2008 (2) TMI 284 - HC - Income Tax

Amount credited to the investment allowance reserve account utilized for purchase of plant and machinery amount in reserve credited to capital accounts of partners is not relevant - ITAT was right in holding that by crediting the partners, capital account by the amount standing to the credit of the investment allowance reserve account does not result in distribution by way of profit of such reserve - no violation of section 32A(5) - investment allowance cannot be withdrawn

Summary

Issues:
1. Interpretation of provisions of section 32A(5) of the Income-tax Act, 1961 regarding utilization of investment allowance reserve.
2. Application of section 155(4A) in case of violation of conditions under section 32A(5).

Analysis:
1. The case involved the interpretation of section 32A(5) of the Income-tax Act, 1961, focusing on the utilization of the investment allowance reserve. The dispute arose when the Assessing Officer withdrew the investment allowance granted to a partnership firm for assessment years 1978-79, 1979-80, and 1980-81, alleging distribution of reserve as profits among partners before the specified period. The Commissioner (Appeals) and the Tribunal found that the reserve amount was used to purchase new machinery and plant, exceeding the reserve balance. The Tribunal emphasized that a mere accounting entry to partners' capital account did not constitute profit distribution, and the reserve was appropriately utilized for the business purpose of acquiring assets. The court referred to relevant legal provisions and previous judgments to support this interpretation.

2. Regarding the application of section 155(4A) in case of violations under section 32A(5), the court analyzed each condition specified in clauses (a), (b), and (c) of the provision. It was established that there was no violation of conditions under clauses (a) and (b) as the reserve amount was used for the intended purpose of acquiring new assets within the specified time frame. The focus then shifted to clause (c), which pertained to the utilization of the reserve for purposes other than the business undertaking. The Tribunal concluded that the purchase of machinery and plant aligned with the business purpose and did not violate this condition. The court upheld the Tribunal's decision, citing relevant case laws to support the interpretation and emphasizing that the actions of the assessee did not warrant the withdrawal of the investment allowance.

In conclusion, the court answered both questions in favor of the assessee, ruling against the Revenue's contentions. The judgment highlighted the importance of correctly interpreting the provisions of the Income-tax Act and ensuring that actions align with the specified conditions to avoid adverse consequences such as the withdrawal of investment allowances.