITR 188, claimed that a provision for promoting economic growth had to be interpreted liberally and that additional depreciation, being an incentive provision, had to be construed so as to advance the objective of the provision and not to frustrate it. The additional depreciation as provided in Clause (iia) of s/s. (1) of section 32 was a one time benefit whereas the normal depreciation was a year to year feature.;If the benefit was restricted only to 50% then it would be against the basic intention to provide incentive for encouraging industrialisation, which would be unfair, unequitable and unjust. There was no restriction provided in law which restricted the carry forward of the additional sum of depreciation which was a one time affair available to assessee on the new machinery and plant. It was also pleaded that what was expressly granted as an incentive could not be denied through a pejorative interpretation of second proviso to section 32(1)(ii), when such provision by itself did not bar consideration of the balance u/s. 32(2) of the Income-tax Act. Alternatively, it was pleaded that the provisions of section 32(1)(iia) did not stipulate any condition of put to use. Therefore, full deduction was allowable in the year of purchase itself and had to be allowed in full in the assessment year 2003-04, itself.

In reply, the Revenue submitted that the full additional depreciation could be allowed as per section 32(1) (iia) only when the assets were put to use for more than 180 days in the year of acquisition; that the additional depreciation on the assets which were put to use by the assessee for less than 180 days was restricted to 50% of the amount by the second proviso to section 32(1)(ii); that there could not be any carried forward additional depreciation to be allowed in subsequent year; and that compliance of the condition to put to use, in the year of claim, was necessary for allowing any type of depreciation.
On hearing both the sides the tribunal observed and held as under;

•    Additional depreciation was introduced for promoting investment in industrial sector.

•    The intention was clarified by the Finance Minister, the Memorandum explaining the provisions and the Circular explaining the amendments.

•    The provision contained in section 32(1)(iia) wherever desired had placed restriction on the allowance of additional depreciation.

•    The said provision did not contain any restriction on allowance of the unabsorbed additional depreciation in the subsequent year.

•    The intention was not to deny the benefit to the assesses who had acquired or installed new machinery or plant. The second proviso to section 32(1)(ii) restricted the allowance only to 50% where the assets had been acquired and put to use for a period less than 180 days in the year of acquisition which restriction was only on the basis of period of use. There was no restriction that balance of one time incentive in the form of additional sum of depreciation should not be available in the subsequent year.

•    Section 32(2) provided for a carry forward and set off of unabsorbed depreciation. The additional benefit in the form of additional allowance u/s. 32 (1)(iia) was a one time benefit to encourage industrialisation and in view of the decision in the case of Bajaj Tempo Ltd. (supra), the provisions related to it had to be constructed reasonably, liberally and purposively to make the provision meaningful while granting the additional allowance.

•    The assessee deserved to get the benefit in full when there was no restriction in the statute to deny the benefit of balance of 50% when the new plant and machinery were acquired and used for less than 180 days.

•    One time benefit extended to assessee had been earned in the year of acquisition of new plant and machinery. It has been calculated at 15% but restricted to 50% only on account of period of usage of these plant and machinery in the year of acquisition.

•    The expression “shall be allowed” confirmed that the assessee had earned the benefit as soon as he had purchased the new plant and machinery in full but was restricted to 50% in that particular year on account of period of usage. Such restriction could not divest the statutory right.

•    The extra depreciation allowable u/s. 32(1)(iia) was an extra incentive which had been earned and calculated in the year of acquisition but restricted for that year to 50% on account of usage. The incentive so earned must be made available in the subsequent year.

BRAKES INDIA LTD.’S CASE

The issue had again come up for consideration before the Chennai Tribunal in the case of Brakes India Ltd. DCIT(LTU), 144 ITD 0403.

In this case, the assessee company contested the disallowance of additional depreciation of Rs. 4,91,39,749 by the AO and confirmed by the Commissioner (Appeals), which was the balance of its claim carried forward from the preceding assessment year. The company had claimed additional depreciation for machinery newly added by it during the preceding assessment year 2006-

7.    Since the machinery were used for a period less than 180 days in the preceding assessment year, the assessee had to restrict its claim to 50% of the normal rate of additional depreciation allowed under the Act. However, for the subsequent assessment year 2007-08, the company claimed carry forward of the balance 50% of the additional depreciation. The AO was of the opinion that additional depreciation could be allowed only for new assets added during the year and since the claim of the assessee related to additions to assets made in the preceding assessment year, it could not be allowed. In other words, as per Assessing Officer, residual additional depreciation from earlier year could not be allowed for carry forward to a subsequent year. The Commissioner (Appeals) confirmed the action of the AO following the decision of the tribunal for the preceding assessment year in the company’s own case, wherein the Tribunal had confirmed the disallowance of such a claim.

