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Commissioner of Income-tax, Mysore, Bangalore Vs. Janardhan Zarapkar - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 128 of 1972
Judge
Reported in(1982)27CTR(Bom)188; [1982]138ITR482(Bom)
ActsIncome Tax Act, 1961 - Sections 28, 29, 33, 34(3) and 34(3)
AppellantCommissioner of Income-tax, Mysore, Bangalore
RespondentJanardhan Zarapkar
Excerpt:
direct taxation - deduction - sections 28, 29, 33, 34 (3) and 256 (1) of income tax act, 1961 - although assessee's accounts on which its initial return based did not comply with section 34 (3) it had before assessment was completed, corrected and made up its accounts so as to comply with section 34 (3) - assessee also filed revised return based on concerned accounts - also no allegation or any material to hold that before assessee-firm rectified its accounts and filed revised return partners had in any manner acted on initial accounts - act does not specify any period of time within which relevant entries should be made - assessee may make necessary entries at any time before return of income is filed - even if entries made during pendency of assessment proceedings income tax officer.....rege, j.1. this is a reference under s. 256(1) of the i.t. act, 1961, by the income-tax appellate tribunal, bangalore bench, at the instance of the commissioner of income-tax, mysore.2. in this case the assessee is a firm having four partners. the concerned assessment year is 1966-67, with the previous financial year ending on 31st march, 1966. during the accounting year relevant to the assessment year the assessee had purchased certain items of machinery called a 'michigan shovel' at cost of rs. 1,98,230, which was brought into use during that very year. in the return of income initially file by the assessee for the said year it had not claimed development rebate on the said machine, to which it was entitled. so also the statement of account of the assessee on which the said initial.....
Judgment:

Rege, J.

1. This is a reference under s. 256(1) of the I.T. Act, 1961, by the Income-tax Appellate Tribunal, Bangalore Bench, at the instance of the Commissioner of Income-tax, Mysore.

2. In this case the assessee is a firm having four partners. The concerned assessment year is 1966-67, with the previous financial year ending on 31st March, 1966. During the accounting year relevant to the assessment year the assessee had purchased certain items of machinery called a 'Michigan Shovel' at cost of Rs. 1,98,230, which was brought into use during that very year. In the return of income initially file by the assessee for the said year it had not claimed development rebate on the said machine, to which it was entitled. So also the statement of account of the assessee on which the said initial return was based had not complied with the statutory conditions under s. 34(3) of the I.T. Act, 1961, namely, 75% of the development rebate actually allowed to the assessee, being shown in the accounts as debited to the profit and loss account and credited to a reserve account, to enable the ITO to allow the said development rebate to the assessee. However, during the hearing of the said assessment proceedings before the ITO the assessee filed a revised return of income based on a fresh statement of accounts made by the assessee, complying with the said statutory conditions laid down under s. 34(3) of the I.T. Act, 1961.

3. The ITO, relying on the decision of the Madras High Court in CIT v. Veeraswami Nainar : [1965]55ITR35(Mad) , rejected the assessee's claim for the development rebated made under the revised return on the ground that the reserve created was not a proper reserve as envisaged under s. 34(3) of the I.T. Act, 1961.

4. The AAC, in appeal from the said order distinguishing the decision of the Madras High Court in Veeraswami's case, relied upon by the ITO, as being not applicable to this case, and relying on the decisions of the Andhra Pradesh High Court in the case of Veerabhadra Iron Foundry v. CIT [1969] 69 ITR 425, and that of the Madras High Court in the case of Radhika Mills Ltd. v. CIT : [1969]74ITR661(Mad) , and of the Rajasthan High Court in the case of CIT v. Mazdoor Kisan Sakhari Samiti , reversed the order of the ITO and directed the development rebate to be allowed to the assessee.

5. The Revenue filed an appeal against the said order to the Tribunal. The Tribunal confirmed the finding of the AAC, holding that in this case the assessee, which was a firm, had complied with the provisions of s. 34(3) of the I.T. Act, 1961. In doing so, the Tribunal observed :

'It was necessary to consider the manner of making up of accounts and striking of profit or loss in relation to and in the background whether it is a firm or a firm or a company or a proprietary business. In the case of a company, the accounts were prepared and placed before the board of directors who passed the said accounts. The directors then placed the accounts before the shareholders for their adoption. Once the director sign the accounts and pass the same for the adoption of the general body, the finality of the making of the accounts is complete. In the case of a firm, there is no such statutory formality as exists for the companies.... In the case of company, the statutory accounts have to be field with the Registrar of Companies while in the case of a firm, no such formality is there. The finality of the accounts in the case of a firm would not be so inflexible or rigid as in the case of a company, for the reason that in the case of a company, the accounts have to be closed within the statutory time and the general body had to approve the same and the accounts have to be file before the Registrar. Therefore, no flexibility will be available in the case of a company. As we have stated earlier, in the case of a firm, there being no such formality, flexibility cannot be ruled out.'

