2011 (8) TMI 496 - HC - Income Tax

Set off of investment allowance - Held that - Year when profits are insufficient or there are no profits, creation of reserve was not mandatory.Sections 32A and 34 have been amended to secure that the condition of creation of reserve even in a year of loss or of insufficiency of profit as laid down by the Hon ble Supreme Court will not be mandatory in respect of both development rebate and investment allowance and it is now provided that in considering whether the condition regarding creation of reserve is fulfilled or not, the reserve(s) created in the year in which the deduction is to be allowed and in any earlier year will be taken into account.

Summary

Issues Involved:
1. Whether the set off of investment allowance needs to be availed in the first year when there are profits, or if it can be carried forward to a subsequent year.
2. Whether the appellate authorities were correct in reversing the finding of the assessing officer regarding the creation of a reserve and the claim of set off in the assessment year 1995-96 instead of 1996-97.

Detailed Analysis:

Issue 1: Set off of Investment Allowance
The Tribunal held that the set off of investment allowance need not be availed in the first year when there are profits. The assessee is entitled to skip that year and effect the carry forward law to set off in a subsequent year of profit. The assessee filed a revised return claiming set-off of unabsorbed investment allowance for the assessment years 1988-89, 1989-90, and 1990-91. The Assessing Officer disallowed the claim, stating that set off must be availed in the immediately succeeding year, not in later years. The appellate authority, however, held that sufficient reserve was created when the investment allowance was claimed, and thus, the assessee was entitled to the investment allowance claimed. The ITAT upheld this view, stating that the creation of reserve was sufficient and in line with the amendment of Section 32A and the CBDT circular, which clarified that creation of reserve in a year of loss or insufficient profit is not mandatory.

Issue 2: Reversal of Assessing Officer's Finding
The appellate authorities reversed the finding of the assessing officer who had stated that the assessee should have created the necessary reserve and claimed set off in the assessment year 1995-96. The appellate authority noted that the assessee had taxable profits in 1995-96 but did not create a reserve in the books of account, hence did not claim deduction under Section 32A. The assessee created a reserve during the assessment year 1996-97 and claimed the investment allowance in the revised return based on CBDT Circular No. 189. The appellate authority found that the reserve creation was sufficient and in line with the amended Section 32A and CBDT Circular No. 572, which stated that creation of reserve in a year of loss or insufficient profit is not mandatory. The ITAT agreed with this view, confirming that the order of the first appellate authority was justified and did not suffer from any error or illegality.

Conclusion:
The High Court, after hearing both parties, scrutinized the material on record and concluded that the assessee had created sufficient reserve when the claim for investment allowance was made. The court referred to the amendment to Section 32A by the Finance Act, 1990, and the CBDT Circular No. 572, which clarified that creation of reserve in a year of loss or insufficient profit is not mandatory. The court held that the orders passed by the first appellate authority and the ITAT were justified, and the order of the assessing officer could not be sustained. The substantial questions of law were answered against the revenue and in favor of the assessee, leading to the dismissal of the appeal.