Investment allowance — some unanswered questions

To provide impetus to the manufacturing sector, Finance Bill 2013 proposes to introduce section 32AC dealing with an investment-linked deduction. A company engaged in manufacture would be entitled to a deduction of 15 per cent of the actual cost of any ‘new asset’ acquired and installed during April 1, 2013 to March 31, 2015, if the investment exceeds Rs 100 crore. ‘New asset’ means new plant or machinery (excluding ships and aircraft), and excludes second-hand machinery, installations in office or residential premises, office appliances including computer and software, vehicles, or any plant or machinery fully depreciable in any previous year. The deduction will be taxable if the assets are sold or transferred within five years. In the case of an amalgamation or demerger, the period would apply to the amalgamated or resulting company.

A company that acquires and installs assets of Rs 80 crore in Year 1 and Rs 45 crore in Year 2 will, therefore, be entitled to a deduction of Rs 18.7 crore (15 per cent of the aggregate cost of Rs 125 crore) only during Year 2.

If the amounts are Rs 110 crore and Rs 150 crore in Years 1 and 2, the deduction will be Rs 16.5 crore in the first year (15 per cent of Rs 110 crore) and Rs 22.5 crore in the next year (that is, Rs 39 crore [15 per cent of Rs 260 crore] less Rs 16.5 crore deduction obtained in the first year).

This deduction would be in addition to the additional depreciation currently available at 20 per cent of the actual cost of new plant and machinery. The company should acquire and install the asset during the period. Therefore, capital works in progress (CWIP) as on March 31, 2013 and assets acquired before March 31, 2015 but installed later may not qualify for deduction.

Unlike additional depreciation, this is a business deduction and not a depreciation allowance. The deduction will not be considered for computing the WDV (written down value) of the ‘block of asset’. Loss, if any, will be regarded as a business loss, and not as unabsorbed depreciation. In the case of assets installed before commencement of business, the deduction and consequent loss may not be allowed unless they relate to extension of an existing business.

A few questions come up on the issue. Capital-intensive mega projects require a longer period for planning, installation, and set-up, and the two-year incentive may not be adequate. In continuous process plants, there is uncertainty whether installation would cover individual, unconnected, partly-installed assets. The term ‘installed’ would also need a wider interpretation in the case of intangibles.

Would power generation, software development or leasing be entitled to the benefit? The Delhi appellate tribunal in the NTPC Ltd case had ruled that the process of electricity generation is akin to manufacture and additional depreciation cannot be denied. The Act was amended to extend the additional depreciation benefit to companies engaged in power generation and distribution. Can the tax authorities contend that the incentive should be denied in such cases as a similar expression is not used in the proposal?

What about assets entitled to 100 per cent depreciation? An asset cannot be regarded as ‘new’ if its actual cost has been allowed as a deduction in ‘any previous year’. Consider a situation where such assets are acquired and installed in Year 1 but used in Year 2. In Year 1, the company can claim 15 per cent deduction, but 100 per cent depreciation would be allowable in Year 2, resulting in an aggregate deduction of 115 per cent over two years. Does the phrase ‘any previous year’ include Year 2, and in such a case would the 15 per cent deduction be withdrawn later?

Furthermore, a company entitled to this and other investment-based deductions (such as section 35AD) may be restricted in its claim, as the aggregate deduction cannot exceed the actual cost of the assets. In such circumstances, there can be claim only under one of the incentive provisions. There is also no requirement for thrusting the deduction unlike depreciation, which is mandatory. A company may acquire assets in Year 1, but install them in Year 2 if it has a tax holiday expiring, or prefers to set off losses, or has not commenced business in Year 1.

The proposal, therefore, needs to be relooked if it is to serve the objective of encouraging investments in the industrial sector.

Milin Thakore is Director, and Anita Nair is Deputy Manager, Deloitte Haskins & Sells

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