The legislative text of section 32(1)(iia) specifies that additional depreciation is allowed on new machinery or plant acquired and installed after a particular date. However, it does not explicitly mention whether this benefit is restricted to the year of acquisition and installation or if it can be carried forward or claimed again in subsequent years. This lack of clarity has resulted in multiple interpretations. Some taxpayers and tax professionals argue that the use of the term “new machinery or plant” implies that the benefit is only for the year the asset is newly put to use. Others argue that since the law does not expressly prohibit the allowance of additional depreciation in later years, it should be interpreted more broadly to allow the deduction as long as the asset meets the original eligibility conditions. The absence of a definitive clarification from the legislation has caused this issue to be repeatedly litigated, leading to a divergence of views in various judicial forums.
Key Conditions Under Section 32(1)(iia)
To better understand the issue, it is essential to first look at the eligibility conditions for claiming additional depreciation under section 32(1)(iia). The conditions include that the assessee must be engaged in the business of manufacture or production of any article or thing, the additional depreciation is allowable only on new plant or machinery, and the asset must be acquired and installed after 31 March 2005. These conditions, though seemingly straightforward, give rise to the debate. The most contentious point is whether the term “new” in the context of machinery or plant restricts the benefit to only the first year of use, or whether the asset’s “new” status at the time of acquisition remains relevant even in subsequent years for purposes of claiming additional depreciation. Judicial forums have approached this question differently, resulting in a need to examine both viewpoints.
Judicial Interpretations Supporting One-Time Claim
Several tribunal decisions have held that additional depreciation is a one-time benefit. These decisions are based on the interpretation of the word “new” and the structure of depreciation under the block of assets system. The reasoning is that the term “new machinery or plant” implies that the machinery must be in its new state in the year of claiming the depreciation. If the asset is used in a later year, it can no longer be considered new, and hence, additional depreciation should not be allowed again. One notable decision in support of this view is that of the Chennai Tribunal in CRI Pumps (P.) Ltd., where the assessee’s claim for additional depreciation in a subsequent year was denied. The tribunal held that once the machinery is put to use and becomes part of the block of assets, it loses its identity as a new asset, and hence, additional depreciation cannot be claimed again.
Role of the Block of Assets Concept
The block of assets concept was introduced to simplify the depreciation calculation process. Instead of calculating depreciation for each asset, assets of similar nature are grouped into blocks, and depreciation is calculated on the written-down value of the entire block. This concept inherently assumes that individual identities of assets are lost once they become part of the block. Proponents of the view that additional depreciation is a one-time benefit argue that allowing additional depreciation in subsequent years would go against the principle of the block system. Since additional depreciation is calculated on the actual cost of the asset, while regular depreciation is calculated on the written down value, allowing both in subsequent years would result in an inconsistent application of the law and could potentially lead to an overstatement of depreciation. This practical challenge forms one of the key reasons why some judicial forums have restricted the allowance of additional depreciation to the first year of use only.
Impact of the Finance Act, 2015 Amendment
The Finance Act, 2015, introduced the third proviso to section 32 with effect from 1 April 2016. This proviso states that if an asset eligible for additional depreciation is put to use for less than 180 days in the year of acquisition, then only fifty percent of the additional depreciation can be claimed in that year. The remaining fifty percent can be claimed in the subsequent year. This provision is often cited in support of the argument that additional depreciation is a one-time benefit. The logic is that the law expressly allows the balance depreciation to be claimed only in the immediate next year and not in subsequent years regularly. This suggests legislative intent to restrict the benefit to a single claim, albeit over two years if necessary. If additional depreciation was meant to be a recurring benefit, the law would have stated so explicitly. Hence, this proviso supports the view that the benefit is intended to be confined to the initial year or, at most, split across two years if the asset was used for less than 180 days in the first year.
