Section 34A, of Income Tax Act, 1961 states that
(1) In computing the profits and gains of the business of a domestic company in relation to the previous year relevant to the assessment year commencing on the 1st day of April, 1992, where effect is to be given to the unabsorbed depreciation allowance or unabsorbed investment allowance or both in relation to any previous year relevant to the assessment year commencing on or before the 1st day of April, 1991, the deduction shall be restricted to two-third of such allowance or allowances and the balance,—
(a) where it relates to depreciation allowance, be added to the depreciation allowance for the previous year relevant to the assessment year commencing on the 1st day of April, 1993 and be deemed to be part of that allowance or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year and so on for the succeeding previous years ;
(b) where it relates to investment allowance, be carried forward to the assessment year commencing on the 1st day of April, 1993 and the balance of the investment allowance, if any, still outstanding shall be carried forward to the following assessment year and where the period of eight years has expired before the portion of such balance is adjusted, the said period shall be extended beyond eight years till such time the portion of the said balance is absorbed in the profits and gains of the business of the domestic company.
(2) For the assessment year commencing on the 1st day of April, 1992, the provisions of sub-section (2) of section 32 and sub-section (3) of section 32A shall apply to the extent such provisions are not inconsistent with the provisions of sub-section (1) of this section.
(3) Nothing contained in sub-section (1) shall apply where the amount of unabsorbed depreciation allowance or of the unabsorbed investment allowance, as the case may be, or the aggregate amount of such allowances in the case of a domestic company is less than one lakh rupees.
(4) Nothing contained in sections 234B and 234C shall apply to any shortfall in the payment of any tax due on the assessed tax or, as the case may be, returned income where such shortfall is on account of restricting the amount of depreciation allowance or investment allowance under this section and the assessee has paid the amount of shortfall before furnishing the return of income under sub-section (1) of section 139.
section 34A of Income Tax Act, 1961
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The Income Tax Act of 1961 bestows upon domestic companies certain provisions for depreciation and investment allowance. Nonetheless, specific companies may find themselves unable to utilize these allowances to their fullest extent due to limitations. As a solution to this issue, the government introduced Section 34A in the ITA, which imposes restrictions on unabsorbed depreciation and investment allowance for a particular category of domestic companies for a limited period.
Section 34A was incorporated into the ITA in 2017 and applies to companies engaged in power generation or distribution, or operating in the development, maintenance, or operation of a special economic zone (SEZ), and that have claimed depreciation or investment allowance in the previous year relevant to the assessment year commencing on or after April 1, 2017. The section limits the amount of unabsorbed depreciation and investment allowance that can be carried forward for a maximum of eight years from the year in which the allowance was initially claimed.
Additionally, the section restricts the amount of unabsorbed depreciation and investment allowance that can be set off against the income of any subsequent year to 40% of the profits of such a year before allowing for such set off and depreciation. If the company amalgamates with another company, the unabsorbed allowances of the amalgamating company will lapse, and the amalgamated company will not be allowed to carry forward such unabsorbed amounts.
If the company is reconstituted or restructured, the unabsorbed allowances of the predecessor company will be deemed to be the unabsorbed amounts of the successor company. These limitations are applicable for a limited period and will only be enforced for the assessment years beginning on or after April 1, 2017.
It is imperative for companies involved in power generation or distribution or SEZ development that have claimed depreciation or investment allowance to be aware of the constraints imposed by Section 34A of the Income Tax Act of 1961 to comply with the legislation.