The depreciation conundrum

The government came out with the second stimulus package in the first week of January 2009. One of fiscal incentives in the package was the increase of depreciation rates for Commercial Vehicles(CV) purchased between January to March 2009 to 50% from 30%. Would it be full 50% of the cost or 25%, due to put to use for "180 or more /less than 180" rule?

Objective of this fiscal incentive was to boost the sales of CV industry which is facing a severe downturn. Considering an average sale price of trucks of Rs.1 million and 50% depreciation , the saving for a buyer would be Rs.0.16 million (approx). Thats some savings for the buyers.

The finance ministry took around 15 days to come out with the notification and it read
"In the Income-tax Rules, 1962, in the Table to New Appendix 1, in Part-A relating to TANGIBLE ASSETS, under the heading III. MACHINERY AND PLANT, in item (3), after sub-item (vi) and entries relating thereto, the following shall be inserted, namely:—
"(via) New commercial vehicle which is acquired on or after the 1st day of January, 2009 but before the 1st day of April, 2009 and is put to use before the 1st day of April, 2009 for the purposes of business or profession [See paragraph 6 of the Notes below this Table] = 50%"

The way in which depreciation needs to be calculated is given in clause (ii) in sub section (1) to section 32 which reads "in the case of any block of assets, such percentage on the written down value thereof as may be prescribed". This needs to be read with the proviso 2 to this sub section "that where an asset referred to in clause (i) or clause (ii) [ or clause (iia)], as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this sub-section in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (i) or clause (ii), as the case may be " . So when the notification is read with the relevant section, sub section and its proviso, the effective depreciation is only 25% and not 50%, as the commercial vehicle is put to use for only less than 180 days.

Hence the effective increase is only 10% (25% - 15% [30%/2]). This should have been guessed at the time of announcement itself as the plan was to provide incentives without amending the act. A 50% rate could have been effected only through an amendment, as in the year 1998-1999 a proviso to this sub section was inserted to specifically mention that the depreciation will be allowed fully.