In appeal before the Tribunal, the company supported its claim on several grounds on the lines of the contentions raised by it before the tribunal for assessment year 2006-07 (copy of unreported decision not available) besides contending that section 32(1 )(iia) was amended with effect from 01-04-2006. and under the amended provision, the only condition for the claim was installation of the asset on which additional depreciation was claimed and that such additional depreciation was statutorily allowable, once assets were installed.

The Tribunal noted and held as under;

•    The first requirement for being eligible for a claim of additional depreciation was that the claim should be for a new machinery or plant. A machinery was new only when it was first put to use. Once it was used, it was no longer a new machinery.

•    Admittedly, the machinery, on which carry forward additional depreciation had been claimed, was already used in the preceding assessment year, though for a period of less than 180 days.

•    Therefore, for the impugned assessment year, it was no more a new machinery or plant. Once it was not a new machinery or plant, allowance u/s. 32(1 ) (iia) could not be allowed to it.

•    Additional depreciation itself was only for a new machinery or plant. Carry forward of any deficit of additional depreciation which, as per the assessee, arose on account of use for a period of less than 180 days in the preceding year, if allowed, would not be an allowance for a new machinery or plant.

•    A look at the second proviso to section 32(1)(iia) clearly showed that it restricted a claim of depreciation to 50% of the amount otherwise allowable, when assets were put to use for a period of less than 180 days, irrespective of whether such claim was for normal depreciation or additional depreciation.

•    The intention of the Legislature was to give such additional depreciation for the year in which assets were put to use and not for any succeeding year.

•    There was nothing in the statute which allowed carry forward of such depreciation. There could not be any presumption that unless it was specifically denied, carry forward had to be allowed. What could be carried forward and set off had been specifically mentioned in the Act.

•    The Tribunal in the assessee’s own case in I.T.A. No. 1069/Mds/2010 dated 6th January, 2012, at para 15, held as under:-

“15. We have considered the rival submissions. A perusal of the provisions of section 32 as applicable for the relevant assessment year clearly shows that additional depreciation is allowable on the plant and machinery only for the year in which the capacity expansion has taken place, which has resulted in the substantial increase in the installed capacity. In the assessee’s case, this took place in the assessment year 2005-06 and the assessee has also claimed the additional depreciation during that year and the same has also been allowed. Each assessment year is separate and independent assessment year. The provisions of section 32 of the Act do not provide for carry forward of the residual additional depreciation, if any. In the circumstances, the finding of the learned CIT(A) on this issue is on a right footing and does not call for any interference. Consequently, ground No.1 of the assessee’s appeal stands dismissed.”

The tribunal upheld the orders of the AO and the Commissioner (Appeals) and held that the Commissioner (Appeals) was justified in following the view taken by co-ordinate Bench of the Tribunal for the preceding assessment year.

OBSERVATIONS

Section 32(1)(iia) was inserted by Finance (No. 2) Act, 2002 with effect from 01-04-2003. The Finance Minister, in his budget speech, stated that the provision for additional depreciation was introduced to provide incentives for fresh investment in industrial sector and that the clause was intended to give impetus to new investment in setting up a new industrial unit or for cases where the installed capacity of existing units is expanded by at least 25%. The section provided, initially, for additional depreciation at the rate of fifteen percent in respect of the new plant and machinery acquired and installed after 31st March, 2002. These provisions were substituted by the Finance (No. 2) Act of 2004 w.e.f. 01-04-2005 and in its present addition provides for additional depreciation at the rate of twenty percent in respect of the new plant and machinery acquired and installed after 31st March, 2005 by an assessee engaged in the business of manufacture or production of any article or thing. The benefit of additional depreciation is not allowed in respect of the second hand assets, assets installed in office or residence or guest-house, ship, aircraft, vehicles, etc.

The view that an assessee is entitled to claim the deduction for the balance additional depreciation in the succeeding year has been upheld by the Cochin Tribunal in the case of Apollo Tyres Ltd., 45 taxmann.com 337, the Mumbai Tribunal in the case of MITC Rolling Mills (P) Ltd., ITA No. 2789/M/2012 dated 13.05.2013 and again by the Delhi Tribunal in the case of SIL Investments, 54 SOT 54. The Chennai bench of the Tribunal however held that the claim for additional depreciation was not allowable every year but only in the year of the installation of the new asset, CRI Pumps, 58 SOT 154. It is therefore clear that but for the lone decision of the Chennai bench in Brakes India Ltd’s case, the overwhelming view is in favour of the allowance of the balance depreciation in the subsequent years.

