1. This income-tax reference arises out of the assessment of a registered firm carrying on business under the name and style of M/s. Markanda Engineers for the assessment year 1969-70 for which the relevant previous year ended on March 31, 1969. The assessed is engaged in an industry covered by items 20 and 22 of the Fifth Schedule to the I.T. Act and was as such entitled to development rebate at 35% of the actual cost of the new machinery or plant installed before April 1, 1970, and wholly used for the purpose of business under s. 33(1)(b)(B)(i)(a) as against the normal rate of 20% available in the case of other assesseds in respect of a like asset under s. 33(1)(b)(B)(iv)(a) of the Act. The deduction towards development rebate is to be allowed in respect of the previous year in which the machinery or plant is installed or where such machinery or plant is first put to use in the immediately succeeding year, then, in respect of that previous year. The grant of the deduction, however, is subject to the conditions laid down in s. 34(3) of the Act which, as it stood at the relevant time, read as follow :
'34. (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 to be utilised by the assessed during a period of eight years next following for the purposes of the business of the undertaking other than -
(i) for distribution by way of dividends or profits; or
(ii) for remittance outside India as profits or for the creation of any asset outside India....
2. It is necessary to refer to one more provision in this context and that is the provision contained in s. 33(2) which sets out the mode of deduction of the allowance by way of development rebate. This sub-section reads as follow :
'33. (2) In the case of a ship acquired or machinery or plant installed after the December 31, 1957, where the total income of the assessed for the assessment year relevant to the previous year in which the ship was acquired or the machinery or plant installed or the immediately succeeding previous year, as the case may be, the total income for this purpose being computed without making any allowance under sub-section (1) or sub-section (1A) of this section (1) of section 33A or any deduction under Chapter VIA or section 280 is nil or is less than the full amount of the development rebate calculated at the rate applicable thereto under sub-section (1) or sub-section (1A), as the case may be, -
(i) the sum to be allowed by way of development rebate for that assessment year under sub-section (1) or sub-section (1A) shall be only such amount as is sufficient to reduce the said total income to nil; and
(ii) the amount of the development rebate, to the extent to which it has not been allowed as aforesaid, shall be carried forward to the following assessment yea, and the development rebate to be allowed for the following assessment year shall be such amount as is sufficient to reduce the total income of the assessed assessable for that assessment year, computed in the manner aforesaid, to nil, and the balance of the development rebate, if any, still outstanding shall be carried forward to the following assessment year and so on, so, however, that no portion of the development rebate shall be carried forward for more than eight assessment years immediately succeeding the assessment year relevant to the previous year in which the ship was acquired or the machinery or plant installed or the immediately succeeding previous year, as the case may be.'
3. The other provisions of ss. 33 and 34 are not relevant for our present purposes.
4. We may now revert to the facts of the present case which should be considered in the context of the above provisions. During the previous year which ended on March 31, 1969, the assessed-firm installed new machinery, the actual cost of which was Rs. 3,02,461. Since the development rebate was at 35% as already mentioned, it would have been eligible for a development rebate of Rs. 1,05,863 provided that it created a reserve as contemplated by the provisions above mentioned. If the entire amount of the development rebate attributable to the new plant and machinery which works out to Rs. 1,05,863 at 35% of the actual cost of Rs. 3,02,461 were to be allowed to the assessed in the previous year it should have created a reserve of 75% of this amount or Rs. 79,397 under. 34(3)(a). The assessed, however, created only a reserve to the extent of Rs. 60,000.
5. While computing the assessment for the assessment year 1969-70, the ITO rejected the assessed's claim for the development rebate straightaway. In his view the assessed should have created a reserve to the extent of Rs. 79,397 but had created a reserve only to the extent of Rs. 60,000 and since the assessed had failed to fulfill one of the statutory conditions necessary to be fulfillled before the development rebate can be allowed as a deduction, the assessed's claim would not be entertained in this respect.
6. The assessed preferred an appeal to the AAC. The assessed's representative appears to have thought of a short cut to get out of the difficulty raised by the ITO. He seems to have contended before the AAC that though the assessed was entitled to development rebate at 35% it was prepared to waive its rights to the higher rate of development rebate and confined its claim for development rebate to 20% which is available in the case of industries other than those specified in the Fifth Schedule. If the claim for development rebate was thus restricted the development rebate allowable would be only a little over Rs. 60,000 and it would have been sufficient if the assessed had created a reserve of about Rs. 45,000. It was, thereforee, urged that the assessed's claim for development rebate at 20% should be granted, as an allowance to that extent was adequately covered by the reserve created by the assessed. This plea commended itself to the AAC who directed the ITO to allow development rebate at 20% as claimed by the appellant.
7. The ITO preferred an appeal to the Appellate Tribunal. It was contended that since the assessed was engaged in a priority industry it was eligible for development rebate at 35% but this could not be allowed because the assessed had failed to create a reserve for an adequate amount which is one of the statutory conditions precedent for the allowance of the claim. It was, thereforee, prayed that the ITO's order should be restored. The matter came before the Vice-President of the Tribunal who disposed of the matter.
