2016 (11) TMI 161 - HC - Income Tax

Investment Allowance - ITAT held that by crediting the Partners capital account by the amount standing to the credit of the investment allowance reserves account does not result in distribution by way of profit of such reserves - Held that - It appears that the amount representing Investment Allowance reserve had been, in fact, utilized before the expiry of 10 years for the purchase of new plant and machinery but, the cost of the new plant and machinery had been debited to plant and machinery account and not to Investment Allowance reserve account because of the accounting practice and hence, the Investment Allowance reserve account was debited and Partners account was credited. In our opinion, making entry in this manner would not mean that the reserve account had been utilized for distributing profits or for any non-business purpose and had not been utilized for purchase of plant and machinery. Thus it is not possible to accept the contention of Revenue that the Tribunal committed any error in law. Thus, we are of the view that no substantial question of law arises in these references.

Summary

Issues:
1. Interpretation of Section 32A of the Income Tax Act, 1961 regarding Investment Allowance reserves.
2. Application of Section 155(4) in the context of Investment Allowance reserves utilization and distribution as profits.

Analysis:
1. The case involved a dispute regarding the utilization of Investment Allowance reserves by a dyeing and printing business. The Assessing Officer withdrew the Investment Allowance, claiming that the partners had credited the reserves to their capital account as profit before the prescribed 10 years under Section 32A of the Act. The CIT(A) overturned this decision, which led to the Revenue appealing to the Tribunal and subsequently filing reference applications.

2. The key legal question revolved around whether the crediting of Investment Allowance reserves to partners' capital accounts constituted distribution as profits, thereby violating the provisions of Section 32A. The Tribunal upheld the CIT(A)'s decision, emphasizing that the reserves were utilized for acquiring new machinery and plant for business purposes, not for profit distribution. This utilization was reflected in the accounting entries, with the Investment Allowance reserve debited and partners' accounts credited.

3. The Court analyzed the facts and concluded that the utilization of the Investment Allowance reserve for purchasing new machinery, even though accounted for differently due to accounting practices, did not amount to profit distribution. The Court highlighted that the reserve was used for a legitimate business purpose, aligning with the intent of the provision. Therefore, the Tribunal's decision was upheld, and no substantial legal question was found to arise from the references.

4. The Court referenced a previous Division Bench judgment to support its decision, emphasizing the importance of complying with the conditions set out in Section 32A to ensure the correct grant of Investment Allowance. The judgment clarified that the mere accounting entry of crediting partners' accounts did not signify profit distribution when the reserve was genuinely utilized for business investments. Consequently, both references were dismissed, affirming the Tribunal's decision in favor of the assessee.