6. The said finding of the Tribunal has given rise to the following question under this reference for our opinion, namely :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee had properly complied with the requirements of section 34(3)(a) of the Act, and was, therefore, eligible for the benefit of development rebate for the assessment year 1966-67 ?'

7. It is contended by the learned counsel for the Revenue that in order that the assessee-firm would be allowed the said development rebate it was necessary that it should have complied with the two statutory conditions under s 34(3) of the I.T. Act, 1961, in respect of its accounts produced by it for the first time before the ITO, which, according to the learned counsel, were the final accounts and that the subsequent amendment or rectification of its accounts by the assessee-firm to comply with the provisions of s. 34(3) was not sufficient to permit the ITO to allow the said rebate. In support of his said contention he relied on certain decisions of the Gujarat High Court.

8. As against this, the learned counsel for the assessee contended that, in any event, in the case of an assessee, which is a firm, as in this case, there was no time-limit for making up the accounts by debiting the requested amount to the profit and loss account and crediting it to development reserve amount, nor was there any bar in law on the firms against amending or rectifying its accounts to comply with s. 34(3)(a) of the I.T. Act, 1961, and all that the ITO was concerned with under s. 34(3), before allowing the rebate to the assessee on the returns file, was to see that the accounts on which the assessee had based his return complied with the said provisions.

9. Before dealing with the said rival contentions we may make it clear at the outset that while determining the question in this case we propose to restrict ourselves only to a case where the assessee is a firm as in this case and we do not propose to consider the said question generally in relation to each and very type of other associations such as a limited company, where different considerations might perhaps arise.

10. To appreciate the said rival contentions, certain provisions of the I.T. Act, 1961, be referred to. Section 28 tells what was to be included under 'profits and gains of business'. Section 29 provides for the computation of such profits in accordance with ss.30 to 43A of the Act. Section 33 provides, inter alia, for deductions to be granted on account of development rebate in respect of new machinery installed. Section 34(3)(a), as far as is relevant for our consideration provides :

'34. Conditions for depreciation allowance and development rebate. - ...

(3)(a) The deduction referred to in section 33 shall not be allowed unless an amount equal to seventy-five per cent of the development rebate to be actually allowed is debited to the profit and loss account of the relevant previous year and credited to a reserve account.....'

11. The question in this case was whether under the said provisions of s. 34(3) of the I.T.Act 1961, the ITO was to allow the assessee for-firm development rebate only if the accounts produced by the assessee for the first time on the basis that they were final accounts, had complied with the statutory conditions laid down in s. 34(3).

12. A plain reading of the said s. 34(3)(a) of the I.T. Act, 1961, shows that it only enjoins upon the ITO not to allow the assessee deduction in respect of development rebate provided under s. 33 unless he was satisfied that in its books of account the assessee had, (a) debited in its profit and loss account of the relevant previous year 75% of the development rebate to be actually allowed to the assessee, and (b) credited the said amount to a reserve account. Therefore, the only thing about which the ITO was that the account of the assessee-firm on which the return was based, had complied with the provisions of s. 34(3) and if he were so satisfied, it was incumbent upon him to allow the rebate if otherwise factually the assessee was entitled to it under s. 33. The object of the provisions appears to be that, while allowing the rebate to which the assessee was entitled under s. 33 for newly installed machinery, the ITO was to ensure that the assessee had built up a reserve for the future development of it s business. The section does not provide for any time-limit within which a firm was required to complete its accounts, debiting the amount to the profit and loss account and crediting the same to a reserve account, nor is there, either in the section or otherwise in law, any bar against a firm either from amending or rectifying the accounts once they were made. In the case of an assessee who is a firm, as in this case, the law does not prescribe any time-limit or formalities for making up its accounts or for its rectification or amendment thereafter with the consent of the partners. Under the circumstances, while considering the allowance of a deduction on account of development rebate under s. 34(3), the ITO was not concerned with the question of finality of the accounts, in a sense that there was to be no rectification thereof, even if permissible in law. Under the said section all that the ITO was concerned with was to see, while completing the assessee firm's assessment, before allowing deduction on account of development rebate, as claimed by the assessee, that its accounts, on which the return was based, complied with s. 34(3).