Arguments Against Recurring Claims
Apart from judicial precedents and statutory interpretations, there are practical arguments against allowing additional depreciation regularly. One such argument is administrative feasibility. Allowing repeated claims of additional depreciation would require taxpayers to track individual assets within a block, calculate actual cost depreciation separately, and maintain dual records. This would contradict the simplification intended through the block of assets mechanism. Moreover, permitting recurring claims could lead to tax planning practices aimed at deferring depreciation claims across multiple years to suit income profiles, thereby affecting the fairness and integrity of the tax system. The purpose of additional depreciation is to provide an incentive for capital investment, not to allow ongoing deductions year after year for a one-time capital expenditure. Therefore, it is argued that the allowance of this benefit should be limited to the period immediately following the acquisition and installation of the asset.
Policy Perspective on Additional Depreciation
From a policy standpoint, the introduction of additional depreciation was aimed at incentivizing businesses to invest in new machinery and equipment. This was especially important in the context of boosting industrial growth and modernizing production capabilities. However, it was not intended as a long-term benefit. Allowing the same additional deduction year after year would dilute the fiscal cost-benefit analysis that justified its introduction in the first place. The government intended to frontload the depreciation benefit as a reward for investment and not to provide a permanent reduction in taxable income. This view aligns with the general principle of tax policy that favors efficiency and fairness. Continued availability of additional depreciation in subsequent years may distort investment decisions and create disparities between businesses based on their interpretation or litigation capacity.
Revenue Implications and Tax Administration
Allowing recurring claims of additional depreciation could have significant revenue implications. If businesses are permitted to repeatedly claim additional depreciation on the same asset, the total depreciation allowed could substantially exceed the asset’s original cost. This would erode the taxable base and lead to revenue loss for the government. Moreover, it would increase the complexity of tax assessments and audits, as tax authorities would need to verify compliance with eligibility conditions year after year. Such a scenario would defeat the purpose of simplifying the depreciation mechanism through the block of assets system. Therefore, restricting the claim to the year of acquisition and installation ensures consistency, predictability, and ease of administration.
Key Judicial Decisions Supporting Recurring Claims
One of the leading judgments supporting the recurring benefit interpretation is that of the Mumbai Tribunal in the case of ACC Ltd. In this case, the tribunal relied on its previous ruling in Ambuja Cement Ltd., and also referred to the Kolkata Tribunal’s ruling in Gloster Jute Mills Ltd. to hold that the additional depreciation under section 32(1)(iia) is available even in subsequent years. These rulings emphasized that the Income Tax Act does not contain any clause that restricts the claim of additional depreciation to only the year in which the asset is put to use. The tribunals pointed out that since the law remains silent on this aspect, a liberal interpretation should be adopted, especially for incentive provisions. The Mumbai Tribunal held that once the conditions specified in section 32(1)(iia) are met, there is no bar to claiming the additional depreciation in later years if the entire benefit could not be claimed in the first year. This includes situations where the asset was not used for the full 180 days in the year of acquisition, or where business circumstances prevented the assessee from utilizing the entire depreciation allowance.
Interpretation of Legislative Silence
A significant argument in favor of allowing recurring claims is the legislative silence on the matter. The statute specifies the eligibility conditions for claiming additional depreciation but does not state that the benefit is limited to the year of acquisition or the year the asset was first put to use. According to principles of statutory interpretation, when a provision intended to confer a benefit is ambiguous or silent on a specific limitation, the interpretation should favor the taxpayer. This approach aligns with the settled legal principle that beneficial provisions should be construed liberally. Therefore, the absence of any express limitation in section 32(1)(iia) could be interpreted to mean that as long as the conditions for eligibility are satisfied, the depreciation can be claimed even in subsequent years.
Reference to General Depreciation Principles
Proponents of the recurring benefit interpretation also draw parallels with the general principles of depreciation under the Income Tax Act. Under section 32(1)(ii), depreciation is allowed on a block of assets every year until the block ceases to exist or its written-down value becomes zero. There is no restriction on claiming regular depreciation each year, and it is considered a recurring allowance until the value of the block is exhausted. Supporters of recurring additional depreciation argue that if regular depreciation is allowed regularly, then additional depreciation, which is also part of section 32, should be treated similarly unless explicitly stated otherwise. From this perspective, it appears inconsistent to limit the allowance of additional depreciation to a single year when regular depreciation is not subject to such restrictions.
