INCOME TAX

Circular Number:
007

Dated 08/08/1968

 Development rebate--Allowance where reserve created is in excess of the statutory percentage.

In para 3 of Board's circular No. 2-(XV-6) of 1968 dated 5-2-68 relating to computation of the capital of a company for the purposes of super profits tax, it was stated that a development rebate reserve which is either less than the statutory percentage [specified in section 10(2)(vib) of the Income-tax Act, 1922, and section 34(3) of the Income-tax Act, 1961] or, in excess of the prescribed percentage could not be said to have been created in compliance with the statutory provisions in the Income-tax Act, and therefore, could not be treated as a "reserve" for the purpose of computing the capital of the company under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963. These observations in the circular were not made with reference to the question of admissibility of the development rebate itself but wholly in context of the computation of capital for the purpose of super profits tax.

It has come to the notice of the Board that the above observations in the Circular dated 5-2-1968 have been interpreted in some quarters to imply that the deduction for development rebate should be entirely denied or withdrawn in a case where the amount credited to the development rebate reserve is in excess of the statutory requirement. This interpretation is not correct. The allowance of development rebate is not to be denied in cases where the reserve created is in excess of the statutory requirements, because this does not result in any violation of the requirement of creation of a reserve equal to the statutory percentage of the development rebate to be actually allowed.