PRACTICAL ISSUES IN ADDITIONAL DEPRECIATION (INCLUDING ISSUES OF FINANCE BILL 2015)

Finance Minister has proposed few clarification regarding additional depreciation in Budget -2015 .Mr NAVIN AGICHA has analysed the whole issue of additional depreciation and changes proposed in Finance Bill 2015 with suitable examples .Hope you will enjoy the article.If any doubts then you may mail directly to author or leave comment in Comment box given below.

ISSUES ARE AS FOLLOWS:-

ISSUE NO.1:- WEATHER YEAR OF ACQUISITION AND YEAR OF INSTALLATION SHOULD BE SAME OR DIFFERENT?

ISSUE NO.2:- IF ACQUISITION AND INSTALLATION DONE IN YEAR 1 AND PUT TO USE IN YEAR 2, THEN  ADDITIONAL DEPRECIATION  WILL BE ALLOWED IN YEAR 1 OR IN YEAR 2 OR WILL BE LAPSE?

ISSUE NO.3:- IF YEAR 1 IT IS USED LESS THEN 180 DAYS THEN 50% DEPRECIATION OF ADDITIONAL DEPRECIATION AND WILL REMAINING 50% OF ADDITIONAL DEPRECIATION LAPSE?

ISSUE NO.4:- CAN BACKWARD AREA ENTERPRISES IN STATE OF ANDRA PRADESH AND TELANGANA CLAIM 35% ADDITIONAL DEPRECIATION INSTEAD OF 20%?

SOLUTION OF ISSUE NO.1

ANALYSIS OF ISSUE NO.1

AS THE PROVISION USED WORDS

SECTION 32(1)(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) 

And purpose of additional depreciation is to boost to the manufacturing sector.

Provision does not say that both should be same year, provisions means that both conditions of Acquisition and Installation should satisfy it may be in same or it can be in different year. There may be some reasons because of which installation may not be possible in same year and if it will not be allowed only because that it is installed in different year it may become unfair for such enterprises.

Let us understand this by example

Question :- If Plant and Machinery is Acquired on 31^st March 2015 and It will take 2 months to install it, and machinery is installed on 31^st May 2015, so Additional depreciation should be allowed or not?

Answer :- It will be Allowed in FY 2015-16 as both conditions of Acquisition and installation satisfied on 2^nd year.

CONCLUSION OF ISSUE NO.1 IS THAT ACQUISITION AND INSTALLATION CAN BE DIFFERENT YEAR.

SOLUTION OF ISSUE NO.2

ANALYSIS OF ISSUE NO.2

THIS IS MOST DEBATABLE ISSUE BECAUSE IT MAY INVOLVE ACTIVE USE AS WELL AS PASSIVE USE.

If plant and machinery is purchased and installed in year 1 and it is put to use in year 2 because it was not ready to use in year 1 then will additional depreciation will be allowed in year 2.

If plant and machinery is purchased and installed in year 1 and it is put to use in year 2 even though it was ready to use in year 1 then will additional depreciation will be allowed in year 1. Because it is passively used in year 1.

Some Reference of case laws are as follows:-

Capital Bus Service (P) Ltd. v CIT, (1980) 123 ITR 404 (Del.), the Delhi High Court held that the allowance for depreciation does not depend on the actual working of the machinery, it is sufficient if the machinery in question is employed by the assessee for the purpose of the business, it is kept ready by him for actual use.

Similar view is taken in CIT v. Refrigeration & Allied Industries Ltd., (2000) 113 Taxman 103 (Delhi) and in CIT v. Geo Tech Construction Corpn., (2000) 244 ITR 452 (Ker.).

If plant and machinery is purchased and installed in year 1 and it is put to use in year 2, it cannot be disallowed because there will be unfair for such enterprises as explained in issue no.1, it will be allowed in year 1 or year 2 as explained above.

Let us understand this by example

Question 1:- If Plant and Machinery is Acquired and Installed on 1^st March 2015 and it is put to use on 1^st May 2015 because it is not ready to use till 30^th April 2015, because of some problems like electricity fitting or some other reasons, then additional depreciation will be allowed in FY 2014-15 or in FY 2015-16?

Answer 1:- It will be allowed in FY 2015-16 even though both conditions of Acquisition and installation satisfied in FY 2014-15 and even normal depreciation will be allowed from FY 2015-16.