Analysis of the Third Proviso to Section 32
The third proviso to section 32, inserted by the Finance Act, 2015, with effect from 1 April 2016, is often cited by both sides of the debate. While those advocating for a one-time benefit view this proviso as a clear indication that the benefit is limited to a specific year or two, others interpret it differently. According to the recurring benefit view, the proviso does not restrict the claim of additional depreciation to just the following year but merely allows a deferred claim for the remaining amount in the next year if the asset was not used for the full 180 days. This, they argue, supports the idea that the benefit can spill over into subsequent years if required. Moreover, the proviso does not mention that the spillover is confined only to cases of less-than-180-day usage; rather, it provides a framework for carrying forward the unclaimed portion. Therefore, if such a carry-forward is permitted in one context, it may also be permissible in other scenarios where the full depreciation was not claimed initially, reinforcing the recurring benefit interpretation.
Business Realities and Practical Considerations
In support of the recurring benefit interpretation, it is also argued that business operations do not always align with statutory timelines. Assets may be acquired towards the end of a financial year and may not be utilized for a full cycle. In such cases, the company might not be in a position to fully utilize the additional depreciation in the first year. Denying the benefit in subsequent years would defeat the very purpose of encouraging investment in new machinery. In many situations, business exigencies, operational delays, or administrative hurdles can prevent the timely usage or claim of depreciation. By allowing recurring claims, the law would better reflect the ground realities of business and ensure that genuine taxpayers are not penalized for factors beyond their control. This argument is particularly relevant for large industrial undertakings and capital-intensive industries, where machinery is procured in phases and commissioned over an extended period.
Equity and Fairness in Taxation
Equity and fairness are foundational principles of tax policy. If two businesses acquire similar machinery and one can claim full additional depreciation in the first year while the other cannot due to delays, it would result in unequal treatment. Allowing recurring claims would help to bridge this inequity and ensure that the benefit is available to all eligible businesses irrespective of their timing or operational circumstances. Taxation should not create a disparity among similarly placed assessees, and a strict one-time claim interpretation could result in arbitrary outcomes. For instance, a delay of a few days in putting the asset to use could lead to a complete denial of the benefit, while another business that uses it slightly earlier could enjoy the full deduction. Recurring claims would offer a more balanced and equitable framework for applying this incentive.
Incentive Purpose and Liberal Construction
The purpose of introducing additional depreciation under section 32(1)(iia) was to encourage capital investment and modernization in the manufacturing sector. The courts have often held that incentive provisions should be interpreted liberally to achieve the intended objective. In this context, a restrictive interpretation that limits the benefit to only the first year may be counterproductive. It would discourage businesses from investing if they are not assured of receiving the full benefit in cases of operational delay. A liberal interpretation that allows additional depreciation in the subsequent years ensures that the objective of promoting investment is achieved without being defeated by technical limitations or procedural timelines. This is especially important in the context of developing economies, where capital investment plays a critical role in job creation and economic growth.
Distinction Between Availability and Quantum of Deduction
Supporters of the recurring benefit approach also make a distinction between the eligibility for claiming the benefit and the quantum of depreciation actually claimed. They argue that eligibility is determined by the satisfaction of conditions specified in section 32(1)(iia) at the time of acquisition and installation of the asset. Once eligibility is established, the assessee should be allowed to claim the deduction in full, even if it is done over multiple years due to practical or statutory reasons. In other words, the benefit is not re-established each year, but the unclaimed portion from a previous year may still be deductible in subsequent years if the assessee continues to meet the conditions and maintains proper records. This distinction between availability and quantum allows for flexibility in claims without violating the statutory framework or causing revenue leakage.
