[Opinion] Claim of Additional Depreciation | One-Time or Recurring Benefit?

S Vasudevan, Ankur Kishanpuria & Tias Bhattacharyya – [2023] 149 taxmann.com 239 (Article)

Background

As per the section 32(1)(iia) of the Income Tax Act, 1961 (‘IT Act‘), an assessee engaged in the business of manufacture or production of any article or thing is allowed an additional depreciation at the rate of twenty percent on the actual cost of plant or machinery acquired and installed after the 31.03.2005. However, the bare provision does not indicate whether additional depreciation is allowable only in the first year when the asset was initially put to use or is it allowed in subsequent years as well.

Recently, the Mumbai tribunal in ACC Ltd. relying on its earlier decision in Ambuja Cement Ltd. and a decision of Kolkata tribunal in the Gloster Jute Mills Ltd. held that the provision for additional depreciation under section 32(1)(iia) would be available even in subsequent years and not just in the year when it was first put to use. This is in contrast with the decision of Mumbai tribunal in Everest Industries Ltd. and Chennai tribunal in CRI Pumps (P.) Ltd., wherein the sub-section was interpreted in a manner to restrict the availability of additional depreciation to only the first year in which the new plant or machinery is initially put to use.

These contradictory decisions of tribunals have given rise to differing opinions on whether additional depreciation is a one-time or recurring benefit. This article attempts to analyze the provision of section 32(1)(iia) to gain some insight into the controversy.

Analysis

Currently, the clause can be interpreted to provide two different views, each of which have been discussed along with references to relevant case laws in the following paragraphs.

View 1: Additional depreciation would be available only in the year when the asset was put to use.

(i) The usage of the word “new” in the clause (iia) of section 32(1) means the asset should be “new” in the year of claim.

The clause (iia) provides that additional depreciation would be available to “any new machinery or plant”, this can be interpreted to mean that the clause would only be attracted in the year of first put to use when the machinery or plant is still new. Once the plant or machinery has been put to use, it cannot be said that the machinery is new. Hence, additional depreciation would only be allowed on the year of put to use and not in subsequent years as the plant or machinery would no longer be “new”.

Reference can be made to the decision of Chennai Tribunal in CRI Pumps (P.) Ltd. wherein the claim of the assessee for additional depreciation was disallowed based on the above reasoning.

(ii) Actual cost vs. Written down value.

Additional depreciation is calculated on the actual cost of the plant and machinery, while in the case of block of assets, the depreciation is calculated on the written down value. Once an asset becomes a part of block, it loses its individual identity. If additional depreciation is allowed every year even after the asset becomes a part of the block of assets, the same would result in absurdity. While normal depreciation under Section 32(1)(ii) would be calculated on the written down value of the block, the additional depreciation under section 32(1)(iia) will have to be calculated on the actual cost of the asset which would be higher than the written down value. Further, the concept of block of assets was introduced to overcome the difficulty of maintaining and arriving at written down value of each and every individual asset. Allowance of additional depreciation in subsequent years as well would militate against the basic purpose of the concept of block of assets.
Reference can be made to the case of Everest Industries Ltd. wherein the Mumbai tribunal disallowed the claim of additional depreciation in a subsequent year by adopting the above reasoning.

(iii) The insertion of 3rd proviso vide the Finance Act, 2015.

The third proviso to section 32 was inserted vide the Finance Act, 2015, with effect from 01.04.2016. It provides that if an asset eligible for additional depreciation under section 32(1)(iia) has been put to use for less than 180 days in the year of acquisition then in that year the assessee would be eligible to avail only 50% of the prescribed rate of depreciation, however, in the subsequent year, the assessee can claim the remaining depreciation. This proviso seems to imply that additional depreciation can be claimed only once.

In the case of Everest Industries Ltd. the tribunal relied heavily on this point and concluded that the third proviso makes it very clear that the additional depreciation is allowed only once.

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