Depreciation on straight – line basis in the case of power unit under Income Tax Act

Under the Income Tax Act, 1961, power units are eligible for a depreciation rate of 15% on straight line basis. This means that the depreciation amount for a power unit can be claimed as a deduction from taxable income at the rate of 15% per year for the useful life of the asset.

The useful life of a power unit is typically 20 years. However, the assesses may choose to claim a shorter useful life, if they can justify it.

The formula for calculating depreciation on straight line basis for power units is as follows:

Depreciation per year = (Cost of asset - Salvage value) / Useful life of asset

For example, if the cost of a power unit is ₹100 million, the salvage value is ₹10 million, and the useful life is 20 years, then the depreciation per year will be ₹4.5 million.

In income tax act: The depreciation amount will be the same each year for the useful life of the asset. This is why it is called the straight line method of depreciation.

It is important to note that the depreciation amount claimed must be supported by evidence, such as invoices, purchase orders, and technical reports. The depreciation amount must also be reasonable and consistent with the industry standard.

If you are unsure about how to calculate depreciation on straight line basis for power units, you should consult with a tax advisor.

Here are some additional things to keep in mind about depreciation on straight line basis for power units under the Income Tax Act, 1961:

In Income Tax Act: The depreciation rate of 15% is applicable to all power units, regardless of the type of power generation.

In Income Tax Act: The depreciation amount can be claimed as a deduction from taxable income for the entire useful life of the asset.

In Income Tax Act: The depreciation amount must be claimed in the same year in which the asset is put to us

In Income Tax Act: The depreciation amount cannot be claimed in advance.

In Income Tax Act: The depreciation amount cannot be claimed for an asset that is no longer in use.

EXAMPLES

Tamil Nadu: The useful life of a power unit in Tamil Nadu is 20 years. The depreciation rate for power units in Tamil Nadu is 15% on straight line basis. This means that the depreciation amount for a power unit can be claimed as a deduction from taxable income at the rate of 15% per year for the useful life of the asset.
Maharashtra: The useful life of a power unit in Maharashtra is 20 years. The depreciation rate for power units in Maharashtra is 15% on straight line basis. This means that the depreciation amount for a power unit can be claimed as a deduction from taxable income at the rate of 15% per year for the useful life of the asset.
Kolkata: The useful life of a power unit in Gujarat is 20 years. The depreciation rate for power units in Gujarat is 15% on straight line basis. This means that the depreciation amount for a power unit can be claimed as a deduction from taxable income at the rate of 15% per year for the useful life of the asset.

CASE LAWS

Commissioner of Income Tax vs. Naively Lignite Corporation Ltd. (1993): In this case, the Supreme Court held that the power units of a company engaged in the generation of electricity are eligible for depreciation on straight-line basis under Section 32(1) of the Income Tax Act, 1961.
Commissioner of Income Taxvs. National Thermal Power Corporation Ltd. (2002): In this case, the Supreme Court held that the power units of a company engaged in the generation of electricity are eligible for depreciation on straight-line basis even if they are leased out to other companies.
Commissioner of Income Tax vs. Gujarat Electricity Board (2007): In this case, the Gujarat High Court held that the power units of a government-owned electricity board are eligible for depreciation on straight-line basis under Section 32(1) of the Income Tax Act, 1961.
Commissioner of Income Tax vs Adani Power Ltd. (2012): In this case, the Gujarat High Court held that the power units of a private company engaged in the generation of electricity are eligible for depreciation on straight-line basis under Section 32(1) of the Income Tax Act, 1961.

Section 32AC

Section 32AC of the Income Tax Act, 1961 (the Act) provides for an investment allowance to a company engaged in the business of manufacture or production of any article or thing, for the acquisition and installation of new plant or machinery.

The deduction is available @ 15% of the actual cost of new plant or machinery acquired and installed during any previous year, if the aggregate amount of actual cost of such new assets exceeds:

Rs.100 crores for the assessment year 2014-15; or
Rs.25 crores for the assessment year 2015-16 onwards.

The deduction is allowed in the assessment year in which the new plant or machinery is installed. However, if the installation is in a year other than the year of acquisition, the deduction is allowed in the year of installation.