Judicial Support for Liberal Interpretation
The liberal interpretation principle is well established in Indian tax jurisprudence. Courts have consistently held that beneficial provisions, especially those designed to promote economic activity or provide incentives, must be interpreted in a manner that favors the assessee unless there is a clear intention to the contrary in the statute. Applying this principle to section 32(1)(iia), it would be reasonable to conclude that the additional depreciation, being an incentive provision, should be liberally construed to allow claims beyond the first year if circumstances justify it. This interpretation does not require rewriting the statute but merely ensures that the intended benefit reaches those for whom it was meant. The tribunal decisions supporting this interpretation are also based on this reasoning, thereby reinforcing its legal and practical viability.
Comparative International Tax Practices
In several jurisdictions, similar depreciation incentives are available and are often structured to allow flexibility in claiming the benefit over multiple years. These international practices serve as a useful reference point in understanding how incentive-based depreciation schemes function in practice. Countries like the United States and the United Kingdom have depreciation rules that allow accelerated or bonus depreciation over multiple years under certain conditions. While the Indian statute may differ in specifics, the policy rationale remains the same. Drawing upon these comparative practices, the recurring benefit interpretation aligns more closely with global tax trends and reflects a business-friendly approach to capital investment incentives. Although Indian tax law is unique in its structure, it is increasingly being aligned with international best practices, especially in the context of ease of doing business and encouraging foreign direct investment.
Potential Safeguards and Recommendations
If the recurring benefit interpretation is to be accepted more broadly, it may be helpful for the legislature or tax authorities to issue clarifications or guidelines to prevent misuse and ensure consistent application. Safeguards could include documentation requirements, limits on the number of years over which the benefit can be spread, and conditions for claiming unutilized depreciation. These measures would help maintain the integrity of the incentive scheme while allowing genuine taxpayers to fully utilize the benefit fairly and transparently. Clear guidance would also reduce litigation and provide certainty to taxpayers in planning their capital investments. It would strike a balance between revenue protection and incentivizing industrial growth.
Reconciling Conflicting Judicial Opinions
The presence of contradictory decisions from different benches of the Income Tax Appellate Tribunal presents a challenge in determining a consistent approach to additional depreciation under section 32(1)(iia). On one hand, tribunals like those in Chennai and Mumbai in cases such as CRI Pumps (P.) Ltd. and Everest Industries Ltd. have held that additional depreciation is a one-time benefit allowed only in the year in which the new asset is first put to use. On the other hand, tribunals like those in Mumbai in ACC Ltd. and Kolkata in Gloster Jute Mills Ltd. have allowed additional depreciation in subsequent years, particularly when only a portion of the depreciation could be claimed in the year of acquisition. These conflicting decisions highlight the interpretational ambiguity surrounding the provision and indicate a pressing need for clarity, either through legislative amendment or authoritative judicial pronouncement from the higher court,,s such as the High Courts or the Supreme Court. Until such clarification is provided, different assessing officers and appellate authorities may continue to interpret and apply the law inconsistently, leading to uncertainty for taxpayers.
Significance of Consistency in Tax Law Interpretation
Consistency in interpretation and application of tax provisions is critical to ensuring fairness and predictability in the tax system. When courts and tribunals render conflicting decisions on the same issue, it erodes taxpayer confidence and can lead to unnecessary litigation. In the case of additional depreciation, the divergence of views creates a situation where similarly placed taxpayers are treated differently based solely on the jurisdiction in which their case is assessed or adjudicated. This not only violates the principle of equity in taxation but also places an administrative burden on both taxpayers and the tax authorities. For a tax incentive to be effective, its application must be transparent and predictable. The inconsistency in judicial interpretations of section 32(1)(iia) undermines these objectives and diminishes the effectiveness of the provision as an incentive for industrial investment.
