254. Tea companies in whose cases only 40 per cent of income is liable to be taxed – Manner in which amount to be credited to investment allowance reserve account should be determined

1. Attention is invited to the provisions of section 32A, which provides for the grant of investment allowance in respect of new machinery and plant installed, inter alia, for the purpose of construction, manufacture or production of articles or things not included in Eleventh Schedule to the Income-tax Act.  The allowance which is equal to 25 per cent of the cost of the machinery and plant is permissible in the year of installation or in the immediately succeeding year, if put to use in that year, if certain conditions are fulfilled.  One such condition prescribed under section 32A(4)(ii) is that an amount equal to 75 per cent of the amount to be actually allowed as investment allowance is debited to the profit and loss account of the previous year in respect of which deduction is to be allowed, and credited to a reserve account.

2. A clarification has been sought from the Board regarding the manner in which the amount to be credited to the investment allowance reserve account should be determined in the case of tea companies in whose cases only 40 per cent of the income is liable to income-tax.  A similar question was examined by the Board in the past with regard to the quantum of reserve to be created for the grant of development rebate in respect of new machinery and plant installed by tea companies. It was clarified by the Board’s Circular Letter F. No. 1(8)-58-TPL, dated 1-11-1958 that in the case of a tea company, it would be sufficient compliance if the tea company created a reserve equal to 75 per cent of the amount of development rebate actually allowed in the assessment of the tea company.

3. Since the conditions regarding the creation of reserve for the grant of investment allowance under section 32A are identical to those prescribed with regard to the creation of reserve for claiming the grant of development rebate, it is clarified that the reserve required to be created for claiming investment allowance should be calculated at 75 per cent of the amount which is actually allowed by way of investment allowance, i.e., 75 per cent of 40 per cent of the investment allowance debited to the profit and loss account.

Circular : No. 324 [F. No. 202/47/79-IT(A-II)], dated 3-2-1982.

JUDICIAL ANALYSIS

EXPLAINED IN – In CIT v. Suman Tea & Plywood Industries (P.) Ltd. [1993] 71 Taxman 622 (Cal.), it was observed that in CBDT Circular No. 27, dated 6-7-1955 as well as Circular No. 324, dated3-2-1982, it has been explained that in respect of tea companies investment allowance, development rebate, etc., are to be allowed only to the extent of 40 per cent of the amounts calculated at the prescribed rates.

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