2.2       Query

Extent of allowance under Section 32AB of the Income-tax Act.

1.A company has entered into borrowing arrangements with a public financial institution for the following project:

            The above project was financed as follows:

2.In this regard, the querist has mentioned the following points:

                        (i)            There were no project over-runs.

(ii) Of the total machinery eligible for allowance under Section 32AB, machinery worth Rs. 51 lacs was acquired in the year 1986-87 and investment allowance has been claimed on the same. The rest of the machinery has been purchased during the current period of 23 months (1.5.87-31.3.89).

(iii) The project has been completed as per schedule.

3.The querist has sought the opinion of the Expert Advisory Committee on the following issues arising from the above:

(a) What is the amount that can be claimed under Section 32 AB for the accounting year 1987-89 (23 months)? Can the company compute it as 80/330x157, i.e., proportionate share of self-generated funds on machinery acquired during the period?

(b) Since the term loan obtained is for over 3 years and has been borrowed from a financial institution, the repayments become eligible for allowance under section 32 AB and since two instalments of Rs. 12.50 lacs each, totalling Rs. 25 lacs, are paid in the current year, the following problems arise:

(i) Can the entire Rs. 25 lacs be claimed as allowance, or

(ii) Only the proportion of term loan for acquiring machinery?

Term loan Rs. 250 lacs is for the project cost of Rs. 330 lacs. Therefore, for Rs. 208 lacs machinery, term loan component is 250/330x208, i.e., Rs. 157.57 lacs.

Repayment of Rs.25 lacs is for total loan of Rs. 250 lacs. Repayment for Rs.157.57 lacs is 25/250x157.57, i.e., Rs. 15.75 lacs.

(c)        For calculation of allowance under section 32 AB is it enough if the company considers the projected ratio of asset acquisition or the ratio has to be computed on actual acquisitions?

(d)        Can the company claim section 32 AB allowance on value of assets acquired under hire purchase and similar arrangements including borrowing arrangements from private parties? If the allow ability of the above is in the negative, can the company claim section 32AB allowance as and when hire purchase rentals are paid or other borrowing instalments are paid?

(e)        Is the allowance under Section 32 AB available for repayment of principal amounts on finance availed from IDBI on deferred payment terms for acquisition of machinery? Under this

            (i)         The transaction is ultimately financed by IDBI, and

            (ii)        the repayment period is more than 3 years.

            This is of particular importance, as per the querist, since the application for allowing credit is scrutinized by the bankers and only on their guaranteeing to pay the amount on the due dates, IDBI discounts the bills and makes available the finance.

                                                                        Opinion                                                        July 31, 1989

1.The Committee notes that paras 6.6 and 6.7 of the ‘Guidance Note on Audit under Section 32 AB of the Income-tax Act’, issued by the Institute of Chartered Accountants of India, recommended as below:

“6.6 The requirement of utilising the amount ‘for the purchase’ of specified machinery should be construed in a broad manner. It is not necessary that the assessee should become owner of the specified machinery during the previous year. It is also not necessary that the specified machinery should be installed or put to use during the previous year. If the assessee has placed an order for purchase of the specified machinery and given an advance to the supplier it can be said that the amount has been utilised for the purchase of the said machinery. The delivery of the machinery may be taken in a subsequent year. When the balance price is paid in a subsequent year it will be considered that the assessee has utilised the balance amount for purchase of the machinery in the said year. If the terms of purchase provide for payment of purchase price in instalments, the assessee can claim the amount paid towards these instalments as utilisation of amount for purchase of the said machinery. In other words, the concept of utilisation of the amount for purchase has to be understood with reference to actual payment made to the supplier from time to time and not with reference to the liability created for the purchase under the mercantile system of accounting. Therefore, even if the account of the supplier is credited with the total price of the machinery and corresponding debit is given to the machinery account the deduction under Section 32 AB can be claimed only in respect of the actual payment made to the supplier in each accounting year.

6.7 The assessee can utilise the amount of profit from eligible business or profession for repayment of the principal amount of term loans contracted after 31.3.1986 and taken for a period of three years or more from a Financial Institution which is engaged in providing long-term finance for industrial development in India or from a scheduled bank or from such other institution as the Central Government may be notification specify. The facility of repayment of term loans does not apply in respect of loans taken from other sources (e.g., debentures and long term borrowings from other sources in the private sector)”.

2.The Committee also notes that Circular No. 461, dated 9.7.1986 [Explanatory Notes on the provisions of Finance Act, 1986, issued by Central Board of Direct Taxes] has stated in paras 17.4-17.6(h) as below:

“(h) For getting the benefit under this provision, the deposit in the Development Bank or the purchase of any new ship, plant, etc., should be out of income from the eligible business or profession. There is an underlying reason for this pre-condition. As mentioned in the Long Term Fiscal Policy (Para 5.14) since the benefit of investment allowance is related to the cost of plant and machinery irrespective of how it is financed, such a benefit had created a distortion in the profitability of companies depending on the extent to which they were able to find the resources internally or through borrowings to acquire the new ship, plant, etc. that being so, under the Investment Deposit Scheme, deduction will be admissible only if the deposit is made or the ship, plant, etc., is acquired out of income chargeable to tax under the head ‘profits and gains of business or profession’.

3.On the basis of the above, the opinion of the Expert Advisory Committee on the various issues raised by the querist in para 3 of the query, is as below:

(a) Since the concept of utilisation of the amount of purchase of eligible machinery has to be understood with reference to actual payment made in this regard and not with reference to the liability created in respect of such purchase, it is essential to calculate the payment made out of the owned funds of the company. Thus, 3(a) of the query is correct.

(b) Only the proportion of the term loan for acquiring machinery, as suggested by the querist in para 3(b) (ii), should be considered as eligible for section 32 AB.

(c) The computation of allowance under Section 32 AB should be with reference to actual utilization.

(d) Since, hire purchase is not a contract of ‘purchase’ of assets, but is a contract of ‘hire’ such a machinery acquired on hire purchase basis would not be eligible for the allowance under section 32 AB. In view of this, Section 32 AB allowance cannot be claimed in respect of the hire purchase rentals paid. Borrowing arrangements form private parties are also not eligible under the said section.

(e) The Committee is of the opinion that acquisition of eligible machinery under the deferred payment terms would be considered as a ‘purchase’ and section 32 AB allowance would be permissible on actual payment of instalments of purchase consideration and not as repayment of the loan.

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