Need for Legislative Clarification
Given the importance of the issue and its impact on a wide range of manufacturing and production businesses, a legislative clarification from the Ministry of Finance or the Central Board of Direct Taxes would go a long way in resolving the ambiguity. This could take the form of an amendment to section 32(1)(i,ia), explicitly stating whether additional depreciation is a one-time benefit or a benefit that may be carried forward or claimed in subsequent years under specified conditions. Alternatively, a clarification could be issued through an explanatory circular that interprets the provision in line with legislative intent. Such clarification would not only harmonize the application of the provision across jurisdictions but would also reduce the volume of litigation and promote greater compliance. Legislative intervention in response to judicial inconsistency is a well-accepted approach and has been effectively used in the past to settle contentious issues in tax law.
Interpretation Based on the Doctrine of Purposive Construction
In interpreting a statutory provision, courts often rely on the doctrine of purposive construction, which focuses on the purpose and intent behind the provision rather than the literal meaning of the words alone. Applied to section 32(1)(iia), the purposive approach would examine the underlying goal of encouraging capital investment in the manufacturing sector. From this perspective, any interpretation that defeats or limits the incentive nature of the provision would be contrary to its legislative intent. Denying additional depreciation in subsequent years merely because of technical language or procedural formality would go against the very purpose for which the benefit was introduced. Therefore, purposive construction supports the view that the benefit should be made available in a manner that fulfills its objective, including allowing the unutilized portion to be claimed in later years where necessary.
The Concept of Incentive Provisions and Their Treatment
Incentive provisions in tax law, such as those granting additional depreciation, accelerated depreciation, investment allowance, or tax holidays, are designed to promote specific economic activities. These provisions are generally treated differently from regular provisions, and courts have repeatedly emphasized the need to interpret them liberally. The purpose of such provisions is to encourage taxpayers to engage in behavior deemed beneficial to the economy, such as making capital investments or setting up operations in specified sectors or regions. Consequently, any ambiguity in an incentive provision is typically resolved in favor of the taxpayer. Additional depreciation under section 32(1)(iia) falls into the category of incentive provisions, and it is therefore consistent with established principles that it should be interpreted in a way that facilitates its effective use by eligible businesses.
The Role of Circulars and CBDT Clarifications
Circulars issued by the Central Board of Direct Taxes have played a significant role in clarifying the interpretation of ambiguous tax provisions. While circulars cannot override the provisions of the statute, they serve as important interpretative tools and are binding on the tax authorities. In the context of additional depreciation, the absence of a CBDT circular explaining the intended scope and frequency of the allowance has contributed to the prevailing confusion. Issuing such a circular could help resolve doubts regarding the applicability of section 32(1)(iia) and guide assessing officers in uniformly treating claims. Experience has shown that timely clarifications from the Board can help prevent litigation and ensure smooth implementation of tax incentives. A clarification from the CBDT on this issue would be particularly helpful in aligning administrative practice with the intended purpose of the provision.
Impact on Small and Medium Enterprises
The interpretation of additional depreciation as either a one-time or recurring benefit has significant implications for small and medium enterprises engaged in manufacturing. These businesses often operate with limited financial and operational flexibility and rely heavily on government incentives to invest in new machinery and expand operations. If additional depreciation is allowed only in the first year, it could disadvantage smaller enterprises that may not be able to fully utilize the deduction in that year due to delayed commissioning or partial use of assets. On the other hand, a recurring or carry-forward benefit would provide them the opportunity to claim the full deduction over time, consistent with their cash flow and business operations. Therefore, adopting a flexible interpretation that allows the benefit to be availed in later years would support the development of small and medium enterprises and contribute to inclusive economic growth.
Compliance and Documentation Requirements
If the interpretation of recurring additional depreciation is accepted, it will become essential for taxpayers to maintain appropriate documentation and records to substantiate their claims in subsequent years. This includes details of the date of acquisition and installation of the asset, proof of actual use, calculations showing the portion of depreciation claimed in earlier years, and explanations for any delay in utilization. Proper documentation will ensure that the benefit is not misused and that the claims can withstand scrutiny during assessments or audits. It will also provide clarity to the assessing officers and facilitate easier verification. To support this, tax authorities may consider issuing a standard checklist or format for documenting such claims, thereby streamlining compliance and minimizing disputes.
