Circular No. 259

274. Condition for creation of reserve - Whether stands satisfied if reserve created in the year of installation or use and/or in subsequent year(s) is equal to requisite amount of 75 per cent of actual allowance in any year or years

What this is

Circular No. 259 was issued by the Central Board of Direct Taxes on 11 July 1979. Its subject is 274. Condition for creation of reserve - Whether stands satisfied if reserve created in the year of installation or use and/or in subsequent year(s) is equal to requisite amount of 75 per cent of actual allowance in any year or years.

What it does

Relaxes the timing of the development rebate reserve. Section 34(3)(a) allows the rebate under section 33 only if an amount equal to 75 per cent of the rebate actually allowed is debited to the profit and loss account of the relevant previous year and credited to a reserve, and the rebate itself is allowed only to the extent it reduces total income to nil, the balance being carried to the following years within eight assessment years. The question was whether reserve created in the year of installation or first use, and in later years as book profits permitted, could be counted in the years in which the rebate is actually allowed. The Board decides that the condition is satisfied if the accumulated reserve for that machinery or plant up to the year or years of actual allowance equals 75 per cent of the rebate actually allowed, so reserve created in the year of installation or use or in any subsequent year may be added up. Officers are to complete pending assessments on this basis, review past assessments and take this stand in pending appeals.

Why it was issued

Assessees short of book profits in the year of installation could not create the full reserve then, and the Board had to decide whether reserve built up later would do.

Who it reaches

Assessees claiming development rebate on plant, machinery or ships
Companies with insufficient book profits in the year of installation
Assessing Officers with pending assessments or appeals on the reserve condition

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.33	no counterpart recorded
s.34	no counterpart recorded

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

274. Condition for creation of reserve - Whether stands satisfied if reserve created in the year of installation or use and/or in subsequent year(s) is equal to requisite amount of 75 per cent of actual allowance in any year or years
1. The Board had an occasion to consider the question whether the development rebate reserve created in respect of a particular machinery or plant in the year of installation or use and/or in the year or years subsequent thereto, to the extent of availability of book profits, can be taken into account for the purposes of section 34(3)( a) in the year or years of actual allowance of the development rebate.
2. Sub-sections (1)(a ) and (1A)(c) of section 33 provide for deduction of development rebate, subject to fulfilment of certain conditions in respect of previous year in which the ship was acquired or the plant and machinery was installed or, if it is first put to use in the immediately succeeding previous year, then, in respect of that previous year. According to sub-section (2) of the said section, the actual allowance in the relevant assessment year is to the extent to reduce the total income as referred to therein, to nil and the balance, if any, is allowed in the same way in the following year or years but no portion of the unabsorbed rebate is to be carried forward for more than eight assessment years immediately succeeding the relevant assessment year. Section 34(3)(a), inter alia, provides that deduction of development rebate under section 33 shall not be allowed unless an amount equal to 75 per cent of the development rebate to be actually allowed is debited to the profit and loss account of the relevant previous year and credited to the reserve account.
3. After considering various aspects of the matter, the Board have decided that the requirements of the provisions of sections 33 and 34(3)(a) will be considered to have been satisfied if the accumulated reserve in respect of the said machinery or plant up to the year or years of actual allowance is equal to 75 per cent of the amount of development rebate to be actually allowed. This would mean that the condition for creation of requisite reserve would stand satisfied if the sum total of the reserve created either in the year of installation or use or in the subsequent year or years is equal to the requisite amount of 75 per cent of the actual allowance of development rebate in any year or years.
4. Necessary instructions may be issued to the Income-tax Officers to complete the pending assessments on the lines indicated above. Past assessments should also be reviewed and the above-noted stand be taken in the pending appeals.
Circular : No. 259 [F. No. 202/37/78-IT(A-II)], dated 11-7-1979.

What to watch

The test is the accumulated reserve measured against the rebate actually allowed in the year of allowance, not the rebate computed at the outset.
The reserve must be for the same machinery or plant; it is not a general reserve requirement.
Unabsorbed rebate cannot be carried beyond eight assessment years following the relevant year, as the circular's own recital of section 33(2) sets out.
The Board directs a review of past assessments and this stand in pending appeals, which is what makes the circular worth citing in an old matter.
Development rebate under section 33 is the provision the circular construes, as the text itself shows.

Where you meet it

In an assessment or appeal where the development rebate is refused because the reserve of 75 per cent was not created in the year of installation itself.

On the same provision

Other instruments in this library that name the same provision of the 1961 Act. They are not necessarily still operative, and a later one may have replaced an earlier one without saying so.

Circular No. 443 — 1537. Additional relief to property bequeathed to educational institutions and hospitals - Notification issued under sub 13 December 1985
Notification No. GSR 83 — 1534. Additional relief to property forming part of trust created for promoting advancement of science, etc. - Notificat 6 January 1985
Circular No. 396 — 1539. Additional relief of gold, gold coin, gold ornament tendered within 6 months of the date of death of deceased as s 28 September 1984
Circular No. 381 — 1538. Additional relief to any one building in occupation of de-recognised Ruler declared as his official residence - No 1 May 1984
Circular No. 377 — 1535. Additional relief to property bequeathed to Jawahar Lal Nehru Memorial Fund - Notification issued under sub-sectio 21 February 1984
Circular No. 352 — 1540. Additional relief to property in respect of which gift-tax has been paid and estate duty has also been levied - No 8 December 1982

← Circular No. 260 · Circular No. 258 →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.