1. This appeal by the assessee is directed against the order of the Commissioner (Appeals) dated 26-9-1979 relating to the assessment year 1977-78. The main issue involved in this appeal is whether on the facts and in the circumstances of the case, the Commissioner (Appeals) erred in upholding the disallowance of Rs. 63,242 claimed on account of investment allowance under Section 32A(4) of the Income-tax Act, 1961 ('the Act')- Insofar as this issue is concerned, the relevant facts are as under.
2. The assessee Swastika Metal Works, Jagadhari, is a registered firm.
It filed a return of income for the assessment year under appeal on 30-7-1977 declaring total income of Rs. 3,84,710. In this return, the assessee claimed initial depreciation on additions by way of new machinery of the value of Rs. 63,243 at the rate of 20 per cent at Rs. 12,648.60. In addition to the initial depreciation, the assessee also claimed normal depreciation at Rs. 80,293. After the deductions, inter alia, the income was determined at Rs. 3,84,709 and so was declared in the return filed on 30-7-1977.
3. During the course of the assessment proceedings, the assessee found that with effect from 1-4-1976, the Finance Act, 1976 had inserted Section 32A for deduction of investment allowance, if the conditions prescribed in the section were fulfilled by the claimant. These conditions have been prescribed under Sub-section (4) of this section and are that (i) the particulars prescribed on-this behalf have been furnished by the assessee in respect of the ship or aircraft or machinery or plant ; and (ii) an amount equal to 75 per cent of the investment allowance to be actually allowed is debited to the profit and loss account of the previous year, in respect of which the deduction is to be allowed and credited to a reserve account (to be called the 'investment allowance reserve account'). There is further prescription how this investment allowance reserve account can be utilised by the assessee but that for our purpose is not material. The assessee, therefore, revised the return on 11-12-1978 and made the claim for investment allowance. The claim for investment allowance on new machinery added was at 25 per cent of Rs. 63,243 which came to Rs. 15,810.75. The depreciation which had been claimed in the original return at Rs. 80,293 was reduced and claimed at Rs. 71,872. The assessee had closed the books of account of the accounting period relevant to the assessment year under appeal when the assessment proceedings were going on. Therefore, the assessee made a reserve as required under Section 32A(4) by debiting 75 per cent of 25 per cent of Rs. 63,243 of the addition of the new plant and machinery in the current year's books of account, i.e., the books of account of the previous year during which the assessment proceedings were going on as on 11-12-1978. For the sake of clarification, we may record here that the previous year followed by the assessee is the financial year which for the assessment year 1977-78 was from 1-4-1976 to 31-3-1977. The assessment was finalised on 31-1-1979, i.e., during the accounting period relevant to the assessment year 1979-80 and the entries in the reserve account were made by the assessee in the books of account relevant to the assessment year 1979-80 as the credit was made on 11-12-1978.
4. The ITO, however, refused the claim for investment allowance made by the assessee on the ground that 'no reserve has been created'. The matter was, therefore, taken up in appeal by the assessee before the first appellate authority, namely, the Commissioner (Appeals).
5. The assessee projected to the Commissioner (Appeals) that the claim for investment allowance has been wrongly rejected by the ITO, in view of the judgment of the Punjab and Haryana High Court in the case of CIT v. Sardar Singh Sachdeva  86 ITR 387. However, the learned Commissioner (Appeals) rejected the assessee's claim because according to him, the ratio of the judgment referred to and relied on by the learned counsel for the assessee was that the assessee should have made entries in the books of account by debiting the profit and loss account of the relevant accounting period, i.e., the books of account for the period from 1-4-1976 to 31-3-1977, to entitle itself for the investment allowance. Since the assessee made the entries in the books of account of the current accounting period when the assessment was going on, the ratio of the judgment of the Punjab and Haryana High Court was not applicable to the case of the assessee. Hence the present appeal.
6. It was contended on behalf of the assessee that the CBDT had issued Circular F. No. 10/49/65-IT (A-1) dated 14-10-1965, which, inter alia, explained the position regarding the creation of a statutory reserve for allowance of development rebate. In view of the judgment of the Supreme Court in the case of Indian Overseas Bank Ltd. v. CIT  77 ITR 512, the CBDT reconsidered this circular. However, with regard to the position that where there was no deliberate contravention of the provisions, the ITO may condone genuine deficiencies, subject to the same being made good by the assessee through creating of adequate additional reserve in the current year's books in which the assessment is framed, it was not changed. Thus, insofar as it was contended, the development rebate reserve was concerned, the assessee was allowed to make good the inadequacy in creation of the reserve or allowed to create the reserve in the books of account of the current year in which the assessment is framed. The learned counsel for the assessee argued that insofar as the investment allowance is concerned, it was effective from 1-4-1976 and the assessment year 1977-78 for the assessee was the first year when it became applicable. The assessee had inadvertently claimed initial depreciation, instead of investment allowance. However, during the course of the assessment proceedings when the mistake was realised, the assessee hastened to create adequate reserve in the current year's books of account and made a claim for investment allowance in the revised return, in place of initial depreciation as claimed in the original return. This should have been accepted by the authorities below, in view of the above position taken by the CBDT with regard to such matters.