Administrative Challenges and the Role of Technology
One of the concerns raised against allowing recurring additional depreciation is the administrative burden it may place on tax officers, particularly in tracking individual assets within the block system and verifying the appropriateness of claims over multiple years. However, with the increasing digitization of tax processes and the availability of advanced software tools, these challenges can be effectively addressed. The use of automated systems and asset registers can help both taxpayers and tax authorities maintain accurate records and monitor depreciation claims. Furthermore, integrating these systems with the income tax e-filing portal can enable real-time validation and reduce the possibility of errors or fraudulent claims. Embracing technology can thus make it feasible to administer recurring depreciation claims without significantly increasing compliance burdens.
Implications for Tax Planning and Investment Decisions
The interpretation of section 32(1)(iia) has a direct bearing on tax planning strategies and investment decisions of businesses. If the additional depreciation is allowed only in the first year, businesses may time their acquisitions and commissioning of machinery more precisely to ensure that the assets are used for the required period and the deduction is fully utilized. In contrast, if the benefit is allowed over multiple years, businesses may have greater flexibility in making investment decisions without being constrained by tax deadlines. This flexibility can encourage more timely and efficient capital investments, improve capacity planning, and enhance the overall productivity of enterprises. From a policy perspective, allowing recurring claims of additional depreciation could thus serve as a more effective stimulus for industrial investment than a rigid one-time deduction.
Possible Models for Implementation
If the government decides to allow recurring claims of additional depreciation through a policy change or legislative amendment, several models can be considered for implementation. One option is to allow unclaimed additional depreciation to be carried forward and claimed in subsequent years, similar to unabsorbed depreciation under section 32(2). This would maintain consistency with existing provisions and ensure smooth integration with current tax practices. Another option is to permit additional depreciation to be spread over a fixed number of years, such as two or three years, with specific conditions regarding asset usage and record-keeping. A hybrid model could also be developed, allowing initial deduction in the year of acquisition and installation, and carry-forward of the remaining portion for up to two subsequent years. These models would provide clarity and certainty while also aligning with the policy objectives of promoting capital investment.
Consideration of Time Value of Money
The time value of money is an important consideration in evaluating the effectiveness of tax incentives. A deduction claimed in the first year provides greater value to the taxpayer compared to the same deduction spread over multiple years. From this perspective, even if additional depreciation is allowed over subsequent years, its financial impact may diminish over time. Therefore, taxpayers may still prefer to claim the entire deduction in the first year wherever possible. However, allowing the benefit to be claimed later ensures that it is not lost altogether due to procedural constraints. Thus, recurring claims offer a second-best alternative to immediate deduction, preserving the benefit in part even if its present value is reduced. This approach balances fiscal prudence with taxpayer support and reinforces the incentive nature of the provision.
Legislative and Judicial Trends in Similar Provisions
Examining legislative and judicial developments in similar provisions can provide useful guidance in interpreting section 32(1)(iia). For example, the treatment of investment allowance under earlier versions of the Income Tax Act permitted deductions over multiple years, subject to certain conditions. Similarly, accelerated depreciation under specific schemes has been allowed over multiple years with defined eligibility criteria. Courts have generally supported flexible interpretations in such cases to ensure that the intended benefits are realized by taxpayers. These trends suggest that allowing recurring or carried-forward claims of additional depreciation would be consistent with established legislative and judicial patterns. Therefore, adopting a similar approach in the case of section 32(1)(iia) would be both reasonable and aligned with precedent.
Implications of the Conflicting Views
The divergence in tribunal rulings and interpretations of section 32(1)(iia) has far-reaching implications for taxpayers, tax practitioners, and revenue authorities. On one hand, taxpayers may be encouraged by favorable decisions to claim additional depreciation in subsequent years, especially where assets are partially used in the first year. On the other hand, the absence of a clear and binding precedent from a higher court keeps the matter open to scrutiny and litigation.