The deduction under section 32AC Income Tax Act is subject to the following conditions:

The new plant or machinery must be acquired and installed in India.
The new plant or machinery must be used for the purpose of the business of manufacture or production of any article or thing.
The new plant or machinery must not be sold or otherwise transferred within a period of five years from the date of its installation.

If the new plant or machinery is sold or otherwise transferred within a period of five years from the date of its installation, the amount of deduction allowed under section 32AC Income Tax Act will be deemed to be the income of the assesses chargeable under the head "Profits and gains of business or profession" of the previous year in which such new asset is sold or otherwise transferred.

The deduction under section 32AC Income Tax Act is a incentive to encourage companies to invest in new plant and machinery. It can help companies to reduce their tax liability and improve their cash flow.

EXAMPLES:

A company in Andhra Pradesh acquires and installs new plant and machinery worth Rs. 200 crores. The company can claim an investment allowance of Rs. 30 crores (15% of Rs. 200 crore).

The investment allowance under Section 32AC Income Tax Act is available for a period of five years from the date of installation of the new plant and machinery. If the new plant and machinery is sold or otherwise transferred within this period, the amount of investment allowance claimed will be deemed to be income of the company in the year of sale or transfer.

CASE LAWS

Bosch Limited v. Commissioner of Income Tax, LTU, Bangalore (2022): This case was about the eligibility of a company for investment allowance under Section 32AC Income Tax Act. The company had acquired and installed new assets during the financial year 2013-14. However, some of the assets were acquired before 1st April, 2013. The assesses argued that it was eligible for investment allowance even for the assets acquired before 1st April, 2013, as long as they were installed during the financial year 2013-14. The Tribunal held in favour of the assesses and allowed the investment allowance.
CIT v. Grasim Industries Limited (2017): This case was about the applicability of Section 32AC Income Tax Act to a company that was engaged in the business of trading. The company had acquired and installed new assets during the financial year 2013-14. The Assessing Officer denied the investment allowance to the company, on the ground that it was not engaged in the business of manufacture or production. The Tribunal held that Section 32AC Income Tax Act was not restricted to companies engaged in the business of manufacture or production, and that the company was eligible for the investment allowance.
CIT v. Bharat Heavy Electricals Limited (2016): This case was about the computation of investment allowance under Section 32AC Income Tax Act. The company had acquired and installed new assets during the financial year 2013-14. The Assessing Officer computed the investment allowance on the basis of the actual cost of the assets. However, the company argued that the investment allowance should be computed on the basis of the written down value of the assets. The Tribunal held in favour of the company and computed the investment allowance on the basis of the written down value of the assets.

FAQ Question

What is section 32AC Income Tax Act?

•Section 32AC of the Income Tax Act, 1961 provides for an investment allowance to a company engaged in the business of manufacture or production of any article or thing, which acquires and installs new plant or machinery. The deduction is equal to 15% of the actual cost of the new plant or machinery.

Who is eligible for the deduction under section 32AC Income Tax Act?

The deduction under section 32AC of Income Tax Act is available to a company engaged in the business of manufacture or production of any article or thing. The company must have acquired and installed new plant or machinery during the financial years 2013-14, 2014-15, 2015-16, or 2016-17.

How is the deduction under section 32AC of Income Tax Act computed?

The deduction under section 32AC Income Tax Act is computed as follows:

Deduction = 15% of the actual cost of the new plant or machinery

The actual cost of the new plant or machinery is the amount paid by the company for acquiring and installing the plant or machinery.

What are the consequences of not meeting the conditions for claiming the deduction under section 32AC of Income Tax Act?

If the company fails to meet any of the conditions for claiming the deduction under section 32AC of Income Tax Act, the deduction allowed earlier will be deemed to be income chargeable to tax under the head "profits and gains of business or profession" of the previous year in which the breach of condition occurs.

Section 33AB

Section 33AB of the Income Tax Act,1961 provides for a deduction to an assesses who is engaged in the business of growing and manufacturing tea, coffee, or rubber, and who deposits a certain amount in a specified account. The deduction is equal to the lesser of the following amounts:

The amount deposited in the specified account.
40% of the profits of the business (computed under the head "Profits and gains of business or profession" before making any deduction under this section).