The original provision for grant of additional depreciation, operating during the period 01-04-2003 to 31-03-2005, contained a very specific provision in the form of first Proviso, to allow a deduction in a previous year in which the new industrial undertaking began to manufacture or produce any article or thing. A specific reference was therefore made to the previous year in which the deduction was allowed. Significantly, under the new provision, no such restriction based on the year is retained, and this again confirms that the new provision effective from A.Y 2006-07, has no limitation concerning the year or years of claim.

The controversy boils down to insignificance when the Revenue realises that the assessee in no case, over a period of life of the asset, can claim a deduction on account of the depreciation as well as the additional depreciation higher than the actual cost of the asset. It perhaps needs to appreciate that there is no loss of revenue at all over a period of time, confirming the fact that the attempts of the Revenue are misdirected when it is contesting the claim of the assessee for the allowance of the balance additional depreciation.

It is true that Clause (iia) of section 32(1) does not contain any restriction or prohibition for claiming the balance additional depreciation in the subsequent year. At the same time, it is also true that the said clause does not expressly provide for such a claim. There neither is an enabling provision nor a disabling provision. In the circumstances a view favourable to the assessee is preferable, more so when the proviso to the said Clause lists several exclusions, and none of them limit the right of an assessee to claim additional deprecation in full nor deny the right of carry forward of the balance amount.

The provision admittedly has been directed towards encouraging industrialisation by allowing additional benefit for acquisition and installation of new plant and machinery. The incentive is aimed to boost new investments in preferred direction. A construction which frustrates the basic purpose of the provision should be avoided in preference of a pragmatic view.

The Finance Minister in his budget speech and the Finance Bill in the Memorandum and the CBDT in its Circular have amplified that the grant of additional depreciation is for incentivising the promotion of capital goods industry. In the circumstances, it is in the fitness of the scheme that the Revenue Department rises to supplement the intentions of the legislature, instead of frustrating the same. It is a settled position in law that an incentive provision should be liberally construed in favour of grant of the deduction. (see Bajaj Tempo Ltd., 196 ITR 188 (SC)). Even otherwise, an interpretation favourable to the assessee should be adopted in cases where two views are possible, Vegetable Products Ltd. 88 ITR 192 (SC), and for the case under consideration, surely two views are possible, as is confirmed by the conflicting decisions of the tribunal on the subject.

In our opinion, the issue under consideration has moved in a narrow compass and in the process, the larger controversy has remained to be addressed, which is, whether there ever was a need to restrict the claim of additional deprecation to 50%, of the eligible amount under the second proviso, in cases where the new asset in question was used for less than 180 days. Had this aspect been addressed by the concerned parties, the understanding of the issue on hand would have been more clear.

Our understanding of the larger issue is as under:

•    The claim for regular depreciation is made possible vide clauses (i) and (ii) of s/s. (1) of section 32 of the Act.
•    The quantum of regular depreciation, so allowed, has been circumscribed to 50% of the deprecation, otherwise allowable, by virtue of the second proviso to the said provision contained in clauses (i) and (ii) of s/s. (1) of section 32 of the Act.

•    The claim for additional depreciation is allowed under a separate Clause namely, Clause (iia) of section 32(1) of the Act, which Clause is otherwise independent of clauses (i) and (ii) above, though it does refer to clause (iia), and therefore, the claim for additional depreciation is independent of the said restrictive second proviso that has application only to the regular depreciation claim made under the said Clauses (i) and (ii).

•    The limitation contained in the said second proviso to Clauses (i) and (ii) should have no application to clause (iia) while claiming additional depreciation.

•    Clause(iia) operates in an altogether different field than that of Clauses (i) and (ii).

•    The claim for additional deprecation therefore shall be allowed in full in the first year itself, irrespective of the number of days of use and should be set off against the income of the year and importantly, to the extent not so set-off, should be carried forward to the subsequent year for being set off against the income for the succeeding year as per the provisions of s/s. (2) of section 32 of the Act.

In our respectful opinion, the additional depreciation is investment based, while the regular depreciation is period based and both are unrelated to each other. For a valid claim of additional depreciation, it is sufficient to establish that new assets are acquired and installed, and once that is proved, the claim has not to be restricted on account of use of such asset for a period of less than 180 days. The additional depreciation, in full, should be allowed, where possible, in the first year itself, and the balance, where remaining to be absorbed, should be carried forward to the succeeding year and should be allowed to be set off against the income of that year.