Manufacturing industries set up in the notified backward areas of specified States to be eligible for a deduction @15% of the actual cost of new plant & machinery acquired and installed during the previous year under Admissible Deductions [Section 32AD] :
(1) In order to encourage the setting up of industrial undertakings in the backward areas of the States of Andhra Pradesh, Bihar, Telangana and West Bengal, new section 32AD has been inserted to provide for a deduction of an amount equal to 15% of the actual cost of new plant and machinery acquired and installed in the assessment year relevant to the previous year in which such plant and machinery is installed, if the following conditions are satisfied by the assessee –
(a) The assessee sets up an undertaking or enterprise for manufacture or production of any article or thing on or after 1st April, 2015 in any backward area notified by the Central Government in the State of Andhra Pradesh or Bihar or Telangana or West Bengal; and
(b) the assessee acquires and installs new plant and machinery for the purposes of the said undertaking or enterprise during the period between 1st April, 2015 and 31st March, 2020 in the said backward areas.
(2) Where the assessee is a company, deduction under section 32AD would be available over and above the existing deduction available under section 32AC, subject to the satisfaction of conditions thereunder.
Accordingly, if an undertaking is set up in the notified backward areas in the States of Andhra Pradesh or Bihar or Telangana or West Bengal by a company, it shall be eligible to claim deduction under section 32AC as well as under section 32AD, if it fulfills the conditions specified in section 32AC and the conditions specified under section 32AD.
(3) For the purposes of this section, “New plant and machinery” does not include —
(a) any ship or aircraft;
(b) any plant or machinery, which before its installation by the assessee, was used either within or outside India by any other person;
(c) any plant or machinery installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house;
(d) any office appliances including computers or computer software;
(e) any vehicle;
(f) any plant or machinery, the whole of the actual cost of which is allowed as deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of business or profession” of any previous year.
(4) In order to ensure that the manufacturing units which are set up by availing this incentive actually contribute to economic growth of these backward areas by carrying out the activity of manufacturing for a substantial period of time, a suitable safeguard restricting the transfer of new plant and machinery for a period of 5 years has been provided.
Accordingly, section 32AD(2) provides that if any new plant and machinery acquired and installed by the assessee is sold or otherwise transferred except in connection with the amalgamation or demerger or re-organisation of business, within a period of 5 years from the date of its installation, the amount allowed as deduction in respect of such new plant and machinery shall be deemed to be the income chargeable under the head “Profits and gains from business or profession” of the previous year in which such new plant and machinery is sold or transferred, in addition to taxability of gains, arising on account of transfer of such new plant and machinery.
(5) However, this restriction shall not apply to the amalgamating or demerged company or the predecessor in a case of amalgamation or demerger or business reorganization referred to in section 47(xiii), 47(xiiib) and 47(xiv), within a period of five years from the date of its installation, but shall continue to apply to the amalgamated company or resulting company or successor, as the case may be.
Additional depreciation @35% to be allowed to assessees setting up manufacturing units in notified backward areas of specified States and acquiring and installing of new plant & machinery [Proviso to section 32(1)(iia)]
(1) Under section 32(1)(iia), to encourage investment in new plant or machinery, additional depreciation of 20% of the actual cost of plant or machinery acquired and installed is allowed. Such additional depreciation under section 32(1)(iia) is allowed over and above the normal depreciation under section 32(1)(ii).
(2) In order to encourage acquisition and installation of plant and machinery for setting up of manufacturing units in the notified backward areas of the States of Andhra Pradesh, Bihar, Telangana and West Bengal, a proviso has been inserted to section 32(1)(iia) to allow higher additional depreciation at the rate of 35% (instead of 20%) in respect of the actual cost of new machinery or plant (other than a ship and aircraft) acquired and installed during the period between 1st April, 2015 and 31st March, 2020 by a manufacturing undertaking or enterprise which is set up in the notified backward areas of these specified States on or after 1st April, 2015.
