Investment in new plant or machinery in notified backward areas in certain States

Investment in new plant or machinery in notified backward areas in certain States

(1) Where an assessee, sets up an undertaking or enterprise for manufacture or production of any article or thing, on or after the 1st day of April, 2015 in any backward area notified by the Central Government in this behalf, in the State of Andhra Pradesh or in the State of Bihar or in the State of Telangana or in the State of West Bengal, and acquires and installs any new asset for the purposes of the said undertaking or enterprise during the period beginning on the 1st day of April, 2015 and ending before the 1st day of April, 2020 in the said backward area, then, there shall be allowed a deduction of a sum equal to fifteen per cent of the actual cost of such new asset for the assessment year relevant to the previous year in which such new asset is installed.

(2) If any new asset acquired and installed by the assessee is sold or otherwise transferred, except in connection with the amalgamation or demerger or re-organisation of business referred to in clause (xiii) or clause (xiiib) or clause (xiv) of section 47, within a period of five years from the date of its installation, the amount of deduction allowed under sub-section (1) in respect of such new asset shall be deemed to be the income of the assessee 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, in addition to taxability of gains, arising on account of transfer of such new asset.

(3) Where the new asset is sold or otherwise transferred in connection with the amalgamation or demerger or re-organisation of business referred to in clause (xiii) or clause (xiiib) or clause (xiv) of section 47 within a period of five years from the date of its installation, the provisions of sub-section (2) shall apply to the amalgamated company or the resulting company or the successor referred to in clause (xiii) or clause (xiiib) or clause (xiv) of section 47, as the case may be, as they would have applied to the amalgamating company or the demerged company or the predecessor referred to in clause (xiii) or clause (xiiib) or clause (xiv) of section 47.

(4) For the purposes of this section, “new asset” means any new plant or machinery (other than a ship or aircraft) but does not include—

(a)  any plant or machinery, which before its installation by the assessee, was used either within or outside India by any other person;

(b)  any plant or machinery installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house;

(c)  any office appliances including computers or computer software;

(d)  any vehicle; or

(e)  any plant or machinery, the whole of the actual cost of which is allowed as deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of business or profession” of any previous year.

section 32AD of Income Tax Act, 1961

Are you looking to understand about Investment in new plant or machinery in notified backward areas in certain States? 

This detailed article will tell you all about Investment in new plant or machinery in notified backward areas in certain States.

Hi, my name is Shruti Goyal, I have been working in the field of Income Tax since 2011. I have a vast experience of filing income tax returns, accounting, tax advisory, tax consultancy, income tax provisions and tax planning.

Investing in new plant and machinery in certain states can offer considerable tax benefits to investors, particularly in less developed regions. Section 32AD of the Income Tax Act, 1961, permits a deduction of 15% of the cost of newly purchased plant or machinery that is installed in notified backward areas falling in categories A and B.

The government identifies backward regions based on a range of factors such as low levels of industrial development, inadequate infrastructure, insufficient employment opportunities, and low human development indices. This deduction is open to all types of businesses including sole proprietorship firms, partnerships, and companies. The deduction is allowed in the year in which the plant or machinery is installed and put to use, and the investment must be made before 31st March 2025 to qualify for the deduction.

This deduction is in addition to the normal depreciation allowed on plant and machinery. The usual depreciation rates for plant and machinery vary between 15% and 40%, depending on the asset’s nature. The additional deduction of 15% under section 32AD can lead to significant tax savings for investors.

For instance, let’s assume a company invests Rs. 10 crores in new plant and machinery in a backward area categorized as A. The normal depreciation rate is 30%, and the company is eligible for an extra deduction of 15% under section 32AD. The tax savings would be:

Normal Depreciation: 30% of Rs. 10 crores = Rs. 3 crores

Additional Deduction under section 32AD: 15% of Rs. 10 crores = Rs. 1.5 crores

Total Deduction: Rs. 4.5 crores

Assuming a corporate tax rate of 30%, the tax savings for the company would be:

Tax Savings: 30% of Rs. 4.5 crores = Rs. 1.35 crores

Therefore, investing in new plant and machinery in backward areas can not only result in tax savings but also offer other advantages such as lower labor costs, better access to raw materials, improved infrastructure, and business expansion opportunities.

To sum up, Section 32AD of the Income Tax Act provides a significant tax incentive for investing in new plant and machinery in backward areas falling in categories A and B. The deduction of 15% of the cost of plant or machinery can lead to substantial tax savings for investors, combined with additional benefits that make investing in backward regions a promising proposition for businesses.