13. Dealing now with the decisions cited across the Bar, it is clear that there is a divergence of opinion on the question before us between the High Court of Gujarat high Court in its decisions have, relying on certain observations of the Supreme court in Indian Overseas Bank Ltd. v CIT : [1970]77ITR512(SC) , taken the view that the accounts once made up by the ITO for the compliance of s. 34(3) of the I.T. Act, 1961. However, various other High Courts, including this court, have found that there was nothing in the said observations of the Supreme Court to justify the strict view taken by the Gujarat High Court. It would be, therefore, convenient to deal first with the decisions of various other High Court, which support the view that we are taking, before dealing with the decisions of the Gujarat High Court, taking a contrary view, and also the decision of the Supreme Court on which the said decisions of the Gujarat High Court were based.

14. The first of such decisions was of the Andhra Pradesh High Court in the case of Veerabhadra Iron Foundry's case : [1968]69ITR425(AP) . In that case the assessee was a firm, and the facts were almost similar to our case. The firm had claimed development rebate on the value of the machinery installed on 4th December, 1959, in its return for the assessment year 1960-61, the previous year ending on March 31, 1960. The assessee had not, before the close of the accounting year, debited any amount in the profit and loss account or credited any amount to the reserve account. During the course of assessment the ITO had brought this omission to the notice of the assessee and the assess had made the requisite entries in its accounts on August 9, 1961, before the assessment was completed debiting the profit and loss account and crediting the development reserve account with the 75% of the amount allowable as development rebate. The ITO had disallowed the assessee's claim on the ground that the entries were not made before the close of the accounting year. In the appeals to the AAC and the Tribunal, the ITO's order was confirmed. However, the High Court, on a reference, held that (headnote) :

'There was no provision in the Act under which the reserve fund account should be credited with the amount of development rebate before the close of the accounting year and that, as the assessee made the necessary entries before the assessment was finalised by the Income-tax Officer, the assessee was entitled to the benefit of the rebate.'

15. The court, however, left open the question as to the ultimate time beyond which the entries could not be made.

16. The next decision was of the Rajasthan High Court in the case of Mazdoor Kisan Sakhari Samiti . There the assessee was a co-operative society, and the provisions applicable were s.10(2)(vib) of the Indian I. T.Act, 1922(same as s. 34(3) of the I.T. Act, 1961). The court there held that under prov. (b)under Expln. 2 to s. 10 (2)(vib) an assessee shall be permitted the allowance in respect of development rebate only if he makes the debit entries as mentioned therein but as no time-limit is place for making such entries in the account books, they may be made at any time till the assessment proceedings are completed and it is not correct to state that they should have been made before the close of the accounting year. Under certain circumstances, the ITO may permit the assessee to make debit and credit entries in the profit and loss account of the relevant previous year event after the return had been filed.

17. The third decision was of the Punjab and Haryana High Court in the case of CIT v. Sardar Singh Sachdeva . There the court held that (headnote) :

'The entries about development rebate should be made in the accounts on or before the last day of the accounting year or even before the preparation of the profit and loss account. It is open to the assessee to make the entries at any time before the assessment is completed. The entries become final only when the assessment is made. Till them they are in a fluid state and any defect or error in them could be corrected.'

18. The next decision was of the Allahabad High Court in the case of CIT v. Modi Spinning & Weaving Mills Co. : [1973]89ITR304(All) . There also the court was dealing with the provisions of s. 10(2)(vib) of the Indian I.T. Act, 1922. In that case the assessee was a public limited company. The assessee had claimed development rebate in respect of certain machinery installed during the accounting year. The ITO rejected the claim on the ground that the assessee had not debited its profit and loss account and created a reserve as required by prov. (b) under Expln. 2 to s. 10(2)(vib). The AAC confirmed the order of the ITO. However, the Tribunal in appeal allowed the claim. The High Court, on a reference, held (headnote) :

'The Act does not specify any period of time within which the relevant entries should be made. The assessee may make the necessary entries at any time before the return of income is filed. Even if the entries are made thereafter, during the pendency of the assessment proceedings, the Income-tax Officer may take them into consideration.'

