Development rebate allowed on assets sold to Government - Whether not liable to be withdrawn even if vendor credits to profit and loss account reserve which he had originally crea - Income Tax - 26/1969

Circular No. 26 Dated 6/8/1969 Development rebate allowed on assets sold to Government - Whether not liable to be withdrawn even if vendor credits to profit and loss account reserve which he had originally created clarification 1 1.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 proprietors 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 . clarification 2 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 There is an impression that the development rebate allowed in respect of an asset sold to the Government will not be withdrawn even if the vendor credits to the profit loss account the reserve which he had originally created to qualify for the grant of the rebate.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 .