Development rebate allowed on assets sold to Government - Whether not liable to be withdrawn even if vendor credits to profit and loss account reserve which he had originally created
Circular No. 26 was issued by the Central Board of Direct Taxes on 6 August 1969. Its subject is Development rebate allowed on assets sold to Government - Whether not liable to be withdrawn even if vendor credits to profit and loss account reserve which he had originally created.
This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.
Corrects an impression that development rebate on an asset sold to Government survives even if the vendor credits the reserve back to the profit and loss account. Section 34(3)(a) makes the rebate conditional on two things together: debiting the profit and loss account and crediting a reserve with an amount equal to 75 per cent of the rebate actually allowed, that reserve not to be used for eight years for dividends or profits, for remittance abroad as profits, or for creating an asset outside India; and the plant or machinery not being sold or otherwise transferred for eight years. The proviso to section 34(3)(b) excuses a transfer in certain circumstances, but that concession runs only to the second condition. An assessee who takes shelter under the proviso for the sale cannot also claim to be free of the reserve condition; an owner who never sells the asset at all forfeits the rebate if he breaches the reserve condition, and a condoned sale does not condone a breach of the reserve condition. On such a breach the rebate already allowed has to be withdrawn.
An impression had grown up that where the asset was sold to Government the rebate would not be withdrawn even if the reserve was written back, and the Board corrected it.
| Under the 1961 Act | Now |
|---|---|
| s.34 | no counterpart recorded |
Development rebate allowed on assets sold to Government - Whether not liable to be withdrawn even if vendor credits to profit and loss account reserve which he had originally created
CLARIFICATION 1
1. There is an impression that the development rebate allowed in respect of an asset sold to the Government will not be withdrawn even if the vendor credits to the profit & loss account the reserve which he had originally created to qualify for the grant of the rebate. This is wrong as clarified below.
2. Section 34(3)(a ) provides, inter alia, that development rebate shall be allowed only if in addition to certain other requirements, the following two conditions are also satisfied :
1. An amount equal to 75 per cent of the development rebate to be actually allowed is debited to the profit & loss account and credited to a reserve account. The reserve so created is not to be utilised for a period of 8 years either for distribution by way of dividends or profits, for remittance outside India as profits, or for creation of any asset outside India; and
2. The machinery or plant in respect of which development rebate has been allowed is not to be sold or otherwise transferred for a period of 8 years.
3. Under proviso to section 34(3)( b), the transfer or sale of the asset will not be penalised in certain circumstances. However, while claiming protection under this proviso in respect of the development rebate already allowed on the ground that the condition should not be enforced, the assessee cannot claim that the first condition too, namely, that the amount of the development rebate reserve should not be utilised for the distribution of dividends or profits, should also not be enforced. Even if the asset is not sold or transferred at all but continues to remain with the original owner, he, too, would forfeit the development rebate allowance in the event of a violation of the first condition. Merely because the violation of the second condition is condoned in certain circumstances by virtue of the proviso to section 34(3)(b), it does not follow that, in those cases, the violation of the first condition also stands condoned. Thus, if this condition is violated, the development rebate already allowed to the assessee will have to be withdrawn.
Circular : No. 26 [F. No. 10/59/69-IT(A-II)], dated 6-8-1969.
In an order withdrawing development rebate after a write-back of the reserve, and in an assessment following the sale of a rebate asset within eight years.
Source: the Income Tax Department’s own published text — its page for this instrument.