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 32ACIncome 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 32ACIncome 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 cores. The company can claim an investment allowance of Rs. 30 crores

The investment allowance under Section 32ACIncome 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 32ACIncome 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 32ACIncome 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 32ACIncome 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 32ACIncome 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 32ACIncome 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 32ACIncome Tax Act?

The deduction under section 32AC ofIncome 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 Actcomputed?

The deduction under section 32ACIncome 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 ofIncome Tax Act?

If the company fails to meet any of the conditions for claiming the deduction under section 32AC ofIncome 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.