Section 33ABA of Income Tax Act: Deduction for Site Restoration Fund

There are a few provisions in the Income Tax Act that allow deductions for setting aside a certain amount of money in funds earmarked for specified purposes. In this article, we explore section 33ABA, which allows a deduction in respect of a contribution made to a site restoration fund.

What is Site Restoration Fund?

• Broadly speaking, this fund is generally maintained by entities who are involved in the business of mining, quarrying, waste treatment, oil and gas exploration, etc., 
• These kinds of business necessarily involve contamination of the place in which the business activity is carried out. So, a fund is generally maintained by these business entities. 
• At the end of business activity, the site is restored, and contaminations and damages are made good to the extent that it can be safely used and accessed for other purposes by the public at large. This is the reason behind the maintenance of the site restoration fund.

What is Section 33ABA?

Broadly speaking, Section 33ABA of the Income Tax Act provides deductions against the amount set aside for site restoration for petroleum and natural gas businesses.

What is the Intent Behind Section 33ABA?

These provisions in the act encourage setting aside money for restoring site damages so that businesses do not face a shortage of funds when reviving the site at the end of their business cycle. This would ensure seamless restoration of the site, thereby avoiding the potential hazards of leaving the site environmentally unsafe.

Who is Eligible for Deduction u/s 33ABA?

• Deduction under this section is provided only for the following businesses related to petroleum and natural gas
  • Extraction - Extraction from the fields 
  • Prospecting - Finding the potential petroleum and gas deposits underground 
  • Production - Refining the crude oil into petrol and other useful products 
• In addition, the Central Government should have entered into an agreement with such business.

Deduction Allowed u/s 33ABA

• Deduction can be allowed for the amount deposited under
  • Special bank account in the State Bank of India under the scheme specifically approved by the Ministry of Petroleum and Natural Gas, or
  • Site Restoration Account specified in a scheme framed by the Ministry of Petroleum and Natural Gas,

Quantum of Deduction Allowed

• The eligible business can claim a deduction of - 
  • Amount deposited*
  • It is to be noted that the maximum deduction allowed is restricted to 20% of its profits as calculated under the Income Tax Act.**
• Deposit of funds needs to be made before the end of the financial year.

Note:

• *Interest credited to the aforesaid bank accounts can also be considered as deposit amount. So, interest can also be considered for deduction.
• **Profits should be calculated without reducing the deductions under this section. Also, for the calculation of profits for the section, brought-forward loss should not be set off.

Calculation of Deductions Amount - An Illustration

Rig Ltd., is engaged in the business of refining crude petroleum into different petroleum products. It has entered into an agreement with the Central Government for carrying out this business. It has opened a bank account in SBI, under the scheme approved by the ministry of petroleum and natural gas, and it contributes against site restoration fund annually. 

It has deposited Rs.45,00,000 in the account on 25-02-2025. Interest credited during the year is Rs.5,00,000. Since interest credited is also considered as a deposit, the total deposit made for the financial year comes to Rs.50,00,000.

Profit for the financial year is as follows:

So, in the above table, profits considered for arriving at 20% of net profits under section 33ABA is (1) - Profits before setting off of brought forward losses and reducing deduction u/s 33ABA. 

Therefore, in any case, the deduction should not exceed : Rs.2 crores *20% = Rs.40,00,000. 

Even though Rs.50,00,000 deposit is made in the financial year, the deduction will be limited to Rs.40,00,000 limit.

Deduction allowed u/s 33ABA - Rs.40,00,000

Conditions for Deductions Allowed u/s 33ABA

• In case deduction is claimed for deposit made in one financial year, deduction cannot be claimed again for the same deposit for any other financial year.
• The business should get its accounts audited for the financial year for which it is claiming deduction. It is not a necessity that the audit should be done as per the provisions of Income Tax Act for claiming this deduction. 
• Audit done under any other law and furnish the report and the form prescribed would suffice for claiming deduction under this section.
• Amount already deposited for which deduction claimed, if withdrawn for reasons other than specified reasons under the scheme, has to be disallowed. Simply speaking, the contribution made should be withdrawn only for reasons specified in the scheme.

Deduction not Allowed in Certain Cases

No deduction is allowed for amount used to purchase the following:

• Machinery in any office premises or residential accommodation, 
• Any office appliances (Deduction allowed for computers)
• Machinery the whole of the actual cost of which is already allowed as a deduction of any one financial year;
• Machinery to be installed in an industrial undertaking for construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule.

Withdrawal on Closure of Account

• When the account is closed and amount is withdrawn by the business, the total amount withdrawn minus the amount payable to government as per the agreement should be considered as an income in the year of withdrawal and chargeable to tax.
• Also, when the amount withdrawn is used for site restoration activity or specified purpose, the withdrawal amount is not considered as taxable income.

Final Word

This section ensures that the businesses plan for their funding of site restoration and encourages to do so by providing deduction to the contributed amount.