Question 2:- If Plant and Machinery is Acquired and Installed in 1^st March 2015 and it is put to use on 1^st May 2015, then additional depreciation will be allowed in FY 2014-15 or in FY 2015-16?

Answer 2:- It will be allowed in FY 2014-15 as both conditions of Acquisition and installation satisfied in FY 2014-15 and even normal depreciation will be allowed from FY 2014-15 because it is passively used in FY 2014-15 as analyzed above with support of case laws.

CONCLUSION OF ISSUE NO.2 IS THAT IT WILL NOT LAPSE, IT WILL BE ALLOWED IN YEAR 1 OR YEAR 2 AS EXPLAINED ABOVE.

SOLUTION OF ISSUE NO.3

ANALYSIS OF ISSUE NO.3

AS FINANCE BILL 2015 USED WORDS ARE:-

“Provided also that where an asset referred to in 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 for a period of less than one hundred and eighty days in that previous year, and the deduction under this sub-section in respect of such asset is restricted to fifty per cent. of the amount calculated at the percentage prescribed for an asset under clause (iia) for that previous year, then, the deduction for the balance fifty per cent. of the amount calculated at the percentage prescribed for such asset under clause (iia) shall be allowed under this sub-section in the immediately succeeding previous year in respect of such asset:”;

Now there is no need of case laws on this as provision is itself say that balance 50% will be allowed in next year.

Let us understand this by example

Question :- If Plant and Machinery is Acquired and Installed on 1^st Jan 2016 assessee claimed additional depreciation @10%, being 50% of the additional depreciation of 20%, will balance of additional depreciation will be allowed in next year?

Answer :-  10% depreciation (being 50% of the additional depreciation of 20%) will be allowed in FY 2015-16 and balance 10% (being remaining 50% of the additional depreciation of 20%) will be allowed in FY 2016-17 as per Finance Bill 2015.

CONCLUSION OF ISSUE NO.3 IS THAT BALANCE 50% OF ADDITIONAL DEPRECIATION WILL BE ALLOWED IN IMMEDIATELY SUCCEEDING PREVIOUS YEAR.

SOLUTION OF ISSUE NO.4

ANALYSIS OF ISSUE NO.4

AS FINANCE BILL 2015 USED WORDS ARE:-

“Provided that where an assessee, sets up an undertaking or enterprise for manufacture or production of any article or thing, on or after the 1st day of April, 2015 in any backward area notified by the Central Government in this behalf, in the State of Andhra Pradesh or in the State of Telangana, and acquires and installs any new machinery or plant (other than ships and aircraft) for the purposes of the said undertaking or enterprise during the period beginning on the 1st day of April, 2015 and ending before the 1st day of April, 2020 in the said backward area, then, the provisions of clause (iia) shall have effect, as if for the words “twenty per cent.”, the words “thirty-five per cent.” had been substituted:”.

AND WORDS USED IN SPEECH OF FINANCE BILL 2015 ARE:-

With a view to give effect to the provisions of section 94 of the Andhra Pradesh Reorganisation Act, 2014, it is proposed to provide an additional investment allowance (@15%) and additional depreciation (@15%) to new manufacturing units set-up during the period 01.04.2015 to 31.03.2020 in notified areas of Andhra Pradesh and Telangana.

As per provision and speech of Finance Bill 2015, The enterprises located in backward areas in state of Andhra Pradesh and Telangana can claim 35% additional depreciation instead of 20%.

Let us understand this by example

Question :- If enterprises located in state of Andhra Pradesh, Acquired and Installed Plant and Machinery  on 1^st Jan 2016 then how much additional depreciation will be allowed in FY 2015-16 and in FY 2016-17?

Answer :-  17.5% depreciation (being 50% of the additional depreciation of 35%) will be allowed in FY 2015-16 and balance 17.5% (being remaining 50% of the additional depreciation of 35%) will be allowed in FY 2016-17 as per Finance Bill 2015.

CONCLUSION OF ISSUE NO.4 IS THAT ENTERPRISES LOCATED IN BACKWARD AREAS IN STATE OF ANDHRA PRADESH AND TELANGANA CAN CLAIM 35% ADDITIONAL DEPRECIATION INSTEAD OF 20%.