19. The court, referring to the decision of the Supreme Court in Indian Overseas Bank's case : [1970]77ITR512(SC) , which was relied upon by the department, observed that the said case was decided on the basis that the entries did not expressly establish compliance with prov. (b)under Expln. 2 to s. 10(2)(vib) of the Indian I.T. Act, 1922. It also pointed out that from the observations in the said decision of the Supreme Court, the court was unable to infer that the profit and loss account originally prepared and passed by the company cannot be subsequently amended by it and that the ITO had no power to allow development rebate if the entries were made after the filing of the original return of income. The court disagreed with the contrary view taken by the Gujarat High Court in Surat Textile Mills' case [ : [1971]80ITR1(Guj) , relying on certain observation of the Supreme Court in the said Indian Overseas Bank's case : [1970]77ITR512(SC) .

20. The next decision was of the Punjab and Haryana High Court in the case of CIT v. Sardar Singh Sachdeva [1972] 85 ITR 387. There the assessee was an individual. The court held that (headnote) :

'It is not necessary that entries about development rebate should be made in the accounts on or before the last day of the accounting year or even before the preparation of the profit and loss account. It is open to the assessee to make the entries at any time before the assessment is completed. The entries become final only when the assessment is made. Till then, they are in a fluid state and any defect or error in them could be corrected.'

21. The next decision was of this court in the case of Tata Iron & Steel Co. Ltd. v N. C. Upadhyaya : [1974]96ITR1(Bom) . In that case the assessee had not claimed development rebate for the price of the rolling mill rolls during the four years they were installed, as the ITO in other cases had disallowed the same. However, subsequently the CBR by its circular dated November 16, 1968, directed the ITO to allow development rebate on such rolls, and the assessee claimed the same in the subsequent year of assessment, which was disallowed by the ITO on the ground of non-compliance with the provisions of s. 34(3) of the I.T. Act, 1961.

22. Although one of the questions for consideration before this court was as regards the interpretation of the provisions of s 34(3) of the I.T. Act, 1961, as applicable to the facts of that case, counsel for the assessee had not pressed the same,being satisfied with the decision on the other question involved. However, the court had discussed the question in details referring to the case-law cited above, and while expressing its agreement with the view taken by the various courts in their decision referred to above and disagreeing with the contrary view taken by the Gujarat High Court, had observed (p. 130) :

'Reviewing the above decisions we find that the Supreme Court has not decided in Indian Overseas Bank Ltd. CIT : [1970]77ITR512(SC) , that the profit and loss account originally prepared and passed by a company cannot be subsequently amended by it and that the ITO has no power to allow development rebate if the entries are made after the filing of the original return of income or even at a subsequent date in cases of bona fide mistake.'

23. The court while disagreeing with the contrary view taken by the Gujarat High Court, solely relying on certain observation of the Supreme Court in Indian Overseas Bank's case, observed at p.11 of the report (96 ITR) :

'With regard to the judgment of the Gujarat High Court we must say with respect that, in our opinion, the Supreme Court nowhere laid down in Indian Overseas Bank Ltd. v. Commissioner of Income-tax : [1970]77ITR512(SC) , the time at which the development rebate reserve must be created.'

24. Further, at p.14 of the report, this court observed :

'We, however, take the view that the Supreme Court has not decided the point, and, with respect, we do not agree with the construction placed by the Gujarat High Court on the judgment of the Supreme Court.'

25. The next decision was of the Orissa High Court in the case of CIT V.Narula Cold Storage & Ice Factory : [1976]104ITR148(Orissa) . The facts there were close to our case. In that case assessee was a registered firm. it had filed its return for the assessment year 1964-65, in February, 1968. When the books of account were originally closed and the return was filed, a provision for development rebate reserve had not been made. The assessee subsequently created the reserve and in March, 1969, submitted revised returns. the revised returns were accepted, but the ITO rejected the claim for development rebate on the ground that the reserve for it had not been created at the time of the making profit and loss account. The AAC confirmed the order of the ITO. The Tribunal held that the development rebate was allowable. On a reference, the High Court Held (headnote) :

'There is no upper limit of time fixed under the Income-tax Act, 1961, for claiming development rebate. The creation of a development rebate reserve is a condition precedent to claiming the rebate but the reserve need not be created at the time of making up the profit and loss account...

Provision had been made for the development rebate reserve by the time the revised returns had been made. Hence, there was no defect which disentitled the assessee to the claim. The assessee was entitled to the development rebate for the assessment year 1964-65.'

26. The court agreed with the view expressed by various courts in their decisions referred to above, and disagreed with the contrary view taken by the Gujarat High Court in Surat Textile Mills case : [1971]80ITR1(Guj) , following certain observations of the Supreme Court in its decision in Indian Overseas Bank's case : [1970]77ITR512(SC) .

