Section 32A of Income Tax Act, 1961: Investment Allowance
Updated: Oct 13, 2022
(1) In accordance with and subject to the provisions of this section, a deduction shall be allowed with respect to a ship, aircraft, machinery, or plant specified in subsection (2) that is owned by the assessee and is used exclusively for the purposes of the business that is carried on by him, with respect to the prior year in which the ship, aircraft, machinery, or plant was acquired, installed, or, if the ship, aircraft, machinery, or plant is first put to use the sum by way of an investment allowance equal to 25% of the actual cost of the ship, aircraft, machinery, or plant to the assessee in the immediately preceding previous year, then, in respect of that previous year:
However, no deduction will be permitted under this section in relation to—
(a) Any machinery or plant installed in any office space or residential unit, including any lodging that is a guesthouse in nature;
(b) Any office equipment or a road vehicle;
(c) Any ship, piece of equipment, or piece of plant for which a deduction for a development rebate is permitted under Section 33; and
(d) Any machinery or plant whose entire actual cost is allowed as a deduction (whether through depreciation or another method) in computing the income chargeable under the heading "Profits and gains of business or profession" of any one previous year.
(2) The vessel, aircraft, piece of equipment, or plant mentioned in subsection (1) shall be one of the following:
(a) A new ship or new aircraft purchased by an assessee involved in the operation of ships or aircraft after March 31, 1976;
(b) Any new equipment or facilities installed after March 31, 1976—
(i) For commercial electricity production or distribution or any other type of power; or
(ii) for the purpose of conducting business in connection with the construction, manufacture, or production of any one or more of the items listed in the Ninth Schedule; or
(iii) In a small-scale industrial undertaking for manufacturing or similar purposes
(3) If the assessee's total income for the assessment year applicable to the previous year in which the ship, aircraft, machinery, or plant was purchased, installed, or, as the case may be, the immediately preceding previous year [the assessee's total income for this purpose being computed after deduction of the allowances under Section and Section 33A, but without making any deductions under Subsection (1) of this Section or any deduction under Subsection (2) of this Section]
(i) The amount that will be permitted as an investment allowance for that assessment year under subsection (1) will only be that amount necessary to bring the stated total income to zero; and
(ii) the amount of the investment allowance, to the extent that it has not been allowed as stated, shall be carried forward to the subsequent assessment year; the investment allowance to be allowed for the subsequent assessment year shall be such an amount as is sufficient to reduce the assessee's total income assessable for that assessment year, computed in the manner aforesaid, to zero; and the balance of the investment allowance, if any, still outstanding shall no portion of the investment allowance may, however, be carried forward for more than eight assessment years immediately following the assessment year pertinent to the previous year in which the ship or aircraft was purchased, the machinery or plant was installed, or, as the case may be, the immediately succeeding previous year.
(4)The deduction under subsection (2) is only permitted if the following requirements are met, specifically:
(i) The assessee has provided the information required in this regard with respect to the ship, aircraft, machinery, or plant;
(ii) credit a reserve account (to be called the "Investment Allowance Reserve Account") to be used, and debit the profit and loss account of the prior year in respect of which the deduction is to be allowed, an amount equal to 75% of the investment allowance to be actually allowed—
(a) for the purpose of purchasing a new ship, aircraft, or machinery or plant [other than machinery or plant of the kind mentioned in clauses (a), (b), and (d) of the proviso to sub-section (1)] before the lapse of a period of ten years following the previous year in which the ship or aircraft was purchased or the machinery or plant was installed.
(b) prior to the purchase of a new ship, aircraft, piece of machinery, or other asset outside of India for the undertaking's business purposes other than dividend distribution, remittance of profits outside of India, or the creation of any asset outside of India:
(c) With the caveat that this clause will apply to a ship as if the word "fifty" were substituted for the word "seventy-five".
However, the Income-tax Officer will not grant this opportunity in cases where the discrepancy between the total income calculated by him and the total income reported by the assessee results from the application of the proviso to sub-section (1) of section 145 or sub-section (2) of that section or the assessee's failure to fully and truthfully disclose his income.
(5) For the purposes of this Act, any allowance made under this section with regard to any ship, aircraft, machinery, or plant shall be deemed to have been made in error if:
(a) the assessee sells or otherwise transfers the ship, aircraft, machinery, or plant to any person at any time before the expiry of eight years from the end of the previous year in which it was acquired or installed; or
(b) If the assessee does not use the money credited to the reserve account under subsection (4) for the purposes of purchasing a new ship, aircraft, or machinery or plant [other than the types of machinery or plant mentioned in clauses (a), (b), and (d) of the proviso to subsection (1)] before the expiration of ten years from the end of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed,
(c) If the assessee uses the money credited to the reserve account under subsection (4) at any point before the aforementioned ten-year period to distribute dividends, remit profits outside of India, create assets outside of India, or for any other reason not related to the undertaking's business, the provisions of subsection (4A) of section 155 will be applicable.
With the caveat that clause (a) is not applicable—
(i) in cases where the assessee sells or otherwise transfers the ship, aircraft, machinery, or plant to the government, a local authority, a corporation created by a federal, state, or provincial law, or a government company as defined in section 617 of the Companies Act, 1956 (1 of 1956); or
(ii) when the sale or transfer of the ship, aircraft, machinery, or plant is made in connection with the amalgamation or succession mentioned in subparagraph (6) or subparagraph I of this section (7),
(6) If, as part of a merger plan, the merging company sells or otherwise transfers to the merged company any ship, aircraft, machinery, or plant for which the merging company has been granted investment allowance According to subsection (1),
(a) If the combined company fails to comply with any of the conditions set forth in subsection (4) with regard to the reserve established by the merging company or with regard to the time period during which such ship, aircraft, machinery, or plant shall not be sold or otherwise transferred, the provisions of subsection (4A) of section 155 shall apply to the combined company as they would have applied to the merging company had it not amalgamated.
(b) the remaining investment allowance, if any, due from the merging company in relation to the ship, aircraft, machinery, or plant shall be granted to the combined company in accordance with subsection (3); however, the total period for which the remaining investment allowance shall be carried forward in the assessments of the merging company and the combined company shall not exceed the period of eight years specified.
(7) The provisions of clauses (a) and (b) of sub-section (6) shall, to the extent possible, apply to the firm and the company in the event that a firm is succeeded in the business it has been conducting by a company, as a result of which the firm sells or otherwise transfers to the company any ship, aircraft, machinery, or plant.
(8) The Central Government may, if it deems it necessary or advantageous to do so, by notification in the Official Gazette, direct that the deduction permitted under this section shall not be allowed with respect to any ship or aircraft acquired or any machinery or plant installed after such date, not earlier than three years from the date of such notification, as may be specified.
(9) For the avoidance of doubt, it is hereby declared that the deduction under subsection (1) shall not be disallowed simply because the amount debited to the relevant previous year's profit and loss account and credited to the Investment Allowance Reserve Account exceeds the amount of the profit of that previous year (as determined without making the aforementioned debit), in accordance with the profit and loss account.
Relevant Rule Related to this section
Section 5AA