2.2 Query
Utilization of Investment Allowance Reserve 1.The deduction in respect of investment allowance is allowed according to section 32A (4) (ii) of the Income-tax Act only if an amount equal to seventy-five per cent 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 Investment Reserve Account. This reserve is to be utilized before the expiry of a period of ten years next following the previous year in which the machinery or plant was installed for the purpose of the business of the undertaking.
2.A case may arise where due to losses the said allowance may have been allowed only in say the 9th or 10th year of the purchase of machinery.
3.Another situation may arise where the investment allowance may have been allowed actually in say the 4th and 5th year of installation of machinery due to losses in earlier years while the assessee might have purchased machinery say in the 2nd or 3rd year exceeding the total investment allowance allowable to the assessee on the first purchase of machinery.
4.The querists have sought the opinion of the Expert Advisory Committee on the following issues arising from the above:
(i) In case the investment allowance is allowed only say in the 10th year, will it be necessary to purchase the machinery in that year to retain the investment allowance allowed earlier?
(ii) Will the purchase of machinery by the assessee even before the investment allowance is actually allowed qualify for the purposes of section 32A (4)?
(iii) Will the purchases by the assessee made even before the creation of Investment Allowance Reserve in the books (which is to be created only when there is profit) be considered for the purpose of investment prescribed in section 32 A (4) (ii) (a)?
Opinion September 9, 1985
1.The Committee notes that section 32A (4) provides as below : “The deduction under sub-section (1) shall be allowed only if the following conditions are fulfilled, namely……….
(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 air-craft 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 the clauses (a), (b) and (d) of the proviso to sub-section (1)] for the purposes of the business of the undertaking”.
2. In this context, the Committee also notes that Section 155(4A) provides as below:
“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—
…… …….. ……..
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 proviso to sub-section (1) of section 32A) for the purposes of the business of the undertaking; …… ……… ……. The investment allowance originally allowed shall be deemed to have been wrongly allowed, and the Income-tax Officer may, not with standing anything contained in this Act, recompute the total income of the assessee for the relevant previous year and make the necessary amendment.”
3.The Committee notes from the above that an amount equal to 75% 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 called 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 machinery (in respect of which Investment Allowance Reserve is created) was installed. It is possible to create the Investment Allowance Reserve in the books of account in a year prior to the year in which the said allowance becomes deductible for income-tax purposes. This is because an assessee may have book profits in the year in which the said reserve is created but may not have taxable income to absorb the allowance as envisaged in subsection 3 of 32 (A).
4.The opinion of the Committee on the issues raised by the querists in para 4 is as below:
(i) The machinery should be purchased after the creation of the Investment Allowance Reserve but before the expiry of a period of ten years next following the year in which the machinery is installed for purposes of the business. If the said reserve is created within the period laid down under section 32 (3) (ii), then it is necessary to purchase the machinery before the expiry of the stated period of ten years.
(ii) New plant or machinery purchased by the assessee even before the investment allowance is actually allowed will qualify for the purposes of section 32(A) (4) (a), provided the Investment Allowance Reserve has already been created.
(iii) Purchase of new machinery before the creation of Investment Allowance Reserve cannot be considered for the purposes of section 32 (A)(4)(a).
___________________________
|