• Shubham Mishra

Section 32AB of Income Tax Act, 1961: Investment Deposit Account

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According to sub-section (1) of section 32AB of income tax Act, 1961 Subject to the other provisions of this section, an taxpayer whose total income includes income chargeable to tax under the head "Profits and gains of business or profession" has, out of such income, -


(a) Deposited any amount in an account (hereafter referred to in this section as deposit account) maintained by him with the Development Bank before the expiry of six months from the end of the previous year or before furnishing the return of his income, whichever is earlier


(b) A scheme 480 (hereinafter referred to as the scheme) to be framed by the Central Government, or, if the taxpayer is engaged in the business of growing and manufacturing tea in India, to be approved in this regard by the Central Government, may have been used during the previous year to purchase any new ship, new aircraft, new machinery, or new plant without depositing any money in the deposit account under clause (a) (such deduction being allowed before the loss, if any, brought forward from earlier years is set off under section 72) –

(i) An amount equal to the sum of the amounts or the total of the amounts,

(ii) 20% of business or professional profits calculated in the taxpayer accounts as audited in accordance with subsection (5), or not less than that amount.


With the caveat that the deduction under this section will not be permitted when determining the income of any partners or, as applicable, members of such a firm, association of persons, or body of individuals where the taxpayer is one of these:


Additionally, no such deduction will be permitted for the assessment year beginning on April 1, 1991, or any subsequent assessment year.


In Sub-section (2) For the purposes of this section, a ship or aircraft that was previously in use by another person is considered a "new ship" or "new aircraft," provided that the owner of the ship or aircraft at the time of the prior use was not an Indian resident;

If the following criteria are met:

(a) Such machinery or plant was not used in India at any time prior to the date of such installation by the assessee; such machinery or plant is imported into India from any country outside of India; and

(b) Such machinery or plant is installed by the assessee after having been used outside India prior to its installation by the assessee.

© In calculating a person's total income for any period prior to the date the machinery or plant was installed by the assessee, no deduction for depreciation related to such machinery or plant has been permitted or is permitted under this Act;


In Sub-section (3) The profits of a business or profession of an assessee are determined after deducting an amount equal to the depreciation computed in accordance with sub-section (1) of section 32 from the amounts of profits determined in accordance with the requirements of Parts II and III of the Schedule VI to the Companies Act, 1956 (1 of 1956), as increased by the sum of –

(i)The amount of depreciation;

(ii)The amount of income tax paid or owed, as well as any related provisions;

(iii)The amount of surtax that has been paid or that is owed in accordance with the Companies (Profits) Surtax Act of 1964 (7 of 1964);

(iv)The amounts transferred to reserves, regardless of the name used;

(v)The quantity or quantities

(vi)The amount set aside to cover subsidiary company losses; and

(vii)The amount or amounts of dividends paid or proposed, if any, and as reduced by the amount or amounts withdrawn from reserves or provisions, if such amounts are credited to the profit and loss account;


In Sub-section (4) Any money used to purchase any of the following items is not eligible for a deduction under subsection (1):

(a) Any machinery or plant that will be installed in any office space or residential property, including any type of lodging that resembles a guesthouse;

(b) Any office equipment that is not a computer;

(c) Every type of road transport vehicle;

(d) Any machinery or plant whose entire actual cost is permitted as a deduction (whether through depreciation or another method) in computing the income chargeable under the head "Profits and gains of business or profession" of any one previous year;

(e) Any newly installed machinery or equipment in an industrial undertaking, other than a small industrial undertaking as defined in section 80HHA,


In Sub-section (5) If the accounts of the assessee's business or profession for the prior year related to the assessment year for which the deduction is claimed have not been audited by an accountant as defined in the Explanation below sub-section (2) of section 288 and the assessee has not provided, along with his return of income, the report of such audit in the prescribed form 493 duly signed and verified by such accountant: the deduction under sub-section (1) shall not be admissible.


With the caveat that if the assessee is mandated by another law to have his accounts audited, getting the accounts of that business or profession audited under that other law will suffice to satisfy the requirements of this subsection.


5A. Except for the purposes listed in the scheme or under the conditions outlined below, no amount to the credit of the assessee in the deposit account may be withdrawn prior to the expiration of a period of five years from the date of deposit. –

(a) A business closing;

(b) An assessee's passing;

(c) Dividing an intact Hindu family;

(d) A firm's dissolution;

(e) A company's liquidation.


(5AA) If an amount that is to the assessee's credit in the deposit account is withdrawn by the assessee during a prior year in the situations described in clauses (a) or (d) of sub-section (5A), the entire amount will be deemed to be profits and gains from that prior year's trade or business and will be subject to income tax as if the business had not closed, or, as the case may be.


(5B) When an amount to the assessee's credit in the deposit account is used by the assessee to pay for any expenses associated with the business or profession.


(6) If any amount held to the assessee's credit in the deposit account during any prior year and released by the Development Bank for the assessee to use for the purposes specified in the scheme, or at the account's closure in circumstances other than those described in clauses (b), (c), and (e) of sub-section (5A), is not used in accordance with and within the time specified in the scheme 498, either fully or in part, the entire amount held to the assessee's credit in.


(7) Any portion of the cost of an asset related to the deductions allowed under subsection (1) shall be deemed to be the profits and gains of business or profession of the previous year in which the asset is sold or otherwise transferred, if any asset acquired under the scheme is sold or otherwise transferred in any previous year by the assessee to any person at any time before the expiry of eight years from the end of the previous year in which it was acquired.

With the following exceptions:

(i) In the event that the asset is sold or otherwise transferred by the assessee to the government, a local government, a corporation created by or operating under a federal, state, or provincial law, or a government company as defined in Section 617 of the Companies Act of 1956 (1 of 1956); or

(ii) If the asset is sold or transferred in connection with a company taking over a firm's business or profession, as a result of which the firm sells or otherwise transfers any assets to the company, and the scheme continues to apply to the company in the same way that it did to the firm.


(8) The Central Government may, if it deems it necessary or advantageous to do so, omit any item from the list of items or things specified in the Eleventh Schedule by publication in the Official Gazette.


(9) The Central Government may, following any investigation it deems necessary, order, by notification in the Official Gazette, that the provisions of this section shall not apply to any class of assessees, effective as of the date it may specify in the notification.


(10) In the event that an assessee has been granted a deduction under this section during any assessment year, the assessee shall not be granted a deduction under subsection (1) of section 32A during the same assessment year (hereinafter referred to as the initial assessment year) and a block of further period of four years beginning with the assessment year immediately succeeding the initial assessment year.

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