Has Govt notification unintentionally restricted depreciation rate to 40% for all taxpayers?

ameya's picture

The Government released a notification no 103/2016 dated Nov 7, amending Rule 5 of the Income Tax Rules.  Rule 5 provides manner of computation of depreciation available u/s 32 of Income Tax Act to all the taxpayers.  Rule 5 refers to New Appendix 1 to Income Tax Rules wherein tax rates for various block of assets (like 5%, 10%, 25%, 60%, 100% etc) are provided.

The Rule 5 has been amended w.e.f. April 1, 2016 and inserts a new proviso restricting depreciation allowance to 40% in case of domestic companies opting concessional taxation under newly inserted Sec 115BA. Finance Act, 2016 introduced Sec. 115BA to provide concessional tax rate of 25% to newly setup domestic companies engaged solely in the business of manufacture or production. The amended Rule 5 provides that in case of domestic companies opting concessional taxation u/s 115BA(4), the depreciation allowance u/s 32(1)(ii) in respect of any block of assets entitled to more than 40%, shall be restricted to 40% on the written down value of such block of assets. 

Clause (a) of the notification provides for these changes. Interestingly, there is also a clause (b) in the same notification, which states that "in the New Appendix I, in the Table, in the second column, for the figures “ ‘50’, ‘60’, ‘80’, ‘100’ ”, wherever they occur, the figure “40” shall be substituted with effect from the 1st day of April, 2017".  

Clause (b) does not make any reference to changes in clause (a), nor does it make any reference to companies opting for concessional tax u/s 115BA. Therefore, a strict reading of clause (b) would have an effect that depreciation rate will be capped to 40% for all categories of taxpayers. 

This would include assets such as computers (eligible for depreciation at 60%), energy saving devices (80%), renewable energy devices like solar or windmill (80%) or air/water pollution control equipment (100%).

Based on the overall 'spirit' of the notification, the intention seems to restrict depreciation only in respect of companies covered by Sec 115BA.  However, a strict reading suggests otherwise. Hence, a clarification on this aspect from the CBDT would be immensely helpful.



My good friend Anuj Deshmukh pointed out an important part from the Memorandum to the Finance Bill, 2016.  On page 8 (http://indiabudget.nic.in/ub2016-17/memo/mem1.pdf) , the Table 2 provides "Proposed Phase out plan of incentives (Accelerated Depreciation/Weighted Deduction) available under the Act".  

At serial number 1, it is stated that "To amend the new Appendix IA read with rule 5 of Income-tax Rules, 1962 to provide that highest rate of depreciation under the Income-tax Act shall be restricted to 40% w.e.f 01.4.2017. (i.e. from previous year 2017-18 and subsequent years). The new rate is proposed to be made applicable to all the assets (whether old or new) falling in the relevant block of assets."

Thus, it appears that 40% depreciation rate restriction in the notification no 103/2016 dated Nov 7 is in fact a 'conscious' change and is applicable to all categories of assets and shall be applicable from the next financial year 2017-18.



It appears that the provisions are as follows:
1. For companies falling under 115BA - The highest rate of depreciation would be 40% with effect from FY 2016-17 (based on Section 115BA, Rule 5 and Notification) ;
2. For other companies - The highest rate of depreciation would be 40% with effect from FY 2017-18 (based on changes to the New Appendix 1A, Notification and Memorandum)
Request your views.
Best Regards,
Dhaval Trivedi


Hi Ameya Kuntey

Whether the 4O% rate of depreciation is applied retrospectively or prospectively on WDV of assets ( i.e., as on 01.04.2017) for companies other than those opting for 115BA.