Intricacies in the implementation of
sections – 32AC(IA) & 32AD
The brief synopsis of
afore-said sections is as under:-
1.
Section
32AC(IA) w.e.f FY 14-15
a) It
is applicable to Company engaged in
business of manufacture or production of
any article or thing.
b) Company
acquires and installs NEW ASSETS and
amount of actual cost of new assets acquired
and installed during the previous year
exceeds Rs. 25Cr.
c) Company
will be entitled to deduction of 15% of
actual cost of such new assets in previous year in which new assets are
installed.
d) The
benefit under this section, at present, is applicable for investment from FY
14-15 to 16-17.
e) New
Asset means new plant & machinery, other than specified assets.
2.
Section
32AD w.e.f FY 15-16
i)
It is applicable to every assessee.
ii)
Assessee set up an undertaking for manufacturing
or production of an article or thing in notified backward area on after
1.4.2015
iii)
Assessee acquires
and installs NEW ASSET for the
purpose of said undertaking on after 1.4.2015 but before 1.4.2020 in
said backward area.
iv)
Upon satisfaction of afore-said conditions, Assessee
is entitled to deduction of 15% in the
previous year in which new assets are acquired & Installed.
v)
New Assets means new plant & Machinery,
other than specified Assets
The complexities/mysteries in
the operation of Section 32AC(IA) & 32AD, are summarized under following heads:-
A) Purpose
of New Asset u/s 32AC(IA)
B) Actual
Cost Computation
C) Benefit
to New Assessee
D) Section
43A impact
Ø Purpose of New Asset- Section 32AC(IA)
1.
The language of section does not mandate the installation of new asset for the PURPOSE of manufacturing undertaking
itself. The question is whether Company engaged in manufacturing
undertaking can claim deduction u/s 32AC(IA) for new assets installed in non-manufacturing enterprise.
2. The
importance of word “Purpose” can be gathered from the following facts:-
a) Chapter
IV-D deals with computation of Income from Business or profession.
b) Despite
this fact, in majority of sections in this chapter dealing with deduction of
expenditure, the words “for the purpose of the business or profession” has been
used conspicuously. Refer section 30, 31, 32, 36, 37.
c) Section
32AD, introduced in statue by Finance Act 2015, specifically provides deduction
on acquisition of asset for the purpose
of undertaking.
d) Where
legislature intends incurring of expenditure devoid of purpose related to
business, it has not used the words for the purpose of business. Refer section
35AC.
3. Assistance
from Memorandum explaining the finance bill
a) Section
32AC(1) was inserted by Finance Bill 2013. The rationale as provided in
Memorandum was to encourage substantial investment in Plant & Machinery by
Company engaged in manufacturing. Here
also no guidance was given for utilization of new plant & machinery for
manufacturing business only
b) Section
32AC(IA) was inserted by Finance (No.2) Bill 2014. In one paragraph, memorandum
stated in one line that “as growth of
the manufacturing sector is crucial for employment generation and development
of an economy---.”
4. The
Points for consideration:-
a) When
law making authority is so cognizant of word “purpose” in chapter IV-D, shall
it be taken as deliberate intention of legislator to ignore the same in section
32AC and provide incentive for investment in new assets by company engaged in
manufacturing business, as they have capacity to do so, irrespective of
business in which such new assets are to be utilized.
b) Whether
one line in memorandum will infuse the desired intent to a section, when
language of said section is quite unambiguous. It is established principle that
the exercise of purposive interpretation by looking into the object and scheme
of the Act and legislative intent would arise only, if the language of the
statute is either ambiguous or conflicting or gives a meaning leading to
absurdity.
Ø Actual Cost
1.
The benefits u/s 32AC(IA) and 32AD is reliant on Actual Cost of new assets acquired &
Installed.
2. There
are 3 stages in bringing new asset into a running condition – Acquisition,
Installation and Put to use.
3. The
word actual cost has not been defined in the Act. Going by the decision of
Supreme Court in Challapali Sugars Ltd.
v CIT (1975) 98 ITR 167, 173 (SC), all incidental cost relating to acquisition,
installation and put to use of an asset should be added to the cost of an asset.
