Section 32AD of Income Tax Act: Benefits and Challenges

Section 32AD of the Income Tax Act: A Comprehensive Guide

Section 32AD of the Income Tax Act is a provision that allows eligible businesses to claim a deduction of 15% of the cost of new plant and machinery acquired and installed on or after 1 April 2015. This provision was introduced by the Finance Act, 2015 and is applicable to businesses engaged in the business of manufacturing or production of any article or thing. In this blog, we will take a closer look at Section 32AD of the Income Tax Act and its various provisions.

Eligibility Criteria for Claiming Deduction

To claim a deduction under Section 32AD of the Income Tax Act, the following conditions must be fulfilled:

1. The business must be engaged in the manufacturing or production of any article or thing.
2. The business must not be formed by splitting up or reconstruction of an existing business.
3. The business must not use any machinery or plant that was used previously in any other business.
4. The business must have acquired and installed new plant and machinery on or after 1 April 2015.
5. The business must not be eligible for any other deduction under the Income Tax Act for the same plant and machinery.

Quantum of Deduction

The deduction allowed under Section 32AD of the Income Tax Act is 15% of the cost of new plant and machinery acquired and installed on or after 1 April 2015. The cost of plant and machinery includes all expenses related to transportation, erection, and commissioning of the machinery.

However, the deduction allowed under this section cannot exceed the total income of the assessee for the relevant assessment year.

Carry Forward of Unabsorbed Depreciation

If the amount of deduction claimed under Section 32AD of the Income Tax Act exceeds the total income of the assessee for the relevant assessment year, the unabsorbed depreciation can be carried forward to the subsequent years. The unabsorbed depreciation can be carried forward for a maximum of eight assessment years and can be set off against the profits and gains of subsequent years.

Benefits of Section 32AD

Section 32AD of the Income Tax Act provides a number of benefits to businesses engaged in the manufacturing or production of any article or thing. Some of these benefits are:

1. Encourages Investment in New Plant and Machinery: The provision of 15% deduction on the cost of new plant and machinery encourages businesses to invest in modern and efficient machinery, which in turn can lead to higher productivity and profitability.
2. Reduced Tax Liability: The deduction allowed under Section 32AD reduces the tax liability of businesses, thereby freeing up more resources for investment and expansion.
3. Competitive Advantage: By investing in modern and efficient machinery, businesses can gain a competitive advantage over their rivals, which can help them to increase their market share and profitability.
4. Boosts Economic Growth: The provision of Section 32AD can help to boost economic growth by encouraging investment in new plant and machinery, which can lead to higher production and employment.

Challenges in Claiming Deduction under Section 32AD

While Section 32AD of the Income Tax Act provides several benefits to businesses, claiming the deduction under this provision can be challenging. Some of the challenges that businesses may face while claiming the deduction are:

1. Meeting Eligibility Criteria: To claim the deduction under Section 32AD, businesses must fulfil certain eligibility criteria, such as being engaged in the manufacturing or production of any article or thing, and not using any machinery or plant that was used previously in any other business. Meeting these eligibility criteria can be challenging for some businesses.
2. Documentation Requirements: Businesses must maintain proper documentation to claim the deduction under Section 32AD. This includes documents related to the cost of plant and machinery, expenses related to transportation, erection, and commissioning of machinery, and invoices and receipts related to these expenses.
3. Calculation of Deduction: Calculating the deduction under Section 32AD can be complex, as it involves considering various factors such as the cost of new plant and machinery, expenses related to transportation, erection, and commissioning of machinery, and the total income of the assessee for the relevant assessment year.
4. Audit and Scrutiny: Businesses claiming the deduction under Section 32AD may be subject to audit and scrutiny by the income tax authorities. This can be time-consuming and may require businesses to provide additional documentation and explanations to support their claim.

Conclusion

Section 32AD of the Income Tax Act provides a valuable deduction to businesses engaged in the manufacturing or production of any article or thing. The deduction is available for new plant and machinery acquired and installed on or after 1 April 2015 and is equal to 15% of the cost of such plant and machinery. However, to claim this deduction, the business must fulfil certain eligibility criteria. If the amount of deduction claimed exceeds the total income of the assessee, the unabsorbed depreciation can be carried forward to subsequent years. Overall, Section 32AD is a valuable provision that can help businesses reduce their tax liability and encourage investment in new plant and machinery.

Read more useful content:

• section 145 of income tax act
• section 10e of income tax act
• section 9 of the income tax act
• section 94b of income tax act
• section 206aa of income tax act

Frequently Asked Questions (FAQs)

1. What is Section 32AD of the Income Tax Act?

Section 32AD of the Income Tax Act provides a deduction of 15% on the cost of new plant and machinery for businesses engaged in the manufacturing or production of any article or thing.

2. Who is eligible to claim deduction under Section 32AD?
Businesses engaged in the manufacturing or production of any article or thing are eligible to claim deduction under Section 32AD.

3. What is the benefit of claiming deduction under Section 32AD?
Claiming deduction under Section 32AD can reduce the tax liability of businesses and encourage investment in modern and efficient plant and machinery.

4. Is there any limit on the amount of deduction that can be claimed under Section 32AD?
No, there is no limit on the amount of deduction that can be claimed under Section 32AD.

5. Can the deduction under Section 32AD be claimed for used plant and machinery?
No, the deduction under Section 32AD can only be claimed for the cost of new plant and machinery.

6. What are the documentation requirements for claiming deduction under Section 32AD?
Businesses must maintain proper documentation related to the cost of plant and machinery, expenses related to transportation, erection, and commissioning of machinery, and invoices and receipts related to these expenses.

7. How is the deduction under Section 32AD calculated?
The deduction under Section 32AD is calculated as 15% of the cost of new plant and machinery.

8. Can the deduction under Section 32AD be claimed along with other deductions?
Yes, the deduction under Section 32AD can be claimed along with other deductions allowed under the Income Tax Act.

9. Can businesses engaged in the service sector claim deduction under Section 32AD?
No, only businesses engaged in the manufacturing or production of any article or thing are eligible to claim deduction under Section 32AD.

10. Is there any time limit for claiming deduction under Section 32AD?
No, there is no time limit for claiming deduction under Section 32AD. However, it must be claimed in the relevant assessment year for which the deduction is sought.