8. Before the Tribunal the departmental representative pleaded that the issue raised in the appeal was an academic one and that, as a matter of fact, there was no question of any development rebate being allowed for the year in question as the total income before the allowance of development rebate was a negative figure. On the other hand, on behalf of the assessed, a direction was sought about the carry forward of unabsorbed rebate. He held as follow :
'I agree with the departmental representative that the development rebate could not be actually allowed for the assessment year 1969-70 for the simple reason that there was no positive income against which the same could be allowed. At the same time, the assessed could not be deprived of the benefit of the reserve that it had created in the year of account. I, thereforee, modify the direction of the Appellate Assistant Commissioner by saying that unabsorbed development rebate sufficiently covered by the reserved created by the assessed shall be carried and allowed in the year in which there is a positive income.'
9. Subsequent to the order of the Tribunal the assessed filed an application under s. 254 before the Tribunal. It was pointed out that the total income for the year under assessment was at a loss and, thereforee, no reserve for development rebate was required to be created at all in the previous year relevant to the assessment year in question. It was contended that even though a development rebate reserve has been created in this year the carry forward could not be restricted to the extent of development rebate reserve and the entire development rebate calculated in accordance with the provisions of s. 33(1) was in law to be carried forward to the succeeding assessment year to be set off against the income of the relevant years in which there is a positive total income. It is only in the year in which the development rebate has to be considered for being actually allowed that a reserve to the extent of 75% of the amount to be actually allowed was required to be created. The assessed, thereforee, sought an amendment of the order of the Tribunal which allowed the carry forward only 'of the unabsorbed development rebate sufficiently covered by the reserve created by the assessed'. This application was, however, rejected by the Tribunal. However, on an application preferred by the revenue under s. 256(1), the Tribunal has referred to us the following question for our decision :
'Whether, on the facts and in the circumstance of the case, the Appellate Tribunal was right in giving directions that the unabsorbed development rebate sufficiently covered by the reserves created by the assessed should be carried forward and allowed u/s. 33(2)(ii) of the Income-tax Act, 1961, in the year in which there was positive income ?'
10. To complete the narration of the relevant facts it is necessary to state that in the accounting year in question the assessed's profit and loss account showed a net loss after deduction of depreciation and development rebate of Rs. 75,173. In this context, it may be mentioned that the assessed had created development rebate in the books only to the extent of Rs. 60,000 apparently under the impression that it was eligible for a development rebate only at the rate of 25%. It was apparently not aware that since it was engaged in one of the industries specified in the Fifth Schedule it was eligible for development rebate at 35%. The total income for the assessment year 1969-70 was again a negative figure. There was no positive income and loss of Rs. 12,605 was determined by the ITO.
11. Looking at the facts in the light of the statutory provisions it appears to us very plain that the assessed is entitled to carry forward the development rebate at 35% on the actual cost of Rs. 3,02,461 and that the disallowance of this claim of the assessed on the ground that no adequate reserve had been created is not correct. A careful perusal of the provisions of ss. 33 and 34 will show that the sections contemplate the allowance of development rebate normally in the previous year in which the asset is installed or in the subsequent previous year if it is brought to use during that year. But development rebate is not a straight deduction like depreciation or other items of expenditure. Section 33(2) restricts the amount of development rebate to be actually allowed in any particular assessment year. It points out that in any particular assessment year the amount of development rebate to be actually allowed should be restricted to the figure of total income determined for that year. It is only that amount which is to be actually allowed in that year. If, as a result of the total amount being either nil or less than the figure of development rebate to which the assessed is entitled, the whole or balance of the amount which has not been actually allowed because of the absence of a positive total income or the sufficiency of it has to be carried forward to it to the subsequent years. In each subsequent year the figures of total income and the claim of development rebate which is carried forward should be compared and the treatment will be similar as in the earlier years. Thus, over a period of eight years the development rebate will be allowed depending upon the total income of the assessed not always in one single year but in some cases distributed over a period of eight years (or less) depending upon the amount of development rebate and the figures of total income of the assessed in the several relevant assessment years. Section 34(3) which deals with the creation of a reserve is very guarded and careful in its language. It does not require an assessed to create a reserve equivalent in amount to 3/4ths of the amount of development rebate to which the assessed is entitled in the year of installation or the year of user of the asset, nor does it say that the reserve should be created in one or the other of the two years above-mentioned. On the contrary, it only requires an assessed to create a reserve equal to 65% of the development rebate to be actually allowed. Since, as we have already pointed out, the development rebate may be actually allowed not in one year or two years but over a large number of years it follows on the language of s. 34(3) that it is quite sufficient if the assessed creates a development rebate reserve in respect of each of the years sufficient to cover 3/4ths of the amount of actual development rebate which is to be allowed in that year. To illustrate the position by means of an example let us take a case where an assessed has installed machinery worth Rs. 50,000 on which he is eligible for a development rebate of Rs. 10,000 in the previous year relevant to the assessment year 1969-70. Let