Sec 32AD of Income Tax Act, 1961: Investment in new plant or machinery in backward areas in states

A legal foundation for investments in new plants and machinery in notified areas of specific states is provided by Section 32AD of the Income Tax Act. If an assessee establishes a manufacturing or production facility in any designated region in the states of Andhra Pradesh, Bihar, Telangana, or West Bengal, Section 32AD will be applicable.

A taxpayer may claim deductions for starting a company or venture for manufacturing or production in certain locations between April 1, 2015, and April 1, 2020. If the entity creates a new asset for the undertaking or enterprise, it is applicable. The taxpaying entity may claim a deduction in the assessment year against the prior year in which the new asset was established of up to 15% of the real cost of the new asset.

If the taxpayer sells the new asset within 5 years of its installation, IT officials will consider the deduction amount under (1) to be income. This revenue must be included in the taxpayer’s profits and gains from their businesses or professions for the previous tax year. Profits generated by the sale or transfer are also taxed. However, it does not apply if the business is merged, demerged, or reorganized in accordance with section 47.

Let’s say the taxpayer sells or transfers the new asset during a corporate merger, demerger, or reorganization in accordance with certain provisions of Section 47. In that situation, the resulting firm will be subject to the provision stated in subsection (2). It should be noted that the sale or transfer must take place within five years of the new asset’s installation.

“New asset” refers to equipment or machinery (except ships or aircraft). The list of objects and things that do not qualify as “new assets” is provided below:

• Plant or machinery used by another person within/outside India before its installation
• Any plant or machinery set up in any office space and residential accommodation, including guest houses
• An appliance used in offices, including computers and computer software
• Vehicles
• Any plant or machinery whose actual cost is allowed as a deduction in computing the income chargeable under ‘profits and gains of businesses or profession’ of a previous year.