Availing Investment Allowance Incentive "Detailed Analysis "

Rajdeep Pawar March 13, 2013

Section 32AC Investment in New Plant & Machinery

In order to encourage substantial Investment in Plant & Machinery, It is proposed in Budget 2013-14 to insert a new section 32AC in the Income Tax Act. As per this section 15% of the amount invested in new Plant & Machinery will be allowed as deduction while computing taxable Income of the Assessee. This deduction will be in addition to Depreciation Allowance available in respect of new Plant & Machinery.

Contents

Applicability Conditions Consequences of Transfer with in 5 Years Challenges & Way Forward Approach

Applicability

Section 32AC : Investment in New Plant & Machinery Applicability

Applicable for COMPANY ASSESSEE only Individual, HUF, Partnership Firms, AOP / BOI, Cooperative Societies, Artificial Juridical Person etc. are not eligible to claim deduction under this section Company must be in the BUSINESS OF MANUFACTURE OR PRODUCTION of any ARTICLE OR THING Company must be in the business of Manufacturing or Production. Service Industry is not eligible for this deduction (ie from IGL Group point of view, KIFTPL, KHL & IGL Finance are not eligible to claim this deduction). Power Generation and Mining can be considered as Manufacturing or Production

Conditions

Section 32AC : Investment in New Plant & Machinery

Conditions
Eligible Company should : ACQUIRE & INSTALL NEW ASSETS COSTING TO RS.100 CRORE OR MORE BETWEEN 01.04.2013 to 31.03.2015 Then there shall be allowed a deduction of a sum equal to 15% of the actual cost of New Assets Unlike section 32 relating to Depreciation, The amount of deduction under this section will not be reduced from the cost of new assets. (Please note that there is no condition attached relating to payment in respect of New Assets)

Section 32AC : Investment in New Plant & Machinery

Conditions
Illustrations: Calculate the amount of deduction u/s 32AC in the following cases : (1) M/s ABC Ltd. Acquired & Installed New Assets costing to Rs.95 Cr. in FY13-14 and New Assets costing to Rs.10 Cr. in FY14-15. Sol.: In FY13-14, M/s ABC Ltd will not be eligible for any deduction u/s 32AC. However in FY14-15, M/s ABC Ltd will get a deduction @ 15% of Rs.105 Cr. in this section. (2) M/s ABC Ltd. Acquired & Installed New Assets costing to Rs.101 Cr. In FY13-14 and New Assets costing to Rs.25 Cr in FY14-15. Sol.: In FY13-14, M/s ABC Ltd will be eligible for deduction u/s 32AC @15% on Rs.101 Cr. and in FY14-15, M/s ABC Ltd can claim deduction u/s 32AC @15% on Rs.25 Cr. (3) M/s ABC Ltd. Acquired & Installed New Assets costing to Rs.85 Cr. In FY13-14 and New Assets costing to Rs.14 Cr. in FY14-15. Sol.: M/s ABC Ltd. Is not eligible for deduction under this section as requirement of minimum investment of Rs.100 Cr. before 01.04.2015 not met.
8

Section 32AC : Investment in New Plant & Machinery

Conditions
NEW ASSET means new Plant & Machinery but doesnt include:
(a) Any P&M which before its installation by Assessee used by any other person (b) Any P&M installed in any office premises or any residential accommodation (c) Office Appliances including Computers or Computer Softwares (d) Vehicles, Ships or Aircrafts; and (e) Any P&M, the whole of the actual cost of which is allowed as deduction in computing Income chargeable under the head PGBP of any previous year. Question : Whether deduction under this section will be available on the assets for which 100% advance was made prior to 01.04.2013 but Plant & Machinery received and capitalised by the Assessee after 01.04.2013? Ans: In my opinion and going by the Intention of the Law, if Advance is paid but new asset is received & installed after 31.03.2013, then we can treat the same as Investment for the purpose of this section.
9

Section 32AC : Investment in New Plant & Machinery

Conditions - Questions
Questions : Whether deduction under this section will be available on the assets for which 100% payment is made after 31.03.2013 but Plant & Machinery were received & installed Prior to 01.04.2013? Ans.: For this section we are not concerned about timing of payment rather we are concerned about acquisition and installation of New Plant & Machinery during specified period. In this case we can not claim deduction under this section. If any Plant & Machinery had already been purchased before 01.04.2013 but lying in Capital Work-in-progress pending installation, whether the same will be eligible for deduction under this section? Ans.: As per the conditions specified to claim this deduction, new Plant & Machinery should be Acquired & Installed during specified period (ie between 01.04.2013 to 31.03.2015). Hence Plant & Machinery acquired before 01.04.2013 and lying in CWIP will not be eligible for deduction under this section.

