254. Tea companies in whose cases only 40 per cent of income is liable to be taxed - Manner in which amount to be credited to investment allowance reserve account should be determined
Circular No. 324 was issued by the Central Board of Direct Taxes on 3 February 1982. Its subject is 254. Tea companies in whose cases only 40 per cent of income is liable to be taxed - Manner in which amount to be credited to investment allowance reserve account should be determined.
Fixes the size of the investment allowance reserve a tea company must create. Section 32A allows investment allowance of 25 per cent of the cost of new machinery and plant installed for the manufacture or production of articles not in the Eleventh Schedule, subject to the condition in section 32A(4)(ii) that 75 per cent of the amount actually to be allowed is debited to the profit and loss account of that previous year and credited to a reserve account. Since only 40 per cent of a tea company's income is liable to income-tax, the Board clarifies that the reserve is to be 75 per cent of the amount actually allowed by way of investment allowance, that is 75 per cent of 40 per cent of the investment allowance debited to the profit and loss account. It follows the same line the Board took for development rebate in its circular letter F. No. 1(8)-58-TPL, dated 1-11-1958, the reserve conditions for the two allowances being identical.
A clarification was sought on how the reserve was to be worked out for tea companies, only 40 per cent of whose income is chargeable to income-tax.
| Under the 1961 Act | Now |
|---|---|
| s.32A | no counterpart recorded |
254. Tea companies in whose cases only 40 per cent of income is liable to be taxed - Manner in which amount to be credited to investment allowance reserve account should be determined
1. Attention is invited to the provisions of section 32A, which provides for the grant of investment allowance in respect of new machinery and plant installed, inter alia, for the purpose of construction, manufacture or production of articles or things not included in Eleventh Schedule to the Income-tax Act. The allowance which is equal to 25 per cent of the cost of the machinery and plant is permissible in the year of installation or in the immediately succeeding year, if put to use in that year, if certain conditions are fulfilled. One such condition prescribed under section 32A(4)(ii) is that an amount equal to 75 per cent of the amount to be actually allowed as investment allowance is debited to the profit and loss account of the previous year in respect of which deduction is to be allowed, and credited to a reserve account.
2. A clarification has been sought from the Board regarding the manner in which the amount to be credited to the investment allowance reserve account should be determined in the case of tea companies in whose cases only 40 per cent of the income is liable to income-tax. A similar question was examined by the Board in the past with regard to the quantum of reserve to be created for the grant of development rebate in respect of new machinery and plant installed by tea companies. It was clarified by the Board’s Circular Letter F. No. 1(8)-58-TPL, dated 1-11-1958 that in the case of a tea company, it would be sufficient compliance if the tea company created a reserve equal to 75 per cent of the amount of development rebate actually allowed in the assessment of the tea company.
3. Since the conditions regarding the creation of reserve for the grant of investment allowance under section 32A are identical to those prescribed with regard to the creation of reserve for claiming the grant of development rebate, it is clarified that the reserve required to be created for claiming investment allowance should be calculated at 75 per cent of the amount which is actually allowed by way of investment allowance, i.e., 75 per cent of 40 per cent of the investment allowance debited to the profit and loss account.
Circular : No. 324 [F. No. 202/47/79-IT(A-II)], dated 3-2-1982.
In an assessment of a tea company where the investment allowance is disallowed for shortfall in the reserve.
A tea company debits investment allowance of Rs. 10,00,000 to its profit and loss account, of which Rs. 4,00,000 is actually allowed, 40 per cent of its income being taxable. The reserve it must credit is 75 per cent of Rs. 4,00,000, that is Rs. 3,00,000, and not 75 per cent of Rs. 10,00,000.
Source: the Income Tax Department’s own published text — its page for this instrument.