This lack of uniformity creates uncertainty in financial planning, tax projections, and compliance efforts. It also leads to inconsistency in assessments and appellate orders, adding to the burden of litigation and compliance for both taxpayers and the department.
The Practical Dilemma for Taxpayers
From a practical perspective, businesses face challenges when deciding whether to claim additional depreciation in subsequent years. While favorable tribunal rulings,g, such as those in the ACC Ltd. and Gloster Jute Mills Ltd. cases, offer a sense of relief and justification, adverse rulings, like those in CRI Pumps and Everest Industries, create the risk of disallowance and penalties.
Taxpayers are often left to make judgment calls based on risk appetite and the likelihood of scrutiny. The lack of clarity in the language of the statute and the differing judicial interpretations compel businesses to either seek advance rulings or prepare for lengthy litigation to defend their claims.
Legislative History and Intent
Understanding legislative intent is critical in interpreting tax laws. When clause (iia) was first inserted by the Finance Act, 2002, the purpose was to encourage investments in plant and machinery by manufacturing entities. By offering an additional deduction over and above normal depreciation, the government aimed to promote capital formation and industrial growth.
However, the provision did not expressly state whether this benefit should be restricted to the year in which the asset is first put to use or allowed over multiple years. This ambiguity suggests that the legislative intent might not have been fully captured in the drafting of the statute. The later insertion of the third proviso to section 32 in 2015 attempts to address this gap to some extent, but only in cases where the asset is used for less than 180 days.
Judicial Discipline and Need for Clarity
The presence of conflicting decisions from coordinate benches highlights the need for judicial discipline. When coordinate benches of tribunals adopt divergent interpretations of the same statutory provision, it confuseconfusesthority of tribunal rulings. Ideally, such conflicts should be resolved by a larger bench or the jurisdictional High Court to provide clarity and consistency.
In the absence of a binding precedent from the Supreme Court or a larger bench, the application of section 32(1)(iia) remains susceptible to varying interpretations across different jurisdictions.
Recommendations for Taxpayers
Until the matter is settled by a higher judicial forum or through legislative amendment, taxpayers may consider the following approaches:
Maintain clear documentation of the usage and commissioning of the assets.
Evaluate the possibility of claiming 50 percent depreciation in the first year and the balance in the subsequent year as per the third proviso, where applicable.
Be prepared to substantiate the claim with legal precedents and reasoning in case of scrutiny.
Obtain a written legal opinion or advance ruling where feasible, especially in high-value cases.
Monitor developments in case law and legislative amendments to stay aligned with current interpretations.
Revenue’s Stand and Departmental Circulars
The Income Tax Department has generally adopted a conservative interpretation of section 32(1)(iia), restricting additional depreciation to the year in which the asset is first put to use. However, no binding circular or notification has been issued to date clarifying this position.
In the absence of such clarification, assessing officers may rely on precedent decisions favoring disallowance in subsequent years. This increases the risk of litigation and necessitates greater preparedness from the taxpayer’s end.
The Policy Imperative
At a broader level, clarity on this issue is important not only from a compliance standpoint but also from a policy perspective. If the government intends to continue promoting investments in capital goods, clarity in the provisions regarding additional depreciation is essential. Clear articulation would encourage taxpayer confidence and reduce compliance ambiguity.
Policymakers should consider issuing a clarification or amendment to explicitly state whether additional depreciation under section 32(1)(iia) is a one-time benefit or can be spread over more than one year under specific circumstances. This will reduce litigation and foster greater compliance.
Conclusion
The controversy over whether additional depreciation under section 32(1)(iia) is a one-time or recurring benefit arises from the ambiguous language of the statute and inconsistent judicial interpretations. While some tribunals have held that additional depreciation can be claimed in subsequent years, others have restricted it to the year of initial usage.
The insertion of the third proviso to section 32 provides limited guidance for cases where assets are used for less than 180 days, but the broader issue remains unresolved. In the current scenario, taxpayers must navigate this ambiguity with caution and remain vigilant to judicial and legislative developments.