Circular No. 26-Income Tax dated 6-8-1969

CLARIFICATION 1

1. There is an impression that the development rebate allowed in respect of an asset sold to the Government will not be withdrawn even if the vendor credits to the profit & loss account the reserve which he had originally created to qualify for the grant of the rebate.  This is wrong as clarified below.

2. Section 34(3)(a ) provides, inter alia, that development rebate shall be allowed only if in addition to certain other requirements, the following two conditions are also satisfied :

1. An amount equal to 75 per cent of the development rebate to be actually allowed is debited to the profit & loss account and credited to a reserve account.  The reserve so created is not to be utilised for a period of 8 years either for distribution by way of dividends or profits, for remittance outside India as profits, or for creation of any asset outside India; and

2. The machinery or plant in respect of which development rebate has been allowed is not to be sold or otherwise transferred for a period of 8 years.

3. Under proviso to section 34(3)( b), the transfer or sale of the asset will not be penalised in certain circumstances.  However, while claiming protection under this proviso in respect of the development rebate already allowed on the ground that the condition should not be enforced, the assessee cannot claim that the first condition too, namely, that the amount of the development rebate reserve should not be utilised for the distribution of dividends or profits, should also not be enforced.  Even if the asset is not sold or transferred at all but continues to remain with the original owner, he, too, would forfeit the development rebate allowance in the event of a violation of the first condition.  Merely because the violation of the second condition is condoned in certain circumstances by virtue of the proviso to section 34(3)(b), it does not follow that, in those cases, the violation of the first condition also stands condoned.  Thus, if this condition is violated, the development rebate already allowed to the assessee will have to be withdrawn.

Circular : No. 26 [F. No. 10/59/69-IT(A-II)], dated 6-8-1969.