Claim of Additional Depreciation: One-Time or Recurring Benefit?

S Vasudevan
Executive Partner, Lakshmikumaran and Sridharan
Attorneys

Ankur Kishanpuria
Principal Associate, Lakshmikumaran and Sridharan
Attorneys

Tias Bhattacharyya
Associate, Lakshmikumaran and Sridharan Attorneys

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.1 relying on its earlier decision in Ambuja Cement Ltd.2 and a
decision of Kolkata tribunal in the Gloster Jute Mills Ltd. 3 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.4 and Chennai tribunal in CRI Pumps (P.) Ltd.5, 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.6 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. 7 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. 8 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.

View 2: Additional depreciation would be available in subsequent years as well.

(i) Legislative history: Deliberate omission of the restriction from Finance Act, 2005 onwards

Clause (iia) for additional depreciation was initially introduced in 1980 and existed in statue books till 1988.
The said clause specifically provided that the additional depreciation will be allowable only in respect of the
previous year in which the machinery or plant was installed or if the machinery or plant was first put to use in
the immediately succeeding previous year then in respect of that previous year i.e. the additional depreciation
was admissible only in one year.

A similar clause was reinserted in 2002 to provide for additional depreciation of fifteen per cent of the actual
cost of new plant or machinery. The sub-section also restricted the additional depreciation allowance to only
in one year, i.e. year of commencement of manufacture or substantial expansion.

Thereafter, the said clause was amended vide the Finance Act, 2005. The rate of additional depreciation was
increased from fifteen percent to twenty percent on new machinery or plant acquired or installed after the
31.03.2005. Most pertinently, the amendment did away with the specific restriction of allowability of
additional depreciation in the year of commencement of new industrial undertaking or substantial expansion
of existing undertaking.

On a perusal of the legislative history, it can be contended that since the legislature has, in its wisdom,
removed the restriction of allowability of claim of additional depreciation in a specific year only, additional
depreciation should be allowed in subsequent years as well.

Reference can be made to the decision of the Kolkata tribunal in the matter of Gloster Jute Mills Ltd. 9
wherein the tribunal noting the legislative history of the clause (iia) of section 32(1), observed that from the AY
2005-06, on a plain and literal construction of the statutory provision, it can be seen that, the restriction with
regard to the year in which additional depreciation should be allowed, was effectively removed. Hence, the
Tribunal allowed additional depreciation in the subsequent years as well.

(ii) The usage of the word "new" in the clause (iia) does not mean the asset has to be "new" every year

The word "new" in the clause (iia) of section 32(1) can be alternatively interpreted to mean that the plant and
machinery must be new at the time of installation to be eligible for additional depreciation.

Reference can again be made to the decision of Gloster Jute Mills Ltd. 10 wherein the tribunal noted that
the usage of the word "new" was to impose the condition that the plant and machinery must be new at the time
of installation. It does not indicate that the plant and machinery must be new even in subsequent years for the
assessee to avail the benefit of additional depreciation.

Conclusion

The clause (iia) of section 32(1) dealing with additional depreciation went through several amendments
ultimately leading to the current clause (iia) which does not provide explicitly when the additional
depreciation would be allowable- every year or only in the first year when the new asset is initially put to use.
Despite several decisions of different tribunals, there is no finality.

In light of the dissenting views, it appears that there remains a fair amount of confusion with respect to how
the clause (iia) should be interpreted. Judgement of higher courts or clarification from the department would
help reduce the said ambiguity and give a clear way forward to the taxpayers.

■■

1. ACC Ltd. v. Addl. CIT [IT Appeal No. 6082/Mum/2014, dated 28-2-2023]
2. Ambuja Cement Ltd. v. Addl. CIT [IT Appeal No. 6375/Mum/2013, dated 7-11-2022]
3. Dy. CIT v. Gloster Jute Mills Ltd, [2017] 88 taxmann.com 738.
4. Everest Industries Ltd. v. Jt. CIT [2018] 90 taxmann.com 330.
5. CRI Pumps (P.) Ltd. v. Asstt. CIT [2013] 34 taxmann.com 123/58 SOT 154.
6. Ibid.
7. Supra at footnote 5.
8. Ibid.
9. Supra at footnote 3.
10. Supra at footnote 3.