Expansion of tax incentive scheme in budget 2014

 Section 32AC: Investment Allowance to Manufacturing Companies

1. Existing provisions:

a) Under Section 32AC of the Income-tax Act, 1961 ('Act'), a manufacturing company is entitled to an investment allowance at the rate of 15 percent of actual cost of new asset acquired and installed during the Financial Years ('FYs') 2013-14 and 2014-15, if the actual cost of such new assets exceeds INR 100 Crore;

b) The quantum and manner of deduction has been provided as under:

  (i) For the Assessment Year ('AY') 2014-15, a deduction of 15 percent of the aggregate amount of actual cost of new assets acquired and installed during the FY 2013-14 shall be allowed, if the cost of such assets exceeds INR 100 crore;

 (ii) For the AY 2015-16, a deduction of 15 percent of aggregate amount of actual cost of new assets acquired and installed during the period beginning on April 1, 2013 and ending on March 31, 2015 shall be allowed, as reduced by the deduction allowed, if any, for the AY 2014-15;

  c) The phrase 'new asset' has been defined to mean any new plant or machinery with certain exceptions;

  d) Further, suitable safeguards have been provided so as to restrict the transfer of the new asset for a period of 5 years (sub-section 2 of Section 32AC of the Act). However, this restriction does not apply in a case of transfer by reason of an amalgamation or demerger.

2. Proposed amendments:

  a) Sub-section (1A) is proposed to be introduced which expands the scope of this section to provide for an investment allowance of 15 percent as a deduction to a manufacturing company which acquires and installs new assets and the actual cost of such new assets acquired exceeds INR 25 Crores in that previous year.

  b) For Financial Year 2014-15, this proposed deduction under sub-section (1A) will not be allowed to a company which is eligible to claim a deduction under sub-section (1).

  c) No deduction under sub-section (1A) will be allowed after March 31, 2017.

  d) The restrictions on transfer under sub-section (2) have been extended to assets acquired as per sub-section (1A).

  e) These amendments have been made to simplify the provisions of Section 32AC and to make medium size investments in plant and machinery eligible for deduction.

This amendment will take effect from 1st April, 2015.

Section 35AD: Investment-linked incentive for specified business

1. Existing provisions:

  a) Section 35AD of the Act provides an investment-linked tax incentive by providing a deduction in respect of whole of the capital expenditure incurred (except expenditure on land, goodwill and financial instrument) wholly and exclusively for the purposes of any specified business carried on by an assessee, during the previous year in which such expenditure is incurred by the assessee.

  b) Specified business has been defined in clause (c) of sub-section (8). Further sub-section (5) also mentions the period within which specified business should commence.

  c) Sub-section (3) of Section 35AD of the Act states that where an assessee has claimed and been allowed a deduction under Section 35AD of the Act, no deduction shall be allowed under the provisions of Part C of Chapter VI-A for the same or any other assessment year.

  d) The section does not lay out a requirement that the capital assets on which deduction has been claimed should be used in the specified business for a particular time period.

2. Proposed amendments:

  a) The coverage of specified business has been extended to include the following two businesses:

  (i) Laying and operating a slurry pipeline for the transportation of iron ore;

 (ii) Setting up and operating a semiconductor wafer fabrication manufacturing unit, if such unit is notified by the CBDT in accordance with the prescribed guidelines.

These businesses need to be commenced post April 1, 2014 to avail of the deduction under Section 35AD of the Act. This amendment has been made to promote investment in these sectors.

  b) Further, sub-section (3) has been amended to state that where an assessee has claimed and been allowed a deduction under Section 35AD of the Act, no deduction would be allowed under Section 10AA of the Act and under the provisions of Part C of Chapter VI-A for the same or any other assessment year.

  c) With a view to ensure that the capital asset on which deduction is claimed is used for purpose of specified business, sub-section (7A) has been introduced to state that the capital asset on which deduction has been claimed under sub-section (1), shall be used only for the specified business for a period of eight years beginning with the previous year in which such asset was acquired.

 d) Sub-section (7B) has been introduced to state that where the capital asset is used for a purpose other than for the specified business within the period mentioned in sub-section (7A), otherwise than by way of a mode referred to in sub-section (vii) to Section 28 of the Act, then the total deduction claimed and allowed in one or more previous years as reduced by the amount of depreciation which would have been allowed under Section 32 of the Act had no deduction been claimed under Section 35AD of the Act, shall be considered as income of the assessee under the head 'Profits and gains from business and profession' in the previous year in which the asset is so used.

 e) Sub-section (7C) has been introduced to provide an exception to sub-section (7B) for a sick industrial company as per the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985.

These amendments will take effect from 1st April, 2015.

3. Issues:

 (i) Whether the amount, if any, taxed as business profits under sub-section (7B) would be allowed as deduction in the form of depreciation under Section 32 of the Act?

(ii) Whether the requirement that the asset should be used only for specified business for eight years would mean that the asset should be actively used in the specified business? Would passive use of the capital asset be allowed? In case the asset is given on lease by the assessee, does it result in use of asset for purpose other than specified business?

4. Resolution of the issues:

Issue no (i)

With respect to this issue, there exists no judicial pronouncement since this provision is a new provision and a similar provision does not exist under any other section of the Act.

Sub-section (4) of Section 35AD states that no deduction in respect of an expenditure referred to in sub-section (1) shall be allowed to the assessee under any other section in any previous year. Sub-section (1) allows the deduction of any capital expenditure incurred wholly and exclusively for the purposes of any specified business.

Accordingly, an interpretation may be drawn that only in a case where the expenditure is allowed as a deduction under sub-section (1), should the restriction mentioned in sub-section (4) apply. In case the provisions of the proposed sub-section (7B) apply, the deduction claimed under sub-section (1) would be reversed. Accordingly, a possible position may be taken that no deduction under Section 35AD of the Act has in effect been claimed and hence the depreciation should be allowed in the future years when the asset is used for purposes other than specified business, subject to compliance with Section 32 of the Act.

Issue no (ii)

The term 'used' has not been defined in the Act. However, the word used does find place in Section 32 of the Act, which allows depreciation for assets used for the purpose of business or profession. In the context of depreciation, it would be relevant to refer to judicial precedents which have explained the term 'used'. In this regard, it would be relevant to refer to the principles laid down in the following rulings:

  •  CIT v. Vishwanath Bhaskar Sathe, (1937) 5 ITR 621 (Bom.) - The word 'used' should be understood in a wider sense so as to give a wider meaning and embrace passive as well as active use.

  •  Whittle Anderson Ltd. v. CIT, (1971) 79 ITR 613 (Bom.) - Held that when the machinery is kept ready for use it will be said to be used for the purpose of business.

  •  Capital Bus Service (P) Ltd. v CIT, (1980) 123 ITR 404 (Del.) - Held that the allowance for depreciation does not depend on the actual working of the machinery; it is sufficient that the machinery in question is employed by the assessee for the purpose of the business and for no other business and it is kept ready by him for actual use.

  •  CIT v. Refrigeration & Allied Industries Ltd., (2000) 113 Taxman 103 (Delhi) – Held that used includes passive use of asset

Basis the aforesaid judgments, it may be considered that in case the asset is not actively used for the specified business but is available for use in specified business (ie passive use) and not being used for any other business, the condition mentioned in the proposed sub-section (7A) is complied with. However, in case the asset is given on lease by the assessee, the asset may be said to be used for purposes other than specified business and hence the consequences under the proposed sub-section (7B) may be triggered.
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