Investment allowance--Creation of reserve--Section 32A of the Income-tax Act, 1961 - Income Tax - 305/1981

Investment allowance--Creation of reserve--Section 32A of the Income-tax Act, 1961 Circular No. 305 Dated 12/6/1981 To All Commissioners of Income-tax. Sir, Subject : Investment allowance--Creation of reserve--Section 32A of the Income-tax Act, 1961. Attention is invited to Board's Circular No. 259 dated the 11th July, 1979, ([1981] 131 ITR (St.) 70) regarding the creation of statutory reserve under section 34(3)(a) in connection with the claim of development rebate under section 33 of the Income-tax Act, 1961. It was stated in the circular referred to above that the condition for creation of the requisite reserve would stand satisfied if the sum total of the reserves created either in the year of installation or use or in the subsequent year or years is equal to the requisite amount of 75 per cent. of the actual allowance of development rebate in any subsequent year or years. 2. The Board have since received representations that similar instructions may be issued in regard to the reserve required to be created in respect of claims of investment allowance under section 32A which has been substituted for development rebate allowance with effect from 1st April, 1976. 3. Investment allowance is admissible in accordance with the provisions of section 32A in respect of the year of installation of the machinery or plant or in the immediately succeeding year if the machinery or plant is put to use in that year. The allowance is, however, granted subject to the creation of a reserve equal to 75 per cent. of the amount actually to be allowed which should be debited to the profit and loss account of that year. It has further been provided in section 32A(3) that only so much of the investment allowance is to be allowed in any year as is sufficient to reduce the total income to nil and the balance of investment allowance has to be carried forward to the following assessment year and so on up to eight assessment years. Thus, in so far as the above matters are concerned, the provisions relating to the grant of investment allowance are in pari materia with the provisions governing the grant of development rebate. It view of the legal position stated above, it has been decided by the Board that the contents of Circular No. 259 dated 11th July, 1979,* referred to above may be followed while considering the adequacy of the reserves created in respect of the grant of investment allowance also. 4. Attention is also invited to the provisions of sub-section (9) of section 32A of the Income-tax Act, 1961, which is reproduced below and which is quite relevant for the purpose of determining the amount of reserve to be created as it gives the assessee an option to create reserve for the full amount admissible of section 32A: "(9) For the removal of doubts, it is hereby declared that the deductions under sub-section (1) shall not be denied by reason only that the amount debited to the profit and loss account of the relevant previous year and credited to the Investment Allowance Reserve Account exceeds the amount of the profit of such previous year (as arrived at without making the debit aforesaid), in accordance with the profit and loss account." 5. The above instructions may please be brought to the notice of all the officers working in your charge. Yours faithfully, (Sd.) M.K. Pandey, Secretary, Central Board of Direct Taxes.