10

Section 32AC : Investment in New Plant & Machinery

Conditions - Questions
Questions : Will the Computer (including Computer Softwares) used in manufacturing process be qualified as new asset under this section? Ans.: As per the rule of Interpretation, words coming next will derive its meaning from the words coming first to it. Hence only those Computers which will be used as office appliances will not be considered as New Assets but Computers that will be used in Manufacturing process should be considered as New Asset If Company purchased trucks or lorries for transferring raw material from stores to Plants, will these be treated as New Assets under this section? Ans.: No In case the Asset acquired has previously been used for any purpose by any other person, will that asset be qualified as new asset under this section? Ans.: No
11

Section 32AC : Investment in New Plant & Machinery

Conditions - Questions
Questions : Whether deduction u/s 32AC will be available in case there are Business Losses? Ans.: Yes deduction under this section will be available (subject to fulfilment of specified conditions) in case of Business Loss. However deduction under this section will then be submerged in the business losses and will be carried forward for next eight years. What will be the treatment of deduction u/s 32AC in case of MAT Calculation? Ans.: No adjustment is specified in respect of this deduction in the calculation of Book profit for MAT purpose. What will be the effect if New Asset is acquired & installed during the specified period but put to use after 31.03.2015? Ans.: No effect as to claim deduction under this section, there is requirement of acquisition & installation of new assets and it is immaterial whether the asset is put to use in specified period or not.
12

Consequences of Transfer of Asset with in 5 Years

13

Section 32AC : Investment in New Plant & Machinery

Consequences of Transfer with in 5Yrs
If any new asset acquired and installed by the Assessee is sold or otherwise transferred, except in connection with the amalgamation or demerger, within 5 years from the date of its installation then deduction allowed in respect of such new assets under this section shall be deemed to be the Income of the Assessee chargeable under the head PGBP of the previous year in which such asset is sold or transferred, in addition to taxability of gains arising on account of transfer of such new asset. Questions : M/s ABC Ltd claimed deduction of Rs.30 Cr. In FY13-14 u/s 32AC but in FY16-17 P&M in respect of which deduction was claimed, is sold. What will be the treatment in this case? Ans: For Previous year 16-17, Rs.30 Cr. will be chargeable to tax under the head PGBP in addition to taxability of any gain or loss arising on account of such sale.
14

Section 32AC : Investment in New Plant & Machinery

Consequences of Transfer with in 5Yrs
Questions : M/s ABC Ltd claimed deduction of Rs.30 Cr. In FY13-14 u/s 32AC but in FY16-17 P&M in respect of which deduction was claimed, is transferred to (A) Amalgamated Company in the scheme of Amalgamation or (B) Resulting Company in the scheme of demerger. What will be the treatment in these cases? Ans: Provisions of this section will apply to the amalgamated company or resulting company as they would have applied to the amalgamating company or demerged company. M/s ABC Ltd. Which has invested a sum of Rs. 80 Cr. in New Assets after 01.04.2013, get demerged and New Assets worth Rs. 60 Cr. are transferred to one Resultant Company X Ltd. & New Assets worth Rs.20 Cr transferred to other Resultant company Y Ltd.. Before 01.04.2015, Both X Ltd & Y Ltd invested Rs.50 Cr. in New Assets, Will both XLtd & Y Ltd be eligible for deduction under this section? Ans.: Only X Ltd will be eligible for deduction under this section as it has complied with the requirement of Investment of Rs.100 Cr. or more in new assets.

15

Challenges & Way Forward Approach

Challenges.

Way forward approach

Aggregating investments of Rs.100 Crs during Medium sized corporate can also aggregate their FY 14, FY 15 is a key challenge for a medium size investments at least over two years of periods to corporates. While this allowance is granted for claim this benefit. all the corporates, only the large corporates are likely to benefit from this incentive.

Installation of an asset is an important Robust planning for the timely acquisition and condition for availing this Investment Allowance. installation should be in place to avail this Investment Allowance. Installation of P&M amounting worth exceeding Rs.100Crs typically takes longer time for final installation. Two year timeframe may be inadequate to achieve this.

Sale of P&M within 5 years from the date of installation will require the assessee to surrender the tax benefit availed on the investment allowance.

As these P&M will not form regular block of assets from investment allowance point of view, one needs to keep detailed documentation for these assets to give correct treatment at the time of acquisition, installation and sale thereof.

17

Thank You!

18