1. In this case, the following two questions have been referred to us for our opinion :
' 1. Whether, on the facts and in the circumstances of the case, the claim for development rebate is allowable for the assessment year 1971-72, in respect of the machinery installed in the accounting year relevant to the assessment year 1970-71 ?
2. Whether, on the facts and in the circumstances of the case, the assessee was entitled to claim relief under Section 80J of the Income-tax Act before the appellate authority when no such claim was made before the Income-tax Officer '
2. The relevant facts may be briefly stated :
The assessee is a registered firm with the financial year as the accounting year and the main business has been that of manufacture of insecticides. During the year of account, the total turnover was found to be Rs. 6,42,090 with a gross profit of 30 per cent. The ITO noticed certain defects in the books and hence added an ad hoc amount of Rs. 50,000 to the trading account. The addition was subsequently reduced to Rs. 20,000 by the AAC. However, the above addition is not the subject-matter of the present case. Before the ITO an amount of Rs. 57,580 was claimed as development rebate. It was noticed that the machinery in respect of which the development rebate was claimed was installed during the preceding year, i.e., during the assessment year 1970-71. In the circumstances, the entire claim of the assessee for development rebate was rejected by the ITO.
3. The matter was taken on appeal before the AAC, who also found that the machinery in question was installed during the assessment year 1970-71 and the assessee did not create any reserve in respect of this machinery as there were no sufficient book profits. The book profits for the assessment year 1970-71 amounted to Rs. 5,934 and the assessed profits for the year were Rs. 3,639. The AAC was, therefore, of the view that the assessee could have created development reserve to the extent of Rs. 3,639 thereby being entitled to the development rebate of Rs. 4,852 (Rs. 3,639 X 100/75). In that view, the AAC reduced the claim of the development rebate for the assessment year 1971-72 by Rs. 4,852, and allowed the remainder as allowable for this year even though the machinery in question was installed in the preceding year.
4. The matter was further taken on appeal before the Tribunal both by the assessee and the department. The Tribunal, relying upon a decision of the Bombay High Court in Indian Oil Corporation v. S. Rajagopalan, ITO : 92ITR241(Bom) , dismissed both the appeals filed by the assessee and the department holding that the assessee was unable to create the required reserve in full during the assessment year 1970-71 and the required reserve had to be created only in the year 1971-72 when the appropriate profits were available. The Tribunal further held that the assessee is bound to create the reserve as required under Section 34 of the I.T. Act in the year in which the machinery has been installed or in the alternative in the year in which profits were available for creating the required reserve. Since the machinery was installed during the assessment year 1970-71 and the assessable profits for this year were Rs. 3,639 the assessee was bound to create the reserve at least to the extent of the above sum of Rs. 3,639 during the assessment year 1970-71 and the assessee not having done so, the development rebate to which the assessee should have rightly been entitled for the assessment year 1970-71 should be deducted from the claim for the assessment year 1971-72. In effect the order of the AAC has been confirmed by the Tribunal.
5. Another contention raised before the AAC was that the ITO erred in not allowing the exemption under Section 80J of the I.T. Act to which the assessee was rightly entitled. The AAC directed the ITO to work out the relief allowable under Section 80J as no reasons were given by the ITO for rejecting the claim of the assessee. On further appeal to the Tribunal, the revenue has contended that since no claim for exemption under Section 80J was made by the assessee before the ITO, the AAC was not justified in giving a direction for allowing appropriate exemption under Section 80J of the Act. As against this, it was contended on behalf of the assessee that such a claim was in fact made before the ITO and that even if such a claim was not preferred, the assessee would be entitled to raise this claim for the first time before the AAC. The Tribunal has rejected the contention of the revenue holding that the observations in the order of the AAC would clearly show that the assessee has in fact preferred a claim for exemption under Section 80J before the ITO. The Tribunal further held that even if such a claim was not made by the assessee before the ITO it is entitled to claim exemption before the AAC which has the same powers as the original authority. The revenue has, therefore, made an application for reference of the two questions extracted above for our opinion.
6. So far as the first question is concerned, it is contended by Mr. Rama Rao, the learned counsel for the revenue, that since the development reserve has not been created in the year 1970-71 as required by the mandatory provisions of Section 34, development rebate ought not to have been allowed for the next year 1971-72. He relied upon a decision of the Supreme Court in Indian Overseas Bank Ltd, v. CIT : 77ITR512(SC) in support of this proposition. This judgment of the Supreme Court was noticed by the Bombay High Court in Indian Oil Corporation Ltd, v. S. Rajagopalan, ITO : 92ITR241(Bom) and it was held by the Bombay High Court that the Supreme Court had never observed that the development rebate reserve had to be created in the same year irrespective of profits. The Bombay High Court has also referred to a decision of the Gujarat High Court in Surat Textile Mills Ltd. v. CIT  80 ITR 1 which is relied upon by the learned counsel for the revenue and distinguished it on facts. Any way in the present case we need not go into this controversy in great detail in view of Circular No. 189 dated January 30, 1976*, issued by the Board as a clarification in this regard. In this circular reference was also made to the judgment of the Supreme Court in Indian Overseas Bank Ltd. v. CIT : 77ITR512(SC) . In para. B of the said circular it is observed as follows :
' 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.'
7. From this circular, it is clear that the assessee is not bound to create any statutory reserve in the year in which it does not make any profits. This circular is binding on the authorities under the I.T. Act. In view of the Board's Circular No. 189 dated January 30, 1976, we answer the question in the affirmative and in favour of the assessee.
8. The second question is whether the assessee was entitled to claim relief under Section 80J of the I.T. Act before the appellate authority when no such claim was made before the ITO. This is a pure question of fact which has to be determined on the facts of the present case. In the order of the AAC, it was observed that the ITO had not given any reason as to why he had not allowed the exemption under Section 80J of the Act. This observation of the AAC presupposes that a claim was preferred by the assessee before the ITO. The Tribunal also in a way finds that this claim has been made before the ITO. No doubt, the Tribunal has also given a finding that the assessee is entitled to claim this relief before the AAC. even though he has not raised it before the ITO. This finding we are unable to agree with having regard to the decision of the Supreme Court in Addl. CIT v. Gurjargravures P. Ltd. : 111ITR1(SC) . However, in view of the factual finding that this question has been raised before the ITO, we answer this question in the affirmative and against the revenue.
9. The reference is answered accordingly, with costs. Advocate's fee Rs. 250.