27. With that, we may now consider the decisions of the Gujarat High Court on which the learned counsel for the Revenue has relied as also the said decision of the Supreme Court in Indian Overseas Bank's case. The first decision is in Surat Textile Mills' case. That was a case where the assessee was a limited company. Although the company had purchased a cheese dyeing plant in the accounting year 1950-51, which was installed in 1959, it had not credited any development rebate reserve in the profit and loss account of the year 1959. But in the accounts of the company for the accounting year ended on December 31, 1961, with the permission of the CBR, it had transferred and adequate amount to the reserve fund from the profit and loss account brought forward from earlier years, and in the assessment for 1960-61, the claim for development rebate was allowed by an order dated 20th March, 1962. However, by reason of the subsequent decision of the Supreme Court in Indian Overseas Bank's case : [1970]77ITR512(SC) , the ITO reopened the assessment and withdrew the same. Both the AAC and the Tribunal, in appeal upheld the order of the ITO. On a reference, the High Court, relying on certain observations of the Supreme Court in its said decision in India Overseas Bank's case, and disagreeing with the view taken by the Andhra Pradesh High Court and the Rajasthan High Court in their decision cited above, held (headnote) :

'Under cl. (b) of the proviso to section 10(2)(vib) of the 1922 Act, the amount to be transferred to the reserve contemplated by that clause must be debited before the profit and loss account is made up and, secondly, the transfer to the reserve fund, should be made at the time of making up of the profit and loss account.'

28. The court further held (headnote) :

'In view of the aforesaid decision of the Supreme Court, the benefit of the development rebate cannot be granted to the assessee in the instant case because of non-compliance with the requisite conditions laid down in clause (b) to the proviso to section 10(2)(vib).'

29. The second decision of the Gujarat High Court also was in the case of Addl. CIT v. Shri Subhlaxmi Mills Ltd. [1975] 100 ITR 188. Here also, the assessee was a limited company. In this case court, again relying on the observations of the Supreme Court in Indian Overseas Bank's case : [1970]77ITR512(SC) , and also following its said earlier decision, took the same view as in the earlier decision.

30. The third decision was in the case of Keshavlal Vithaldas v. CIT : [1976]105ITR601(Guj) . In that case the assess was a firm. In the previous year relevant to the assessment year 1969-70, the assessee had installed certain machinery. When the profit and loss account of the firm was first prepared, no provision for development reserve was made nor was a reserve created. But some time prior to the filing of the return, development reserve was created by drawing up a general profit and loss account of the previous year. When the profit and loss account was first prepared, the net profit was distributed amongst the five partners by making the necessary havala entries in the books of account. At the time when the general profit and loss account for the previous year was drawn up later, entries were made and the amount of the development rebate reserve was propionate debited to the account of the parties and was credited to the development reserve account. The Tribunal disallowed the assessee's claim on the ground that the conditions required for the allowance of rebate were not fulfilled. the High Court on a reference, mainly relying on the observations of the Supreme Court and its two earlier decisions cited above, and disagreeing with the view taken by the Punjab and the Allahabad High Courts in their afore-cited decisions, held, agreeing with the Tribunal, as follows (headnote) :

'Once the profit and loss account is actually finally made up and the amount of the net profit is ascertained, at no subsequent date can the amount be debited to the profit and loss account by making further necessary entries.'

31. The court in its judgment observed (p. 611) :

'In this sense it is clear that it is not required by law that the profit and loss account should in physical fact be made up on the very last day of the accounting year under consideration. It can be made up even some time after the close of the year after collecting figures of all the different items of income and after making the necessary calculations but once those calculations are made and the profit and loss account ins made up and the actual profit arising in the course of the business is ascertained, the last moment for debiting the amount of the development rebate reserve to the profit and loss account is gone because it is before the profit and loss account for the accounting year is finally made up that the development rebate reserve has to be created by debiting the amount to the profit and loss account and crediting it to the reserve account.'

32. The view taken by the Gujarat High Court in its said decision, as evident from its above-quoted observations, was based expressly on the following observations of the Supreme Court in its decision in the Indian Overseas Bank's case : [1970]77ITR512(SC) , to the effect (p. 514) :

'It is also clear from the terms of the proviso that transfer to the reserve fund should be made at the time of making up the profit and loss account.'

33. It would be, therefore, proper to examine the said decision of the Supreme Court to see whether from any of the observations therein the strict view taken by the Gujarat High Court was justified.