4. Since
the benefit under afore-said sections is calculated on actual cost of asset
acquired and installed, care should be taken to determine the actual cost by
capitalizing the expenses up to the stage of installation. Capitalisation of
expenses after installation but before put to use should not be considered as a
part of actual cost for determining the deduction under afore-said section.
5. This
aspect is particularly important from perspective of section 32AC(IA), where
deduction is contingent upon actual cost of new assets exceeding Rs. 25 Cr.
6. Suppose
actual cost of assets acquired and installed in May 15 is Rs. 24 Cr and will be
put to use in Jan 16. The Interest on loan relating to such asset from May 15-
Jan 16 will be Rs. 1.50 Cr. Though actual cost of new asset in the books will
be Rs. 25.50 Cr, but assessee will not be entitled to deduction under section
32AC(IA), since actual cost of asset upto installation is less than Rs. 25 Cr.
Ø New Assessee – Asset’s Installation and Commencement
of Business falls in different Previous year
1. Under
Income Tax legislation, setting up of an undertaking and commencement of
business from said undertaking are two different events having diverse
implications. Setting up of undertaking leads to beginning of previous year and
commencement of business cast liability to compute business income by availing
statutory deductions and pay tax on net income.
2. Thus
in case of new assessee, where
undertaking is set up in one year (assets are installed) and commencement of
business starts in next year, the question is whether can assessee claim deduction
u/s 32AC(IA) and 32AD in the year in
which business is commenced.
3.
The deduction u/s 32AC(IA) and 32AD is available
in the previous year in which new assets
are acquired & Installed.
4. In
erstwhile operative section 32A, legislature specifically provides that
investment allowance was available in the year in which assets were installed
but if the assets are put to use in immediate next year, then said allowance
will be available in that next year.
5. Similar
treatment is missing in section 32AC and 32AD, thus in case stated above, new
assessee will not be able to claim deduction under these sections, as in the
year when asset are installed assessee is not eligible to compute business
income and in the year in which business income is to be computed, new assets
are not installed.
Ø Section 43A- Impact
1. Section
43A provides that prescribed foreign exchange fluctuation (FEF) loss/income
should be added or reduced from the actual cost of the asset.
2. Section
43(6) dealing with computation of WDV of block of asset for the purpose of
depreciation, inter-alia provides that WDV of block at the beginning of
previous year shall be increase by actual
cost of assets acquired during the previous year to arrive at
closing WDV.
3. In
practice the foreign exchange fluctuation loss in previous year is added to
opening WDV of block of assets to arrive at closing WDV for calculating
depreciation. The FORM 3CD also mandates so. Despite the fact that section
43(6) warrants addition to opening WDV only when assets is acquired during the
previous year , foreign exchange fluctuation is still added.
4. Now
Consider the following case:-
a) Assessee
install new asset of Rs. 24 Cr and 23 Cr in FY 15-16 & FY 16-17
respectively
b) There
is FEF loss of Rs. 2.10 Cr in FY 16-17 (Feb 17) relating to asset acquired in
FY 15-16
c) Now
assessee claims either of two options
i)
The actual cost of assets acquired in FY 15-16
is 26.10 Cr by virtue of provision of section 43A and thus entitles to revise
Return of Income by claiming deduction u/s 32AC(IA) OR
ii)
FEF loss of Rs. 2.10 be considered as addition
of actual cost and since aggregate of actual cost of assets acquired in FY
16-17 is Rs. 25.10 Cr, it is entitled to deduction u/s 32AC(IA)
d) Probable
conclusion
i)
The assessee stand in first option seems legally
justified in view of unambiguous language of section 43A. The point for
consternation is whether event subsequent to previous year amounts to error or
omission in previous year entitling assessee to revise the return.
ii)
The assessee stand in second year will be
counter on the ground that section 32AC required installation of new assets,
not used by any other person. Since in FY 16-17, though there is addition to
actual cost but it is in respect of assets used by assessee itself in FY 15-16,
benefit u/s 32AC(AI) will not be available.
