Whether manufacturer can be denied additional depreciation on machineries acquired by it, merely because they are installed at later date - NO: HC

THE ISSUE IS - Whether an assessee manufacturer can be denied additional depreciation u/s 32(1)(iia) on machineries acquired by it, merely because they were installed belatedly and that too on account of replacement of damaged parts. NO is the verdict.

Facts of the case:

The assessee is engaged in the business of fabrication and manufacturing of equipment / polyfilm rolls used in dairy, pharmaceuticals, beverages and other other industries. Consequent to filing of its return, the scrutiny assessment u/s 143(3) was completed assessing total income at Rs.NIL, after settling of depreciation to the extent of income available of Rs.6,83,33,991/. Subsequently, the AO noted that assessee had claimed additional depreciation u/s 32(1)(iia) of Rs.2,18,50,976/at 20% on newly purchased Flexo Printing Machinery of Rs.10,92,54,880/. Although the said machinery was purchased on Feb 12, 2004, however, it was installed on April 15, 2005. Therefore, in reassessment proceedings the AO disallowed the claim of additional depreciation and reassessed the income of assessee at Rs.4,77,74,100/-.

On appeal, the HC held that,

++ the short question posed for consideration of this Court is whether in the facts and circumstances of the case the assessee is entitled to additional depreciation u/s 32(1)(iia). In the present case the assessee claimed additional depreciation of Rs.2,18,50,976/- on the plant and machinery which was purchased before Mar 31, 2005, but installed after Mar 31, 2005. It is noted that though the machinery was purchased on Feb 12, 2004, however, certain damaged parts of machinery were replaced by the supplier at Germany on Dec 13, 2004 and therefore the said machinery was installed on April 15, 2005. According to the Revenue as the plant and machinery on which the additional depreciation is claimed was not acquired and installed during the year under consideration and therefore, twin conditions of acquisition and installation has not been satisfied, the assessee is not entitled to additional depreciation at 20% u/s 32(1)(iia). The purpose and object of section 32(1)(iia) seems to be to give a boost to the manufacturing sector by allowing the deduction of a further sum equal to 20% of the actual cost of such machinery or plant acquired and installed. Therefore, underlying object and purpose is to encourage the industries by permitting the assessee setting up the new undertaking / installation of new plant and machinery to claim the benefit of additional depreciation. Keeping in mind the above object and purpose the question posed for consideration of this Court is required to be considered;

++ it is the case on behalf of Revenue that the language used in section 32(1)(iia) is that a further sum equal to 20% of actual cost of any new machinery or plant acquired and installed after 31st Day of March 2005 by the assessee engaged in the business of manufacturing or production of any article or thing, is allowed as deduction as further depreciation. Therefore, it is the case on behalf of Revenue that on literal interpretation of the provision of Section 32(1)(iia), while framing the deduction as further depreciation u/s 32(1)(iia), the assessee must have acquired and installed new plant and machinery on which the additional depreciation is claimed after March 31, 2005. If the submission on behalf of Revenue is accepted, it will lead to an absurd and unjust result and the purpose and object of granting the additional depreciation will be frustrated. If the contention on behalf of the Revenue is accepted, the assessee shall never get the additional depreciation as provided u/s 32(1)(iia). In the facts and circumstances of the case, the twin conditions of the acquired and installed shall never be satisfied in a year and therefore, the assessee shall never get any depreciation. The purpose and object of granting additional depreciation u/s 32(1)(iia) is stated here-in-above i.e. to encourage the industries by permitting the assessee setting up the new undertaking / installation of new plant and machinery and to give a boost to the manufacturing sector by allowing additional depreciation deduction. Thus, as rightly held by the ITAT the provision of section 32(1)(iia) is required to be interpreted reasonably and purposively as the strict and literal reading of section 32(1)(iia) will lead to an absurd result denying the additional depreciation to the assessee though admittedly the assessee has installed new plant and machinery.