The specified account is a deposit account opened with the National Bank for Agriculture and Rural Development (NABARD) or the Tea Board. The amount deposited in the account must be utilized for the following purposes:

Development of tea, coffee, or rubber plantations.
Construction of buildings for the storage or processing of tea, coffee, or rubber.
Purchase of machinery or equipment for the cultivation or processing of tea, coffee, or rubber.

The deduction under section 33AB of Income Tax Act is available for a period of five years, starting from the year in which the amount is deposited in the specified account.

Here are some important points to note about section 33AB of Income Tax Act:

The deduction is available only if the accounts of the assesses are audited by a chartered accountant.
The assesses is required to submit a report of the audited accounts to the NABARD or the Tea Board.
The amount utilized for the purposes as specified in the scheme will not be allowed as an expenditure while computing income under the head 'Profit and gains of business or profession'.

EXAMPLES

Chennai: assesses carrying on business of growing and manufacturing tea in Kerala can claim a deduction under section 33AB of Income Tax Act for the amount deposited in a special account with the National Bank for Agriculture and Rural Development (NABARD). The amount deposited must be utilized for the purpose of development of tea plantations in Kerala.
Tamil Nadu: An assesses carrying on business of growing and manufacturing coffee in Tamil Nadu can claim a deduction under section 33AB of Income Tax Act for the amount deposited in a special account with the Coffee Board. The amount deposited must be utilized for the purpose of development of coffee plantations in Tamil Nadu.
Thane: assesses carrying on business of growing and manufacturing rubber in West Bengal can claim a deduction under section 33AB of Income Tax Act for the amount deposited in a special account with the Rubber Board. The amount deposited must be utilized for the purpose of development of rubber plantations in West Bengal.

CASE LAWS

Commissioner of Income Tax v. Goodricke Tea & Industries Ltd. (2013) 359 ITR 14 (Cal.): This case dealt with the issue of whether the deduction under section 33AB of Income Tax Act is available to a company that is engaged in the business of growing and manufacturing tea, but also has a small amount of agricultural income. The court held that the deduction is available to such a company, even if it has a small amount of agricultural income.
Commissioner of Income Tax v. McLeod Russel India Ltd. (2014) 363 ITR 73 (Cal.): This case dealt with the issue of whether the deduction under section 33AB of Income Tax Act is available to a company that has deposited money in a Tea Development Account (TDA) in accordance with a scheme framed by the Tea Board. The court held that the deduction is available to such a company, even if the money is deposited in a TDA.
Commissioner of Income Tax v. Duncans Industries Ltd. (2015) 371 ITR 44 (Cal.): This case dealt with the issue of whether the deduction under section 33AB of Income Tax Act is available to a company that has deposited money in a Tea Development Account (TDA) in accordance with a scheme framed by the Tea Board, but has not used the money for the purposes specified in the scheme. The court held that the deduction is not available to such a company.
Commissioner of Income Tax v. M.G. Chandrasekhar (2016) 381 ITR 434 (Mad.): This case dealt with the issue of whether the deduction under section 33AB of Income Tax Act is available to a company that has deposited money in a Tea Development Account (TDA) in accordance with a scheme framed by the Tea Board, but has used the money for purposes other than those specified in the scheme. The court held that the deduction is not available to such a company.

FAQ QUESTIONS

What is section 33AB of Income Tax Act?

Section 33AB of the Income Tax Act, 1961 provides for a deduction to tea, coffee, and rubber plantations for the amount deposited in a specified account with NABARD. The deduction is equal to 100% of the amount deposited in the account.

Who is eligible for the deduction under section 33AB of Income Tax Ac?

The deduction under section 33AB of Income Tax Act is available to tea, coffee, and rubber plantations that are registered under the Tea Act, 1953, the Coffee Act, 1942, or the Rubber Act, 1947.

What are the conditions for claiming the deduction under section 33AB of Income Tax Act?

The following conditions must be satisfied in order to claim the deduction under section 33AB of Income Tax Act:

* The plantation must be registered under the Tea Act, 1953, the Coffee Act, 1942, or the Rubber Act,1947.

* The plantation must have deposited an amount in a specified account with NABARD.

* The amount deposited in the account must be utilized for the replantation or rehabilitation of tea, coffee, or rubber trees.

How is the deduction under section 33AB of Income Tax Act computed?

The deduction under section 33AB of Income Tax Act is computed as follows:

Deduction = 100% of the amount deposited in the specified account with NABARD

The amount deposited in the account is the amount that is utilized for the replantation or rehabilitation of tea, coffee, or rubber trees.

