Circular No. 325

Section 33A l Developme NT Allowance

What this is

Circular No. 325 was issued by the Central Board of Direct Taxes on 3 February 1982. Its subject is Section 33A l Developme NT Allowance.

What it does

Settles the size of the reserve a tea company must create to claim development allowance under section 33A. Section 33A(3) requires a reserve equal to 75 per cent of the development allowance actually to be allowed, debited to that year's profit and loss account and credited to a reserve to be used for the business of the undertaking over the next eight years. Since only 40 per cent of a tea company's income is chargeable to tax, the question was whether the base is the gross figure computed on the specified percentage of the cost of planting or only the 40 per cent that is actually allowed. The Board takes the latter: the reserve is 75 per cent of the amount actually allowed, that is 75 per cent of 40 per cent of the amount computed on the specified percentage of the cost of planting tea bushes. It follows the same view taken for development rebate reserves in Board's Circular Letter F. No. 1(8)-58-TPL dated 1 November 1958, the conditions being identical.

Why it was issued

Clarifications were sought from the Board on how the reserve for claiming development allowance is to be calculated, given that only 40 per cent of a tea company's income is chargeable to tax.

Who it reaches

Companies growing and manufacturing tea claiming development allowance under section 33A
Auditors and accountants creating the section 33A(3) reserve
Assessing Officers testing the adequacy of the reserve

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.33A	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.

SECTION 33A l DEVELOPME NT ALLOWANCE
280. Creation of reserve for claiming development allowance - Whether should be calculated at 75 per cent of 40 per cent of amount calculated on the basis of specified percentage of cost of planting tea bushes
1. Attention is invited to section 33A which provides for the grant of deduction by way of development allowance of a certain percentage of expenses incurred on planting of tea bushes on any land in India owned by an assessee who carries on business of growing and manufacturing tea. Sub-section (3) of section 33A stipulates certain conditions which must be fulfilled before the abovesaid deduction is allowed. One of the conditions is that a reserve of an amount equal to 75 per cent of the development allowance to be actually allowed is debited to the profit and loss account of the relevant previous year and credited to a reserve amount to be utilised by the assessee during the period of eight years next following for the purpose of the business of the undertaking.
2. Clarifications have been sought from the Board regarding the manner in which the amount of reserve for claiming deduction on account of development allowance is to be calculated. In this connection, it is pointed out that provisions of law require that the reserve should be equal to 75 per cent of the ‘development allowance actually to be allowed’. It is argued that since only 40 per cent of the income of a tea company is chargeable to tax, the actual allowance on account of development allowance is only 40 per cent of the amount calculated on the basis of specified percentage of the cost of planting tea bushes.
3. A similar question had been examined with regard to the quantum of reserve to be created for claiming deduction on account of development rebate in the cases of tea companies. Vide Board’s Circular Letter F. No. 1(8)-58-TPL, dated 1-11-1958, it was clarified that in the case of tea companies it would be sufficient compliance if the reserve created is equal to 75 per cent of the amount actually allowed as development rebate. Since the conditions regarding the creation of reserve for the grant of development allowance under section 33A are identical to those prescribed with regard to the creation of reserve for claiming deduction on account of development rebate, it is clarified that the reserve required to be created for claiming development allowance should be calculated at 75 per cent of the amount which is actually allowed by way of development allowance, i.e., 75 per cent of 40 per cent of the amount calculated on the basis of specified percentage of the cost of planting tea bushes.
Circular : No. 325 [F. No. 202/62/77-IT(A-II)], dated 3-2-1982.

What to watch

A smaller reserve is enough, but the reserve must still be debited to the profit and loss account of the relevant previous year — timing is as much a condition as amount.
The reserve must be utilised for the purposes of the business of the undertaking within the eight years next following, and misuse can undo the allowance.
The 40 per cent step is specific to tea, where only that share of income is chargeable; the reasoning does not travel to other assessees.
The circular deals only with the quantum of the reserve, not with entitlement to development allowance or the specified percentage itself.

Where you meet it

In a tea company's assessment where development allowance is refused for an inadequate reserve.

An example

Ours, not the Board’s: a worked case built from the rule the instrument sets, to show how it falls out.

Suppose the amount computed on the specified percentage of the cost of planting comes to Rs. 10 lakh. Only 40 per cent of it, Rs. 4 lakh, is the allowance actually allowed. The reserve required is 75 per cent of that, namely Rs. 3 lakh, not 75 per cent of Rs. 10 lakh.

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.

Notification No. 619E — A notification under section 33A of the Income-tax Act, 1961 24 June 1988
Circular No. 367 — Section 264 l Revision of Other Orders [Corresponding to section 33A of the 1922 Act] 26 July 1983
Notification No. 1526 — Areas mentioned below to be hilly areas declared under section 33A 18 May 1966

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.