34. In Indian Overseas Bank's case : [1970]77ITR512(SC) the assessee, a banking company, had claimed development rebate under prov. (b) under Expln. 2 to s. 10(2)(vib) of the Indian I.T. Act, 1922, and had contended that the transfer which it had made to the reserve under s. 17 of the Banking Companies Act, 1949, was sufficient compliance with the said prov. (b) under Expln. 2 to s 10(2)(vib) (s. 34(3)of the I.T. Act, 1961). The court there held (headnote) :

'The reserve contemplated by section 17 of the Banking Companies Act, 1949, and the one contemplated by proviso (b) to section 10(2)(vib) of the Income-tax Act, 1922, are two independent reserves. The entries in the account books required by proviso (b) to section 10(2)(vib) were not an idle formality. A separate reserve fund had to be created for the proposes of section s. 10(2)(vib). Under the circumstances, the assessee was not entitled to the development rebate. The grant of the rebate was a concession subject to the fulfilment of the conditions prescribed under the proviso, and the creation of a reserve fund under section 17 of the Banking Companies Act was not sufficient compliance with the proviso, even though the amount so carried to the reserve might be large enough to cover both requirements.'

35. In that case the court was not considering the question before us but only one question, namely, whether creation of a reserve under s. 17 of the Banking Companies Act was a sufficient compliance with the condition for the creation of the reserve account under the prov. (b) under Expln.2 to s. 10(2)(vib) of the Indian I.T. Act, 1922(s. 34(3) of the I.T. Act, 1961). It was in the course of a consideration of the said question, while pointing out the distinction between the two reserves, that the court made the said general observations quoted above, relying on which the Gujarat High Court had held as above.

36. It appears to us that the said contrary view taken by the Gujarat High Court in its afore-cited decision, solely relying on the said observations of the Supreme Court, was too strict a view, not justified by its said observations. Firstly, as pointed out above, the Supreme Court in that case was not concerned with the question that is before us. In that case no reserve fund as required under s. 10(2)(vib) of the Indian I.T. Act, 1922, was in fact created, and, therefore, the court held that the company, not having complied with the conditions under the said section, was not entitled to development rebate. The court there had not to consider, even remotely, the question as regards the finality or otherwise of the accounts, and, therefore, the said observations were of general nature, and cannot be considered to be laying down any dicta. At the most, all that the said observations can be said to lay down was that, for complying with s. 34(3) of the I.T. Act, 1961, the transfer to the reserve account should be made at the time of making up the profit and loss account. They, however, do not say anything as to the time of making up the profit and loss account. The said judgment also nowhere deals with the question of finality of accounts in the case of a firm nor does it lay down that the profit and loss account originally prepared by the firm cannot be subsequently amended by it and/or that the ITO had no power to allow development rebate if the entries were made after the filing of the original return of income. In our view, therefore, the Supreme Court in its said decision had not considered and/or decided the question before us, and the observation of the Supreme Court in its said decision cannot be read to that effect, as done by the Gujarat High Court. In that view of the matter, we are in agreement with the view taken by this court as well as various other High Courts on this question,and we are unable to agree with the contrary view taken by the Gujarat High Court.

37. In our view, that being the position in law as regards the compliance by the firm with the statutory conditions of s. 34(3) of the I.T. Act, 1961, for deductions on account of development rebate being allowed, we may now deal with the facts of this case. There is no dispute in this case that factually the assessee-firm was entitled to deduction on account of development rebate. The only question, therefore, was as to its compliance with s. 34(3) as regards its accounts. It is also not disputed that although the assessee's accounts, on which its initial return was based, did not comply with s. 34(3), it had before the assessment was completed corrected and made up its accounts so as to comply with s. 34(3) and had also filed a revised return based on the said accounts. There was also no allegation or any material to hold that before the assessee-firm rectified its accounts and filed a revised return, the partners had in any manner acted on the initial accounts. Therefore, on the position in law discussed above, in this case, so far as the ITO was concerned, the accounts of the firm before him on which the revised return was file d which the ITO could not ignore, had fully complied with the statutory conditions of s. 34(3). He was, therefore, bound to allow the assessee the deductions on account of development rebate and was not justified in rejecting the same on the ground that the assessee had not created the reserve in its accounts when the books were produced by the assessee for the first time before him.

38. In that view of the matter, we answer the question referred to us in the affirmative and in favour of the assessee. The Revenue to pay the costs of the reference.


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