When natural calamities or unforeseen events disrupt an industrial undertaking, re-establishing the business can be a daunting task. Recognizing this challenge, the Indian government introduced Section 33B in the Income Tax Act to provide a rehabilitation allowance. This provision aims to support industrial undertakings in their recovery efforts by offering a specific tax concession. Let’s delve into the details of this provision and understand how it benefits businesses.
What is Rehabilitation Allowance?
Rehabilitation allowance is a tax concession granted to industrial undertakings that have been forced to discontinue their business due to extensive damage or destruction of their capital assets. This allowance facilitates the re-establishment, reconstruction, or revival of such businesses.
Eligibility Criteria for Rehabilitation Allowance
Nature of Business:
- The business should be an industrial undertaking primarily engaged in:
- Generation or distribution of electricity or any other form of power.
- Construction of ships.
- Manufacture or processing of goods.
- Mining.
Discontinuation of Business:
- The business must have been discontinued in any previous year due to extensive damage or destruction of its building, machinery, plant, or furniture. The causes of such damage include:
- Flood, typhoon, hurricane, cyclone, earthquake, or other convulsions of nature.
- Riot or civil disturbance.
- Accidental fire or explosion.
- Action by an enemy or action taken in combating an enemy (with or without a declaration of war).
Timely Revival:
The business must be re-established, reconstructed, or revived by the assessee before the expiry of three years from the end of the previous year in which it was discontinued.
Deduction Allowed Under Section 33B
If the above conditions are satisfied, the assessee is entitled to a deduction by way of rehabilitation allowance. The deduction is equivalent to 60% of the terminal allowance permissible under clause (iii) of sub-section (1) of section 32, in respect of the building, machinery, plant, or furniture that was damaged or destroyed.
Key Provisions and Considerations
Terminal Allowance:
The rehabilitation allowance is calculated based on the terminal allowance, if any, admissible under section 32(1)(iii) of the Income Tax Act. This involves deducting the salvage value or insurance money received from the written down value of the damaged or destroyed assets.
Complete Cessation of Business:
The discontinuation implies the complete cessation of the business, not just a temporary halt of some activities or closing down of a few units.
Unabsorbed Business Loss:
The unabsorbed business loss of the undertaking, including past business losses brought forward, is eligible for being carried forward and set-off against the profits of the re-established, reconstructed, or revived business up to a period of 8 years.
No Limitation on Deduction:
Unlike other deductions such as development rebate or investment allowance, the rehabilitation allowance is not limited to the assessable income of the relevant year. The entire amount is allowed even if it results in a business loss, which can be carried forward and set-off in subsequent years.
Insurance Proceeds:
In cases where the insurance money received exceeds the written down value of the assets, no terminal allowance, and consequently no rehabilitation allowance, will be admissible.
Period of Re-establishment:
The business must be re-established, reconstructed, or revived within three years from the end of the previous year in which the discontinuation occurred.
Cessation of Deduction:
Following an amendment by the Finance Act, 1984, the deduction under Section 33B is not allowed for the assessment year 1985-86 and subsequent years.
Historical Context
Insertion of Section 33B:
The section was introduced by the Finance (No. 2) Act, 1967, with effect from April 1, 1967, to grant tax concessions for the revival of businesses affected by specific calamities.
Amendment by Finance Act, 1984:
A proviso was added to Section 33B, specifying that no deduction will be allowed for the assessment year 1985-86 and subsequent years. This reflects the evolving tax policies and economic conditions.
Practical Examples and Case Studies
Example 1: Flood Damage to a Power Generation Plant
An industrial undertaking engaged in power generation faced extensive damage to its machinery and building due to a severe flood. The business was discontinued in the financial year 2019-20. The company managed to revive the business by rebuilding and purchasing new machinery within two years, by the end of FY 2021-22. The written down value of the damaged assets was ₹50 lakhs, and the insurance proceeds received were ₹30 lakhs. The terminal allowance calculated under section 32(1)(iii) was ₹20 lakhs. Thus, the rehabilitation allowance would be 60% of ₹20 lakhs, amounting to ₹12 lakhs.
Example 2: Fire in a Manufacturing Unit
A manufacturing unit suffered an accidental fire that destroyed significant portions of its plant and machinery. The business was halted in FY 2018-19. The company received insurance money but decided to upgrade and reconstruct the plant within the next three years, completing it by FY 2020-21. The original written down value of the destroyed assets was ₹40 lakhs, and the salvage value was ₹10 lakhs. The terminal allowance was ₹30 lakhs, and thus the rehabilitation allowance provided would be 60% of ₹30 lakhs, equating to ₹18 lakhs.
Case Study: Revival of a Textile Factory Post Civil Disturbance
A textile factory located in a region prone to civil disturbances had to cease operations in FY 2017-18 due to extensive damage caused by riots. The total damage to the plant and machinery was evaluated at ₹80 lakhs. The company took strategic steps to reconstruct the factory and restarted operations by the end of FY 2019-20. The insurance coverage was ₹50 lakhs, leading to a terminal allowance calculation of ₹30 lakhs. Hence, the rehabilitation allowance amounted to ₹18 lakhs (60% of ₹30 lakhs).
Frequently Asked Questions (FAQ)
1. What is the primary purpose of the rehabilitation allowance under Section 33B?
The primary purpose of the rehabilitation allowance under Section 33B is to provide tax concessions to industrial undertakings that have been forced to discontinue their business due to extensive damage or destruction of their capital assets. This allowance helps facilitate the re-establishment, reconstruction, or revival of such businesses.
2. Which types of businesses are eligible for the rehabilitation allowance?
Eligible businesses include industrial undertakings primarily engaged in the generation or distribution of electricity or any other form of power, construction of ships, manufacture or processing of goods, and mining.
3. What are the causes of damage that qualify a business for the rehabilitation allowance?
The qualifying causes of damage include:
- Natural calamities such as floods, typhoons, hurricanes, cyclones, and earthquakes.
- Riot or civil disturbance.
- Accidental fire or explosion.
- Action by an enemy or actions taken in combating an enemy (with or without a declaration of war).
4. Is there a time limit within which the business must be revived to qualify for the rehabilitation allowance?
Yes, the business must be re-established, reconstructed, or revived before the expiry of three years from the end of the previous year in which the discontinuation occurred.
5. How is the rehabilitation allowance calculated?
The rehabilitation allowance is calculated as 60% of the terminal allowance permissible under clause (iii) of sub-section (1) of section 32, after deducting the salvage value or insurance money received from the written down value of the damaged or destroyed assets.
6. Can the rehabilitation allowance result in a business loss?
Yes, unlike other deductions, the rehabilitation allowance is not limited to the assessable income of the relevant year. The entire amount is allowed even if it results in a business loss, which can be carried forward and set-off in subsequent years.
7. What happens if the insurance money received exceeds the written down value of the assets?
If the insurance money received exceeds the written down value of the assets, no terminal allowance, and consequently no rehabilitation allowance, will be admissible.
8. Why was the deduction under Section 33B discontinued?
The deduction under Section 33B was discontinued following an amendment by the Finance Act, 1984, which specified that no deduction would be allowed for the assessment year 1985-86 and subsequent years. This change reflects the evolving tax policies and economic conditions.
Conclusion
Section 33B of the Income Tax Act was a significant concession aimed at aiding industrial undertakings that faced severe damage or destruction, enabling them to revive and continue their operations. Although this provision has been discontinued for assessment years starting from 1985-86, its historical significance highlights the government’s efforts to support businesses in times of crisis.
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