2013 (9) TMI 812 - HC - Income Tax

Deduction u/s 32A(1) of the Act Investment allowance - Requirement u/s 32A(2) needs to be fulfilled - Assessee is running sugar factory and fully owned by the State of U.P. For the assessment year under consideration, the loss return was filed before passing of the assessment order under Section 143(3) of the Act - Assessee had claimed the investment allowance deduction for Rs.1,40,35,103/- under Section 32A(1) of the Act - Assessee did not comply with the statutory requirement of Section 32A(4)(ii) of the Act, as the assessee has not created the 75% reserve amounts to Rs.1,05,26,327/-, but created a reserve only for Rs.93,26,754/-. The same is less than 75% of the claim for the investment allowance Held that - Reliance has been placed upon the judgment of Hon ble Bombay High Court in the case of Indian Oil Corporation Ltd. vs. S.Rajagopalan, Income-Tax Officer, Companies Circle II(1), Bombay & Ors., 1973 (4) TMI 12 - BOMBAY High Court and also on the judgment in the case of Commissioner of Income-tax vs. Khandelwal Ferro Alloys Ltd., 1988 (11) TMI 54 - BOMBAY High Court If during the assessment year relevant to the year of installation or use the total assessed income of the assessee is nil or negative, then the assessee cannot be expected to create an actual and non-illusory reserve equivalent to 75% of the claim and as such reserve can only be created out of assessed profits. There can be no obligation on the part of the assessee to create a reserve as a condition merely for carrying over the development rebate without it being actually allowed to the assessee by setting off the rebate against the assessed profit. So, we are unable to accept the contention of the Department that the assessee must create the reserve in the year of installation or use of the plant or machinery, irrespective of any profits. So, it is expected to create reserve as per condition, in the subsequent years in which assessee is assessed profits Assessee is directed to create 75% reserve in the subsequent assessment years with the positive income Decided in favor of Assessee.

Summary

Issues:
Assessment of investment allowance deduction under Section 32A(1) of the Income-Tax Act, 1961 for the assessment year 1987-88.

Analysis:
The appellant, an assessee running a sugar factory fully owned by the State of U.P., filed an appeal under Section 260A challenging the judgment of the Income Tax Appellate Tribunal. The issue revolved around the claim of investment allowance deduction of Rs.1,40,35,103 under Section 32A(1) of the Act. The Assessing Officer (AO) contended that the assessee failed to meet the statutory requirement of maintaining a 75% reserve as mandated by Section 32A(4)(ii) of the Act. The AO observed that the reserve created by the assessee was only Rs.93,26,754, falling short of the required amount of Rs.1,05,26,327. Consequently, the AO disallowed the claim, a decision upheld by the Tribunal. The appellant, dissatisfied with the Tribunal's ruling, approached the High Court.

Upon hearing both parties and examining the case details, it was established that the appellant had indeed set up a sugar factory and claimed the investment allowance under Section 32A(1) of the Act. However, due to filing a loss return, the appellant failed to maintain the requisite 75% reserve of the total claim, leading to the AO's addition. The Court referred to Section 32A(1) & (4) of the Act, emphasizing the conditions for allowing the deduction, particularly the necessity of fulfilling the 75% reserve requirement. Citing relevant legal precedents, the Court highlighted that if the assessed income of the assessee in the relevant year is nil or negative, there is no obligation to create a reserve solely for carrying over the development rebate without actual allowance against assessed profits. Therefore, the Court ruled that the appellant should create the 75% reserve in subsequent assessment years with positive income, rather than mandating its creation in the year of installation or use of the plant or machinery.

In conclusion, considering the facts and circumstances of the case, the High Court set aside the Tribunal's order and upheld the decision of the Commissioner of Income Tax (Appeals), directing the appellant to create the required reserve in subsequent years with positive income. As a result, the appeal filed by the assessee was allowed at the admission stage.