2.3 Query
Treatment of Investment Allowance Reserve on its utilisation and Surtax Act, 1964.
A company has been claiming investment allowance under section 32A of the Income-tax Act, 1961 and had created the Investment Allowance Reserve accordingly. The company, whenever purchased any plant and machinery, considered it to be the utilisation of the amount credited to Investment Allowance Reserve and accordingly transferred the balance from ‘Investment Allowance Reserve’ to ‘Investment Allowance Utilisation Reserve’ to the extent of utilisation of the reserve. The querist has sought the opinion of the Expert Advisory Committee on the following issues:
(i) Whether the transfer from Investment Allowance Reserve to Investment Allowance Utilisation Reserve Account to the extent of amount utilised for purchase of assets permitted by Income-tax Act, 1961, violates any provision of section 32A of the Income-tax Act, 1961?
(ii) Whether the amount shown as Investment Allowance Utilisation Reserve in the Balance Sheet should not be considered as Investment Allowance Reserve for the purpose of computation of capital employed to be taken in Sl. No. 3 of Part III of Form No. 1 of Surtax Act, 1964?
(iii) If the Investment Allowance Utilisation Reserve is not on the footing of Investment Allowance Reserve, then whether this amount can be treated as ‘other reserve’ to be shown in SI. No. 4 of Part III of Form No. 1 of Surtax Act, 1964?
Opinion January 23, 1990
1.The Committee notes section 32A(4) of the Income-tax Act, 1961, which prescribes, inter alia, as under:
“(4) The deduction under sub-section (1) shall be allowed only if the following conditions are fulfilled, namely: -
(i) the particulars prescribed in this behalf have been furnished by the assessee in respect of the ship or aircraft or machinery or plant;
(ii) an amount equal to seventy-five per cent of the investment allowance to be actually allowed is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the “Investment Allowance Reserve Account”) to be utilised:
(a) for the purposes of acquiring, before the expiry of a period of ten years next following the previous year in which the ship or aircraft was acquired or the machinery or plant was installed, a new ship or a new aircraft or new machinery or plant [other than machinery or plant of the nature referred to in clauses (a), (b) and (d) of the second proviso to sub-section (1)] for the purposes of the business of the undertaking;
and
(b) until the acquisition of a new ship or a new aircraft or new machinery or plant as aforesaid, for the purposes of the business of the undertaking other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India:.…..” (emphasis given by the Committee) 2. The Committee also notes the provisions of section 32A(5) and section 155(4A) of the Income-tax Act, 1961. Section 32(A)(5) prescribe, inter alia, as under:
“(5) Any allowance made under this section in respect of any ship, aircraft, machinery or plant shall be deemed to have been wrongly made for the purposes of this Act-
(a) ………
(b) ……….
(c) if at any time before the expiry of the ten years aforesaid, the assessee utilises the amount credited to the reserve account under sub-section (4) for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any assets outside India or for any other purpose which is not a purpose of the business of the undertaking,
and the provisions of sub-section (4A) of section 155 shall apply accordingly:……….
Section 155 (4A) prescribe, inter alia, as under:
“(4A) Where an allowance by way of investment allowance has been made wholly or partly to an assessee in respect of a ship or an aircraft or any machinery or plant in any assessment year under section 32A and subsequently-
(a) ………………
(b) ……………
(c) at any time before the expiry of the ten years referred to in clause (b), the assessee utilises the amount credited to the reserve account under sub-section (4) of section 32A-
(i) for distribution by way of dividends or profits; or
(ii) for remittance outside India as profits or for the creation of any asset outside India; or
(iii) for any other purpose which is not a purpose of the business of the undertaking,
the investment allowance originally allowed shall be deemed to have been wrongly allowed and the Assessing Officer may,…”
3 On the basis of the above the opinion of the Committee on the issues raised by the querist is as below:
(i) Transfer of an amount from Investment Allowance Reserve to Investment Allowance Utilisation Reserve Account, to the extent that the amount transferred represents the amount utilised for the purchase of ship, aircraft, plant or machinery as referred to in section 32A(4) (ii)(b), does not violate the provisions of section 32A, subject to the condition that the provisions of section 32A(5) and section 155(4A) shall also apply to the Investment Allowance Utilisation Reserve. Thus, for all practical purposes the Investment Allowance Utilisation Reserve will be treated as Investment Allowance Reserve.
(ii) As per para 3(i) above, Investment Allowance Utilisation Reserve will be treated as Investment Allowance Reserve for all practical purposes. Therefore, Investment Allowance Utilisation Reserve should be considered as Investment Allowance Reserve for the purpose of computation of capital employed to be taken in Sl. No. 3 of Part III of Form No. 1 of the Surtax Act, 1964.
(iii) The third query needs no answer in view of the above.
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