Section 33A of ITA, 1961 : Section 33A: Development Allowance

Explanation using Example

Imagine a tea company, "GreenLeaf Teas Ltd.," which operates in the business of growing and manufacturing tea in India. In 2021, they decide to expand their tea plantations and prepare a new area of land for planting tea bushes. The actual cost incurred for planting tea bushes on this new land, which has never been planted with tea before, amounts to INR 10,00,000.

Under Section 33A of the Income-tax Act, 1961, GreenLeaf Teas Ltd. would be eligible for a development allowance. Since this is a new plantation area, they would qualify for a deduction equivalent to 50% of the actual cost of planting, which in this case would be INR 5,00,000 (50% of INR 10,00,000).

The company would need to meet certain conditions to claim this allowance, such as furnishing prescribed particulars and creating a reserve account with 75% of the allowance amount. This reserve must be used for the business of the undertaking within the next eight years and cannot be used for distribution as dividends or for creating assets outside India.

If GreenLeaf Teas Ltd.'s total income for the year after other deductions but before claiming this development allowance is INR 4,00,000, they can only claim an allowance up to the amount of their total income, which would reduce their taxable income to nil. The remaining INR 1,00,000 (INR 5,00,000 - INR 4,00,000) can be carried forward to subsequent years, subject to the carry-forward limit of eight years.

If GreenLeaf Teas Ltd. were to sell the land before the expiry of eight years from the end of the previous year in which the allowance was claimed, they would face a withdrawal of the allowance, and it would be added back to their income, unless the land is sold to the government or in connection with certain types of business reorganizations.