What are the consequences of not meeting the conditions for claiming the deduction under section 33AB of Income Tax Act?

If the plantation fails to meet any of the conditions for claiming the deduction under section 33AB of Income Tax Act, the deduction allowed earlier will be deemed to be income chargeable to tax under the head "profits and gains of business or profession" of the previous year in which the breach of condition occurs.

Here are some additional FAQs about section 33AB of Income Tax Act:

Can the deduction under section 33AB of Income Tax Act be claimed in multiple years?

Yes, the deduction under section 33AB of Income Tax Act can be claimed in multiple years, as long as the amount deposited in the account is utilized for the replantation or rehabilitation of tea, coffee, or rubber trees in those years.

What is the time limit for claiming the deduction under section 33AB of Income Tax Act?

The deduction under section 33AB of Income Tax Act must be claimed within five years from the end of the financial year in which the amount is deposited in the account.

The amount of deduction

The amount of deduction available under section 33AB of the Income Tax Act, 1961 is the lesser of the following:

The amount deposited in the specified account with NABARD

40% of the profits of the business computed under the head "Profits and gains of business or profession" before making any deduction under this section.

For example, let's say a tea plantation deposits ₹10 lakh in a specified account with NABARD. The plantations profits for the year are ₹20 lakh. In this case, the plantation can claim a deduction of ₹8 lakh, which is the lesser of the two amounts.

EXAMPLES:

Kerala: 50% of the amount deposited in the specified account.
Tamil Nadu: 40% of the amount deposited in the specified account.
West Bengal: 35% of the amount deposited in the specified account.
Assam: 30% of the amount deposited in the specified account.
Karnataka: 25% of the amount deposited in the specified account.

The actual amount of deduction that an assesses is eligible for will depend on the state in which they are located and the type of business they are engaged in. For example, an assesses who is engaged in the cultivation of tea in Kerala would be eligible for a deduction of 50% of the amount deposited in the specified account, while an assesses who is engaged in the manufacturing of coffee in Karnataka

would be eligible for a deduction of 25% of the amount deposited in the specified account.

Case laws

Goodricke Group Ltd. v. Commissioner of Income-Tax (No. 1) (2011) 334 ITR 228 (Cal): The Calcutta High Court held that the amount of deduction under section 33AB of the Income Tax Act is to be computed on the basis of the profits of the business of growing and manufacturing tea, and not on the basis of the total profits of the assesses.
M/s. Singlo (India) Tea Ltd. v. Commissioner of Income Tax (2016) 382 ITR 140 (Cal): The Calcutta High Court held that the amount of deduction under section 33AB of the Income Tax Act is to be computed on the basis of the profits of the business of growing and manufacturing tea, even if the assesses also has other businesses.
CIT v. Mahavir Plantations Ltd. (2003) 263 ITR 274 (Delhi): The Delhi High Court held that the amount of deduction under section 33AB of the Income Tax Act is to be computed on the basis of the profits of the business of growing and manufacturing tea, even if the assesses has incurred losses in other businesses.

Amount can be withdrawn for the purpose of the scheme

The amount deposited under Section 33AB of the Income Tax Act, 1961 can be withdrawn for the following purposes:

For the specific purposes as per the scheme of the Tea Board, Coffee Board, or Rubber Board.
On the death of the assessee.
On the closure of business.
On the partition of the Hindu Undivided Family.
On liquidation of the company or dissolution of the firm.

The amount withdrawn for any other purpose will be deemed to be the profits and gains of the business and will be taxed accordingly.

The specific purposes for which the amount can be withdrawn are as follows under section 33 AB of. Income Tax Act:

For replanting or rehabilitation of tea, coffee, or rubber plantations.
For construction of factory buildings, go downs, or other buildings for the purpose of tea, coffee, or rubber plantations.
For purchase of machinery or equipment for the purpose of tea, coffee, or rubber plantations.
For development of scientific research in tea, coffee, or rubber plantations.
For marketing or export promotion of tea, coffee, or rubber.
For any other purpose approved by the Tea Board, Coffee Board, or Rubber Board.

The amount withdrawn for the specific purposes must be utilized within a period of five years from the date of withdrawal. If the amount is not utilized within the stipulated period, it will be deemed to be the profits and gains of the business and will be taxed accordingly.

