Section 32(1)(iia): Additional Depreciation under the Income Tax Act, 1961
- Rupsa Sinha
- Nov 12
- 3 min read
Additional Depreciation
Introduction
Depreciation is one of the most significant tax deductions available to businesses under the Income-tax Act, 1961. It allows taxpayers to spread the cost of a capital asset over its useful life and claim annual deductions to reflect wear and tear, obsolescence, or reduction in value. However, to encourage industrial growth and investment in productive assets, the legislature introduced an additional depreciation incentive under Section 32(1)(iia). This additional depreciation is granted over and above the normal depreciation, providing manufacturers and power generation companies an opportunity to claim an extra deduction on new machinery and plant.
Eligibility Conditions
(a) Eligible Assessee The assessee must be engaged in: Manufacture or production of any article or thing, or Generation, transmission, or distribution of power.
(b) Eligible Asset As per the provisions of the Income Tax Act 1961, the benefit applies only to new plant and machinery acquired and installed after 31 March 2005.
The asset must satisfy all the following conditions:
a. It must be new—not used before by any person (in India or abroad).
b. It must be acquired and installed by the assessee.
c. It should be used for business purposes of manufacture or power generation.
d. It must not fall under the following exclusions: a. Second-hand or previously used machinery. b. Machinery or plant installed in office premises or residential accommodation, including guest houses. c. Office appliances or road transport vehicles.d. Machinery where the entire cost has already been claimed as deduction under any other provision (e.g., Section 35).
(c) Usage Requirement
If the eligible machinery or plant is put to use for less than 180 days in the previous year, the assessee can claim only 50% of the additional depreciation in that year. The balance 50% can be claimed in the immediately following year. This ensures that premature asset acquisition near the year-end doesn’t allow full-year benefit.
Quantum of Deduction
General Rate: 20% of the actual cost of new eligible plant and machinery.
For Notified Backward Areas: 35% of the actual cost, if the unit is located in the notified backward area of Andhra Pradesh, Bihar, Telangana, or West Bengal, and the machinery is installed between 1 April 2015 and 31 March 2020.
This deduction is in addition to the normal depreciation allowed under Section 32(1)(ii). The normal depreciation is computed on the Written Down Value (WDV) of the block, while additional depreciation is directly based on the actual cost of the eligible asset.
Working of Depreciation under Section 32(1)(iia)
Case 1: Asset used for 180 days or more
If the machinery is used for at least 180 days during the financial year of installation:
The assessee is eligible for full 20% (or 35%) additional depreciation in that year itself.
Case 2: Asset used for less than 180 days
If the machinery is used for less than 180 days:
Only 50% (i.e., 10% or 17.5%) of additional depreciation can be claimed in the year of acquisition, and
The balance 50% can be claimed in the subsequent financial year.
Judicial and Administrative Clarifications Over time, multiple judicial decisions have shaped the interpretation of Section 32(1)(iia):
1. One-time vs. Recurring Benefit:Courts have clarified that additional depreciation is a one-time allowance linked to the acquisition and installation of new machinery. However, where only 50% was claimed due to usage <180 days, the balance can be claimed in the next year (as held in CIT v. Rittal India Pvt Ltd, Karnataka HC).
2. Printing and Publishing: CBDT Circular No. 15/2016 confirms that printing and publishing constitute manufacturing; hence, eligible for additional depreciation.
3. Trial Run Considered as Use: Several tribunal rulings hold that even trial runs amount to “use” of machinery for business purposes, qualifying the asset for depreciation.
4. Second-hand Machinery Disqualification: Courts consistently reject additional depreciation claims on reconditioned or imported second-hand machinery, as it fails the “new machinery” test.
Strategic Planning Insights From a tax planning perspective, Section 32(1)(iia) can be leveraged effectively through:
b. Asset Segregation: Maintain a separate fixed asset register for assets eligible for additional depreciation, simplifying audit compliance.
c. Project Feasibility Analysis: While preparing financial projections, factor in tax savings from additional depreciation to improve IRR and payback period.
d. Cash Flow Forecasting: Recognize that although depreciation is a non-cash item, its tax shield enhances