3.1 Query: Utilisation of Investment Allowance Reserve.
1. A shipping company acquired a new ship in the Assessment Year 1986-87 at a cost of Rs. 32.76 crores and 2 new ships in the Assessment Year 1987-88 at a cost of Rs. 79.64 crores. During the assessment year 1986-87, the investment allowance claimable in respect of the ship purchased was Rs. 8,23,21,934. However, for want of profits the investment allowance reserve that could be created was only to the extent of Rs. 86,52,447. Investment allowance allowed as per Income-tax order was Rs. 88,67,317. Similarly, for Assessment Year 1987-88, in respect of the ships purchased, investment allowance claimable was Rs. 21,49,12,517. However, for want of profits the investment allowance reserve that could be created was only to the extent of Rs. 1,43,295. Investment allowance allowed as per Income-tax order was Rs. 42,056. Consequent to the above the carry over investment allowance amounts to Rs. 28,78,95,137.
2. The querist has informed that since then (from Assessment Year 1988-89 to 1991-92) the company has been running in losses and therefore no reserve could be created for the amount of unabsorbed investment allowance. However, the company made profit in Assessment Year 1992-93 and reserve was created to the extent of profit available which amounted to Rs. 11,89,41,592, Rs. 8,58,75,046 for the Assessment Year 1993-94 and Rs. 21,16,52,404 for the Assessment Year 1994-95. As the company had huge depreciation loss, the investment allowance reserve so far created could not be absorbed. Meanwhile the time limit for utilisation of the reserve for acquiring new ships has ended on 31.03.96 with regard to ship purchased during the Assessment Year 1986-87, and would end on 31.03.97 with regard to ships purchased during the Assessment Year 1987-88.
3. The querist has stated that the company is not in a position to purchase additional vessels subsequently and its proposal for acquisition of vessels is awaiting clearance from the Government. In the next one year company does not forsee any possibility of utilisation of this Investment Allowance Reserve. In the earlier years, the company was not in a position to create any investment allowance reserve due to insufficiency of profits. Had the company earned profits during the assessment year 1986-87, the company could have created the reserve in 1986-87 and utilised the same in the assessment year 1987-88 itself since the company purchased 2 new vessels in that year. The company just completed 10 years allowance period, since its entitlement to claim investment allowance has arisen in 1986-87 and as no immediate acquisition of vessels is expected by the company, it may have to effect payment of income-tax during the current year, if there were sufficient profits and due to writing back of investment allowance created earlier. As the very purpose of creation of investment allowance reserve is the ultimate expansion of the business by way of new acquisitions and the company has already fulfilled this basic objective of the provision of investment allowance reserve. The relative data has been submitted by the querist for the perusal of the Committee.
4. The querist has sought the opinion of the Expert Advisory Committee on the issue whether the company is entitled to consider the acquisition of ships in 1987-88 as utilisation of the reserve which was created subsequently (e.g.,) in 1992-93 and afterwards?
Opinion February 24, 1997
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 any previous year in respect of which the deduction is to be allowed under sub-section (3) or any earlier previous year (being a previous year not earlier than the year in which the ship or aircraft was acquired or the machinery or plant was installed or the ship, aircraft, machinery or plant was first put to use) 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.
2. The Committee also notes the provisions of section 155(4A) of the Income- tax Act, 1961, which provides, 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) at any time before the expiry of eight years from the end of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed, the ship, aircraft, machinery or plant is sold or otherwise transferred by the assessee to any person other than the Government, a local authority, a corporation established by a Central, State or Provincial Act or a Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956), or in connection with any amalgamation or succession referred to in sub-section (6) or sub-section (7) of section 32A; or
(b) at any time before the expiry of ten years from the end of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed, the assessee does not utilise the amount credited to the reserve account under sub-section (4) of section 32A for the purposes of acquiring 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) of section 32A) for the purposes of the business of the undertaking; or
(c) 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, notwithstanding anything contained in this Act, recompute the total income of the assessee for the relevant previous year and make the necessary amendment; and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) if that section being reckoned –
(i) in a case referred to in clause (a), from the end of the previous years in which the sale or other transfer took place;
(ii) in a case referred to in clause (b), from the end of the ten years referred to in that clause.”
3. The Committee notes from the above that an amount equal to 75% of the investment allowance to be actually allowed has to be debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to the Investment Allowance Reserve Account and such reserve must be utilised for the acquisition of the new plant or machinery within a period of ten years next following the previous year in which the ship was installed.
4. The Committee is, therefore, of the opinion that the ships should have been purchased after the creation on the Investment Allowance Reserve but before the expiry of a period of ten years next following the year in which the ship is installed for the purposes of the business. Therefore, the company in question is not entitled to consider the acquisition of ships in 1987-88 as utilisation of the reserve which was created subsequently, i.e., in 1992-93 and afterwards. _____________________________ |