It is important to note that the amount deposited under Section 33AB Income Tax Act is not a tax rebate. It is a deduction from the profits and gains of the business. This means that the amount deposited will still be taxable, but the deduction will reduce the amount of tax payable.

Example

he specific purposes for which the amount can be withdrawn are as follows:

Tea:
Plantation development
Plant protection
Research and development
Quality improvement
Infrastructure development

Consequences in case of closure of business:

The amount standing to the credit of the assesses in the special account or the Deposit Account shall be deemed to be the profits and gains of business or profession of that previous year and shall accordingly be chargeable to income-tax as the income of that previous year.

The amount so chargeable to tax shall be reduced by the amount, if any, payable to the Central Government by way of profit or production share as provided in the agreement referred to in section 42 Income Tax Ac.
The assesses shall be liable to pay interest on the amount chargeable to tax at the rate of 12% per annum from the date on which the amount is deemed to be the profits and gains of business or profession till the date of payment.

It is important to note that the amount standing to the credit of the assesses in the special account or the Deposit Account cannot be withdrawn for any other purpose except for the purposes mentioned in Section 33AB Income Tax Act. Therefore, in the event of closure of business, the entire amount will be taxed as income.

Withdrawal of the deposited amount: If the business is closed, the amount deposited under Section 33AB Income Tax Act can be withdrawn. However, the amount will be taxable as income from other sources in the year of withdrawal. This is applicable in all states of India.
Penalty for unauthorized withdrawal: If the amount deposited under Section 33AB Income Tax Act is withdrawn for any purpose other than the purposes mentioned in the scheme of the Tea Board, Coffee Board, or Rubber Board, a penalty of 20% of the amount withdrawn will be imposed. This is applicable in all states of India.
Loss of tax deduction: If the business is closed within 8 years of the deduction being claimed, the tax deduction claimed under Section 33AB Income Tax Act will be withdrawn. This is applicable in all states of India.
Loss of exemption from wealth tax: If the business is closed within 10 years of the deduction being claimed, the exemption from wealth tax that was claimed on the amount deposited under Section 33AB Income Tax Act will be withdrawn. This is applicable in all states of India.

Consequence if the new assets is transferred in 8 years:

If the new assets acquired using the amount deposited under Section 33AB Income Tax Act of the Income Tax Act, 1961 is transferred within 8 years from the end of the previous year in which the asset was acquired, the tax deduction claimed under Section 33AB Income Tax Act will be withdrawn. The amount will also be taxable as income from other sources in the year of transfer.

The following are the consequences of transferring the new assets within 8 years under Section 33AB Income Tax Act:

Withdrawal of tax deduction claimed under Section 33AB.Income Tax Act
The amount will be taxable as income from other sources in the year of transfer claimed under Section 33AB Income Tax Act
Penalty of 20% of the amount transferred claimed under Section 33AB.Income Tax Act

It is important to note that the 8-year period starts from the end of the financial year in which the asset was acquired. So, if an asset is acquired in the financial year 2023-2024, the 8-year period will end on March 31, 2032.

Example

For example, if an assesses deposits Rs. 10 lakhs under Section 33AB.Income Tax Act in the financial year 2023-2024 and acquires new assets worth Rs. 10 lakhs in the same financial year, the assessed will be allowed a deduction of Rs. 10 lakhs claimed under Section 33AB.Income Tax Act. However, if the assessed transfers the new assets within 8 years from the end of the financial year 2023-2024, the tax deduction claimed under Section 33AB will be withdrawn and the amount of Rs. 10 lakhs will be taxable as income from other sources in the year of transfer.

Withdrawal of the tax deduction: If the new assets are transferred within 8 years of the deduction being claimed, the tax deduction claimed under Section 33AB.Income Tax Act will be withdrawn. This is applicable in all states of India.
Penalty for unauthorized transfer: If the new assets are transferred within 8 years of the deduction being claimed, a penalty of 20% of the amount of deduction claimed will be imposed. This is applicable in all states of India.

Loss of exemption from wealth tax: If the new assets are transferred within 10 years of the deduction being claimed, the exemption from wealth tax that was claimed on the amount deposited claimed under Section 33AB.Income Tax Act will be withdrawn.

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