Srinivasa Iyengar, J.
1. In this writ petition, the order of the CIT dated October 26, 1974, passed under s. 263 of the I.T. Act, 1961, directing withdrawal of the development rebate set off that had been allowed in the assessment for 1973-74, relating to the development rebate carried forward for the assessment year 1968-69, is challenged. The ground on which the CIT interfered with the order of the ITO was that no development rebate reserve had been created in the year in which the new machinery was installed. It is contended for the assessee that this view of the Commissioner is erroneous and opposed to the circulars issued by the department.
2. The income computed for the assessment year 1968-69, was a loss before any allowance of development rebate. As there was no positive profit the assessee was unable and did not create a reserve. It transpires that for certain subsequent assessment years also development rebate allowable was computed, but was not actually allowed as there was no sufficient profit out of which it could be set off. Only in the assessment year 1973-74, there was sufficient profit out of which a portion of the development rebate that had been carried forward could be set off and also the specific reserve contemplated in that behalf under s. 34 of the Act had been created. In view of these circumstances, the ITO set off the unabsorbed development rebate that had been carried forward to the extent of the profits available in the assessment year 1973-74, and yet the unabsorbed development rebate was directed to be carried forward.
3. Before the Commissioner the decision of the Madras High Court in the case of Radhika Mills Ltd. v. CIT : 74ITR661(Mad) , was relied upon for the assessee, but the Commissioner was not prepared to accept the proposition stated therein.
4. Prima facie, the view taken by the Commissioner is untenable. The ruling of the Madras High Court referred to above was to the effect that it was not obligatory on the part of the assessee to create a development rebate reserve in the very year of installation of the new machinery. This view has been accepted by the High Court of Bombay and the High Court of Calcutta and also certain other High Courts. However, it appears that the Gujarat High Court had taken a contrary view. The decisions of the Bombay High Court are reported in Indian Oil Corporation Ltd. v. S. Rajagopalan, ITO : 92ITR241(Bom) and Tata Iron & Steel Co. Ltd. v. N. C. Upadhyaya : 96ITR1(Bom) , and the decision of the Calcutta High Court is reported in the case of West Laikdihi Coal Co. Ltd. v. CIT : 87ITR501(Cal) .
5. Section 33(2) of the Act, inter alia, provides that the sum to be allowed by way of development rebate for a particular assessment year shall be only such amount as is sufficient to reduce the said total income to nil and further makes provision for the unabsorbed development rebate computed in accordance with the provisions of law to be carried forward up to eight years. The condition required for the actual allowance of the development rebate by creation of a specific reserve in that behalf as provided under s. 34(3) does not control the carry forward of the development rebate computed in the earlier years and does not provide that if in the year when new machinery is installed such a reserve is not created, the development rebate allowable shall not be carried forward or shall not be allowable in any subsequent year when the condition is satisfied.
6. It is relevant to point out that in a circular issued by the Central Board of Direct Taxes in F.No. 10/49/65-ITA. 1, dated October 14, 1965, it had been specifically stated 'in a case where the total income computed before allowing the development rebate is a loss there was no legal obligation to create any statutory reserve in that year, as no development rebate would actually be allowed in that year'. It appears that consequent on the decision of the Supreme Court reported in the case of Indian Overseas Bank Ltd. v. CIT : 77ITR512(SC) , and the decision of the Gujarat High Court in the case reported in Surat Textile Mills Ltd. : 80ITR1(Guj) , the Board had issued a circular in 1972 withdrawing the instruction issued in the earlier circular of 1965 in relation to certain industrial undertakings particularly those in which the Government was in participation, indicating in effect that any other kind of reserve that might be existing might be considered as including the reserve for purposes of development rebate reserve though such a reserve was not specifically created. Consequent on this withdrawal of the earlier circular to the extent mentioned above, it appears that certain instructions also were issued for reviewing the past assessments, etc., and the authorities were taking proceedings even in regard to matters strictly not coming within the ambit of the circular issued in the year 1972. In these circumstances, the Board issued a further circular No. 189 dated 30th January 1976, clarifying the position. (This circular is to be found in  102 ITR 90 . The said circular noticed the decisions of the High Court of Bombay in Indian Oil Corporation Ltd. v. S. Rajagopalan, ITO : 92ITR241(Bom) and Tata Iron & Steel Co. Ltd. v. N. C. Upadhyaya : 96ITR1(Bom) , and reviewed the position and stated as follows (at p. 91 para 5) :
'The Board have re-examined the issues involved and are of the view that except the clarification given in part (a) of para. 1 above, which stands superseded by the aforesaid decision of the Supreme Court, the clarifications given in parts (b) and (c) of para-1 above hold good.'
7. The clarification given in Part (b) in the aforesaid circular is what has been extracted earlier as being part of the circular issued on 14th October, 1965. It is, therefore, seen that the view of the Board also was that in a case where the total income computed before allowing the development rebate is a loss, there was no legal obligation to create any statutory reserve in that year. It is also in accordance with the relevant provision of law.
8. Therefore, the ground on which the Commissioner interfered with the order of the ITO is not tenable. Accordingly, the rule is made absolute and the order of the Commissioner is quashed. Parties to bear their own costs.