Controversy on additional depreciation - V. K. Subramani - Article published in Business Advisor, dated February 10, 2015 http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/

1. Volume X Part 3 February 10, 2015 23 Business Advisor
Controversy on additional depreciation
V. K. Subramani
Section 32(1)(iia) provides for additional depreciation to
assessees 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. This
is applicable in respect of any new machinery or plant
acquired and installed after 31.03.2005. This additional
depreciation or accelerated depreciation is not applicable
for ships and aircraft.
The quantum of additional depreciation is equal to 20% of
the actual cost of machinery or plant.
Additional depreciation is not applicable in respect of the following:
(1) Any machinery or plant which was used either within India or outside
India by any other person, i. e., second hand machinery.
(2) Any machinery or plant installed in any office premises or any residential
accommodation including accommodation in the nature of guesthouse.
(3) Any office appliances or road transport vehicles.
(4) Any machinery or plant the whole of the actual cost is deductible as
deduction either as depreciation or otherwise in computing the income
chargeable under the head „Profits and gains of business or profession‟ of
any one previous year.
Controversy
An assessee may acquire a machinery or plant which is installed and put to
use say in January month of the previous year. The quantum of
depreciation and additional depreciation would be limited to 50% of the
eligible amount. Whether the balance of additional depreciation could be
claimed in the succeeding year is one of the controversies in recent times.
In Century Enka Ltd v. Dy. CIT (2015) 37 ITR (Trib) 644 (Kolkata), the
assessee was engaged in the manufacture of polyester fibres and yarns. It
acquired plant and machinery for its captive power plant and was allowed
50% of the additional depreciation as the machinery was put to use for less
than 180 days in the previous year. In the following assessment year, the
assessee claimed the balance 50% of additional depreciation, i.e. 10% of the
actual cost, which the Assessing Officer rejected on the ground that the

2. Volume X Part 3 February 10, 2015 24 Business Advisor
assessee was not eligible to claim additional depreciation on the assets
purchased for the power plant. The tribunal held that once the conditions
for claim of depreciation and additional depreciation have been examined by
the Assessing Officer in the very first year, he cannot go back and hold that
additional depreciation was not allowable on the business of generation and
distribution of power. It also held that the assessee is eligible to claim
unutilised 50% of the additional depreciation in the subsequent year.
Precedent
In Brakes India Ltd v. Dy. CIT (2013) 96 DTR (Chennai)(Trib), the assessee for
the assessment year 2006-07 claimed additional depreciation in respect of
new machinery acquired during the year. As the machinery was used for
less than 180 days, the claim was restricted to 50 per cent of the normal
rate by way of additional depreciation. The assessee for the subsequent
assessment year claimed another 10 per cent of the actual cost towards
additional depreciation as in the preceding assessment year the claim was
limited to 10 per cent and the balance of 10 per cent claim became eligible
in the subsequent year. The CIT (Appeals) did not allow the claim of the
assessee and the matter hence went to the tribunal.
The tribunal held that the first requirement for eligibility of additional
depreciation claim is that the asset should be a new machinery or plant. A
machinery or plant is new only till it is first put to use. Once it is used, it is
no longer a new machinery or plant. The new machinery, on which
additional depreciation for the second year was claimed, was already used
in the preceding assessment year though for a period of less than 180 days.
A look at the second proviso to section 32(ii) shows that the claim of
depreciation must be restricted to 50% of the amount otherwise allowable,
when the assets are put to use for a period of less than 180 days. The
tribunal observed that this restriction will apply regardless of whether the
claim is for normal depreciation or additional depreciation.
The tribunal held that the intention of the legislature was to give additional
depreciation only for the year in which the eligible asset was first put to use
and not for any succeeding year. There is nothing in the statute which
allows carry forward of such additional depreciation or additional claim of
such depreciation to the succeeding assessment year.
Another precedent
In the case of Dy. CIT v. Cosmo Films Ltd (2012) 139 ITD 628 (Del), the claim
of additional depreciation of 10% in the subsequent assessment year was
upheld. The tribunal observed, “There is no restriction that balance of one-

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time incentive in the form of additional sum of depreciation shall not be
available in the subsequent year. Section 32(2) provides for a carry forward
set off of unabsorbed depreciation. This additional benefit in the form of
additional allowance U/s 32(1)(iia) is one-time benefit to encourage the
industrialisation and in view of the decision of Hon‟ble Supreme Court in
the case of Bajaj Tempo Ltd (Supra), the provisions related to it have to be
constructed reasonably, liberally and purposive to make the provision
meaningful while granting the additional allowance”.
Recent developments
Two recent issues can be thought of and the first one is in respect of
windmills meant for power generation. The prescribed rate of depreciation is
80% (installed on or after 01.04.2014) and it is also eligible for additional
depreciation since the embargo will apply only when the rate of depreciation
is 100%.
Now, when additional depreciation of 20% is also granted to windmill the
entire asset cost would become deductible.
Actually the eligibility for additional depreciation on power generating units
was bestowed when the rate of depreciation was reduced from 80% to 15%
(w.e.f 01.01.2012 to 31.03.2014) by the Finance Act, 2012 w.e.f.1.04.2013.
Recently, the rate has been restored to 80% but the additional depreciation
continues to remain applicable for windmills.
Another issue with regard to additional depreciation is the sale of asset
acquired earlier on which additional depreciation was claimed @10% and
the possibility of claiming the balance 10% in the subsequent year when the
block of assets exist. This could be in favour of the taxpayer as the asset,
once it enters the block of assets, loses its identity and the claim partly
allowed earlier on satisfaction of prescribed conditions will favour the
taxpayers to claim the balance in the subsequent year.
Similarly, where the block ceases to exist, the eligibility for additional
depreciation which was partly allowed in earlier year and validity of claiming
the balance in the subsequent year needs to be addressed.
This has to be negatived, as the block ceases to exist, the aspect of allowing
additional depreciation would not arise. Both depreciation and additional
depreciation are allowed on the block asset concept. When the block does
not exist, the issue of claiming additional depreciation would not be
possible.
(V. K. Subramani is Chartered Accountant, Erode)