Development rebate allowed on assets sold to Government – Whether not liable to be withdrawn even if vendor credits to profit and loss account reserve which he had originally create
1. In para 1.45 of their 100th Report (1969-70), the Public Accounts Committee have observed as follows :
“The Government are yet to clarify to the public whether a party would forfeit the development rebate when the entire assets are sold to Government and the development rebate reserve cannot stand as such in his books. The Committee trust that Government will take suitable action at an early date.”
2. Section 34(3)(a ) provides, inter alia, that development rebate shall be allowed only if in addition to certain other requirements, an amount equal to 75 per cent of the development rebate to be actually allowed is to be debited to the profit and loss account and credited to a reserve account. The reserve so credited is not to be utilised for a period of 8 years either for distribution by way of dividends or profits or for remittance outside India, as profits or for creation of any asset outside India. When an assessee sells his entire assets to the Government, the development rebate reserve created on such assets cannot stand as such in his books. The development rebate reserve account would then be closed by transfer to the capital account of the proprietor. If the sale takes place within 8 years of the previous year when the development rebate was created and the reserve is credited to the proprietor’s capital account, it would amount to utilisation of the reserve for distribution by way of profit to the proprietor under section 34(3)(a )(i).
Circular : No. 40 [F. No. 10/59/69-IT(A-II)], dated 11-5-1970.