Section 34A of ITA, 1961 : Section 34A: Restriction On Unabsorbed Depreciation And Unabsorbed Investment Allowance For Limited Period In Case Of Certain Domestic Companies

Explanation using Example

Imagine XYZ Pvt. Ltd., a domestic company, has been operating a manufacturing business. For the financial year 1991-92, the company had an unabsorbed depreciation allowance of INR 300,000 and an unabsorbed investment allowance of INR 200,000 due to insufficient profits. According to Section 34A of the Income-tax Act, 1961, when XYZ Pvt. Ltd. calculates its profits for the financial year 1992-93, it can only deduct two-thirds of these allowances from its profits.

Therefore, XYZ Pvt. Ltd. can deduct INR 200,000 (two-thirds of INR 300,000) for depreciation and INR 133,333 (two-thirds of INR 200,000) for investment allowance, totaling INR 333,333. The balance of INR 100,000 for depreciation and INR 66,667 for investment allowance will be carried forward. The unabsorbed depreciation will be added to the depreciation allowance for the next financial year (1993-94), and the unabsorbed investment allowance will be carried forward to the same year, with the possibility of extending the carry forward period beyond eight years if not fully absorbed.

Moreover, if the total unabsorbed allowances were less than INR 100,000, XYZ Pvt. Ltd. would not be subject to the restriction and could deduct the entire amount in the financial year 1992-93. Additionally, if the shortfall in tax payment due to this restriction is paid before filing the return, XYZ Pvt. Ltd. will not face interest penalties under sections 234B and 234C for this shortfall.