7. The learned counsel for the assessee argued that even on proper appreciation of the judgment of the Punjab and Haryana High Court in the case of Sardar Singh Sachdeva (supra), which has been followed by the same Court in the case of CIT v. Rita Mechanical Works  108 ITR 552, the reserve for investment allowance could have been created by the assessee as done by it and the investment allowance claimed could not be rejected on the set of facts stated above. The learned counsel for the assessee emphasised that the view propounded by him finds support from the judgment of the Allahabad High Court in the case of Addl. CIT v. Saran Engineering Co. Ltd.  115 ITR 270. In this case, he submitted, in rectification proceedings under Section 154 of the Act, the ITO held that the assessee was entitled to the development rebate, at a rate higher than that already allowed but, as the assessee had not created the necessary reserve, it could not be allowed. The Tribunal held that as the rectification proceedings are part of the assessment proceedings, the assessee was entitled to an opportunity to create a reserve till the end of the rectification proceedings and on a reference, the High Court held that the Tribunal was right in directing the ITO to allow an opportunity to the assessee to meet the deficiency in the reserve. Therefore, the case of the assessee was on much stronger ground.because though the assessee made a mistake initially at the time of filing the original return in claiming initiation depreciation, yet that claim was substituted before the process of the assessment came to an end, by filing a revised return and making a proper claim for investment allowance. The orders of the authorities below may, therefore, be reversed and the assessee be allowed investment allowance as claimed.
8. These submissions were strongly opposed by the revenue through Shri R.S. Khichi, junior authorised representative. He submitted that the real issue was whether the assessee can be allowed the investment allowance without creation of the statutory reserve in the relevant books of account, i.e., the books of account of the accounting period relevant to the assessment year under appeal. In this regard, he submitted that the circular referred to by the learned counsel for the assessee was issued by the CBDT, by way of clarification and it cannot override the provisions of law. Moreover, it was submitted, that circular applies only to cases of deficiencies and not to cases where the assessees had altogether omitted to create the reserve. Moreover, there was no such projection made by the assessee before the ITO and as such, the ITO was justified in disallowing the claim of investment allowance.
9. It was further contended that the judgment of the Punjab and Haryana High Court in the case of Sardar Singh Sachdeva (supra) was under the 1922 Act with regard to the provisions of Section 10(2)(vi) of that Act, which employed different language from that of Section 34(3)(a) of the Act. With particular reference to the provisions of Section 32A(4), he pointed out that the words used are 'in the books of the previous year relating to the assessment year in which the deduction is to be allowed'. Since the assessee did not create a separate reserve in the books of account of the previous year relevant to the assessment year under appeal, the conditions precedent for allowing the investment allowance had not been fulfilled. For the above proposition, he placed reliance upon the Supreme Court judgment in the case of Indian Overseas Bank (supra) with particular refernce to page 514, where the Supreme Court observed that the creation of the reserve contemplated by this provision is a condition precedent for obtaining the allowance of development rebate and it was not a mere forality. The learned departmental representative also referred to the judgment of the Gujarat High Court in the case of Keshavial Vithaldas v. CIT  105 ITR 601 in which a reference was made to the judgment of the Supreme Court in the case of Indian Overseas Bank (supra). In nut shell it was argued that the assessee had not made out a case for an interference in the order of the Commissioner (Appeals) and, therefore, the appeal of the assessee be dismissed.
10. We have given careful consideration to the rival submissions and have also very carefully perused the relevant authorities cited before us, along with the statutory provisions of law and the facts of the case. It is clear that the assessee made the adequate provision of reserve in the current year's books of account during the course of the assessment proceedings. Admittedly, the assessee did not make any reserve in the books of account relevant to the previous year for the assessment year under appeal. However, in our opinion, since before the assessment was finalised, the assessee created the adequate reserve, the conditions prescribed under Section 32A(4) had been complied with by the assessee. This appears to us to be the position of law, taking into consideration the circular of the CBDT issued and reported in 102 ITR 90 (Statutes) and the judgment of the Punjab and Haryana High Court in the case of Rita Mechanical Works (supra). In this judgment, the Court has observed that the Andhra Pradesh High Court in the case of Veerabhadra Iron Foundry v. CIT  89 ITR 425 ; the Allahabad High Court in the case of CIT v. Modi Spinning & Weaving Mills Co. Ltd.  89 ITR 304 ; the Bombay High Court in the case of Tata Iron & Steel Co. Ltd. v. N.C. Upadhyaya  96 ITR 1 and the Punjab and Haryana High Court in the case of Sardar Singh Sachdeva (supra) along with the Orissa High Court in the case of CIT v. Narula Cold Storage & Ice Factory  104 ITR 148 have consistently taken the view that the Act does not contemplate a limit of time for claiming development rebate. It may be noted here that the conditions for investment allowance are substantially in pan materia with that of development rebate. The High Court has pointed out that only the Gujarat High Court had taken a contrary view in the case of Keshavlal Vithaldas (supra).
But in this judgment, that is in the case of Rita Mechanical Works (supra), the Court was interpreting the provisions of Section 34(3)(a) of the 1961 Act and upheld the earlier view of the Punjab and Haryana High Court in the case of Sardar Singh Sachdeva (supra) which was decided under the 1922 Act. Therefore, the argument of the revenue that the judgment in the case of Sardar Singh Sachdeva (supra) is under the 1922 Act does not carry much weight. The judgment, however, was on the facts of that case and to our mind if an assessee creates the adequate statutory reserve before the assessment is completed in the current year's books of account and makes a proper claim before the ITO, the is bound to allow the claim if all the conditions are satisfied.
11. In the case before us we find that all the conditions required for claiming a deduction for the investment allowance by the assessee for the assessment year under appeal were complied with and the claim of the assessee was refused only on the ground that the reserve had been created in the books of account, other than the books of account of the relevant previous year for which the assessment was in progress. To our mind, this is not fatal to the claim of the assessee. The spirit of the section and the natural justice that is followed in the income-tax proceedings requires that the assessee should be given an opportunity to make the claim. In this case, the assessee himself filed all the details of proper claim before the ITO finalised the assessment. The claim was, therefore, admissible. We, therefore, direct that the claim of the assessee be admitted and investment allowance allowed.
12 & 13. [These paras are not reproduced here, as they involve minor issues.]