Deduction for sum transferred in Special Reserve

Introduction

Banks, housing finance companies and financial institutions can claim deduction for the sum deposited in special reserve account. The deduction is allowed up to 20% of the profits derived from the eligible business. When aggregate amount of deposit in special reserve account exceeds 200% of the paid-up share capital and general reserves of the eligible assessee, no further deduction shall be allowed thereafter.

1. About

1.1. Who can claim this deduction?

1.1-1. Banks and Financial Institutions

Banking companies, co-operative banks

(a) Industrial and agricultural development

(b) Development of infrastructure facility in India

(c) Development of housing in India

1.1-2. Housing Finance Company

A housing finance company engaged in the business of providing long-term finance for the construction or purchase of houses in India for residential purposes shall be entitled to claim deduction under this provision.

1.1-3. Any other financial corporation

Any other financial corporation which is engaged in the business of providing long-term finance for development of infrastructure facility in India can claim this deduction.

1.2. How much deduction is allowed?

The amount of deduction under this provision shall be lower of following:

(a) Amount transferred during the tax year to the special reserve account created for the purpose of this deduction

(b) 20% of the profits derived from eligible business as specified above

(c) 200% of paid-up share capital and general reserve as on the last day of the tax year minus balance in special reserve account on the first day of the tax year.

When aggregate amount of deposit in special reserve account exceeds 200% of the paid-up share capital and general reserves of the corporation or public company, no further deduction shall be allowed thereafter.

1.3. Consequences of withdrawal from special reserve

If any amount is withdrawn from the special reserve account it will be chargeable to tax in the year in which amount is withdrawn. Such withdrawal shall be taxable only if deduction had been allowed under this provision in the year of deposit. This taxability arises regardless of the fact whether the business is in existence in that year or not.

A business entity can carry forward and set-off the business losses for up to 8 tax years immediately succeeding the tax year for which the loss was first computed. After expiry of these 8 tax years, the unclaimed losses shall lapse and cannot be adjusted against any taxable business profits. However, the business losses pertaining to the year in which business was discontinued can be set-off, even after expiry of 8 tax years, against the receipt which is deemed as notional business income under this provision.

1.4. Meaning of certain terms

1.4-1. Long-term finance

The expression ‘long-term finance’ shall mean any loan or advance wherein the terms, under which money is given, provide for repayment along with interest thereof during a period of not less than 5 years.

1.4-2. Infrastructure facility

It includes following:

(a) Road including toll road, a bridge or a rail system;

(b) Highway project including housing or other activities being an integral part of the highway project

(c) Water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid waste management;

(d) Port, airport, inland waterway or inland port or navigational channel in sea area

(e) Any other public facility of a similar nature as, the CBDT may prescribe.

1.4-3. Conditions for notification

For the purpose of being notified as an infrastructure facility, a public facility is required to fulfil the following conditions:

(a) It must be owned by a company registered in India or by a consortium of such companies or by an authority or a board or corporation or any other body established or constituted under any Central or State Act;

(b) There must be an agreement with the Central Government or a State Government or a local authority or any other statutory body for developing or operating and maintaining or developing, operating and maintaining a new infrastructure facility.

(c) It has started or starts operating and maintaining such infrastructure facility on or after the 1st day of April, 1995.

References

Other than a primary agricultural credit society or a primary co-op. agricultural and rural development bank

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.