(3) Such additional depreciation shall be restricted to 17.5% (i.e., 50% of 35%), if the new plant and machinery acquired is put to use for the purpose of business for less than 180 days in the year of acquisition and installation.
(4) The balance 50% of additional depreciation (i.e., 50% of 35%) would, however, be allowed in the immediately succeeding financial year.
Illustration
X Ltd. set up a manufacturing unit in notified backward area in the state of Telangana on 01.06.2015. It invested Rs 30 crore in new plant and machinery on 1.6.2015. Further, it invested Rs 25 crore in the plant and machinery on 01.11.2015, out of which ` 5 crore was second hand plant and machinery. Compute the depreciation allowable under section 32. Is X Ltd. entitled for any other benefit in respect of such investment? If so, what is the benefit available? Would your answer change where such manufacturing unit is set up by a firm, say, X & Co., instead of X Ltd.?
Solution
(i) Computation of depreciation under section 32 for X Ltd. for A.Y. 2016-17
| Particulars | Rs (in crores) | |
| Plant and machinery acquired on 01.06.2015 | 30.000 | |
| Plant and machinery acquired on 01.11.2015 | 25.000 | |
| WDV as on 31.03.2016 | 55.000 | |
| Less: Depreciation @ 15% on Rs 30 crore | 4.500 | |
| Depreciation @ 7.5% (50% of 15%) on Rs 25 crore | 1.875 | |
| Additional Depreciation@35% on Rs 30 crore | 10.500 | |
| Additional [email protected]% (50% of 35%) on Rs 20 crore | 3.500 | 20.375 |
| WDV as on 01.04.2016 | 34.625 |
Computation of deduction under section 32AC & 32AD for X Ltd. for A.Y. 2016-17
| Particulars | Rs (in crores) |
| Deduction u/s 32AC(1A) @ 15% on Rs 50 crore (since investment in new plant and machinery acquired and installed in the previous year 2015-16 by X Ltd., a manufacturing company, exceeds Rs 25 crore) | 7.50 |
| Deduction under section 32AD @ 15% on Rs 50 crore | 7.50 |
| Total benefit | 15.00 |
(ii) Yes, the answer would be different, where the manufacturing unit is set up by a firm. The deduction under section 32AC is available only to corporate assesses, and therefore, the deduction of Rs 7.50 crore under section 32AC would not be available if the manufacturing unit is set up by X & Co., a firm. However, it would be eligible for deduction of Rs 7.50 crore under section 32AD.
Notes:
(1) As per the second proviso to section 32(1)(ii), where an asset acquired during the previous year is put to use for less than 180 days in that previous year, the amount deduction allowable as normal depreciation and additional depreciation would be restricted to 50% of amount computed in accordance with the prescribed percentage.
Therefore, normal depreciation on plant and machinery acquired and put to use on 1.11.2015 is restricted to 7.5% (being 50% of 15%) and additional depreciation is restricted to 17.5% (being 50% of 35%).
(2) As per third proviso to section 32(1)(ii), the balance additional depreciation of Rs 3.5 crore, being 50% of Rs 7 crore (35% of Rs 20 crore) would be allowed as deduction in the A.Y.2017-18.
(3) As per section 32(1)(iia), additional depreciation is allowable in the case of any new machinery or plant acquired and installed after 31.3.2005 by an assessee engaged, inter alia, in the business of manufacture or production of any article or thing. In this case, since new plant and machinery acquired was installed by a manufacturing unit set up in a notified backward area in the State of Telengana, the rate of additional depreciation is 35% of actual cost of new plant and machinery. Since plant and machinery of Rs 20 crore was put to use for less than 180 days, additional [email protected]% (50% of 35%) is allowable as deduction. However, additional depreciation shall not be allowed in respect of second hand plant and machinery of Rs 5 crore.
Likewise, the benefit available under sections 32AC and 32AD would not be allowed in respect of second hand plant and machinery.
Accordingly, additional depreciation and investment allowance under sections 32AC and 32AD have not been provided on ` 5 crore, being the actual cost of second hand plant and machinery acquired and installed in the previous year.