us assume that in the assessment year 1969-70, the assessed has only a total income of Rs. 2,000 then though the development rebate admissible to the assessed is Rs. 10,000 the development rebate that can be actually allowed in the assessment year 1969-70, the assessed has only a total income of Rs. 2,000 then though the development rebate admissible to the assessed is Rs. 10,000 the development rebate that can be actually allowed in the assessment year 1969-70 will only be Rs. 2,000. The assessed will have to create a reserve so far as this year is concerned to the extent of Rs. 1,500. If such reserve has been created, development rebate should be allowed to the extent of Rs. 2,000 in the assessment year 1969-70. The balance of Rs. 8,000 is carried forward to the assessment year 1970-71. Suppose in the assessment year 1970-71, the total income of the assessed is nil then there is no development rebate to be actually allowed to him in that year and it is immaterial whether the assessed creates a reserve in that year or not. The balance of Rs. 8,000 which remains unadjusted will be carried forward to the assessment year 1971-72. Suppose in that year the assessed has a total income of Rs. 10,000, carried forward development rebate of Rs. 8,000 will be set off to reduce the income to Rs. 2,000 provided the assessed has created a reserve equal to 75% of the amount to be actually allowed, namely, Rs. 8,000. In other words, the assessed should create in the assessment year 1971-72, a reserve to the extent of Rs. 6,000. If all the years are taken together the assessed would become eligible for a development rebate of Rs. 10,000. But he would and should have created a reserve of Rs. 7,500 not in one assessment year but in three years, namely, Rs. 1,500 in 1969-70, nil in 1970-71 and Rs. 6,000 in 1971-72. This appears to be the plain and simple meaning of the statutory provisions. If we apply that interpretation for the purposes of the present case it clearly follows that since the assessed's total income for the assessment year 1969-70 was nil the development rebate to be actually allowed is nil and, thereforee, the amount of reserve to be created by the assessed is also nil. In other words, the assessed need not have created any reserve at all during the previous year relevant for the assessment year 1969-70 since he is not going to get any deduction in this respect for this assessment year. thereforee, the non-creation of a reserve only at Rs. 60,000 which in the opinion of the ITO is inadequate cannot debar the assessed from the claim to the development rebate of 35% for, the fact remains that though nominally the assessed is entitled to development rebate it gets no relief in this assessment year and the amount has only to be carried forward to subsequent years and will be allowed in the various assessment years depending upon the fulfillment of the requirements for the creation of the reserve in the respective previous year (s) in regard to which the development rebate is actually allowed to the assessed. It, thereforee, appears to us that the Tribunal erred in giving its directions in two respects. In the first place, the Tribunal seems to have proceeded on the footing that the assessed had created a smaller amount of development rebate reserve than it should have. Apparently, the Tribunal agrees with the department that the assessed is entitled to a development rebate of about Rs. 1,05,863 and that it should have created a reserve of Rs. 79,397 during the previous year. The Tribunal has, however, taken the view that though the assessed has created a reserve only to the extent of Rs. 60,000 the consequence should be not to deprive the assessed of development rebate to the extent of Rs. 1,05,867 but only to deprive him of a part of it. Apparently, according to the Tribunal, the assessed is entitled to development rebate which is sufficiently covered by the reserve that has been created. What perhaps the Tribunal thinks is that since the assessed has created a reserve to the extent of Rs. 60,000 it will be entitled to carry forward only a development rebate to the extent of Rs. 86,666 (3/4 of Rs. 60,000) which is the amount in the language of the Tribunal 'sufficiently covered by the reserve created by the assessed'. Secondly, the Tribunal apparently has though that this unabsorbed development rebate of Rs. 86,666 can be carried forward by the assessed and set off in future years irrespective of whether it creates or does not create a reserve in subsequent years subject only to the limitation that there should be a positive total income in the year in which the amount has to be set off. Both these aspects have been attacked by the department before us and we think rightly. In our view, the assessed need not have created any reserve at all so far as this assessment year is concerned and, thereforee, there is no provision in the Act which disentitles the assessed from claiming the development rebate at 35%. This entire amount of Rs. 1,05,863 can be carried forward by the assessed as the unabsorbed development rebate as no part of it is actually allowed during this previous year. The unabsorbed development rebate so carried forward should be set off against the total income of the assessed in subsequent years where there is a positive figure of total income. The question as to whether the statutory conditions have been fulfillled in respect of each of those assessment years in which the assessed may claim actual allowance of the development rebate need not have been decided by the Tribunal at this stage and should have been left to be decided in the appropriate assessment year depending upon the facts relating to the total income and to the creation of the reserve and other relevant circumstances. We are, thereforee, of opinion that we should answer the question referred to us by saying that the Tribunal was not right in saying that the unabsorbed development rebate sufficiently covered by the reserve created by the assessed should be carried forward to be set off in the year in which there is positive income. The Tribunal should have directed that the full unabsorbed development rebate to the extent of Rs. 1,05,863 was eligible to be carried forward by the assessed but that it should be set off in future years in which there was positive income subject to the conditions of s. 34(2) being fulfillled in the relevant previous years.
12. Learned counsel for the department invited our attention to a large number of decisions. These decisions have held, (1) that the assessed cannot plead as an excuse for the non-creation of a reserve the absence of a positive figure of income according to its profit and loss account, but that the assessed should create the reserve irrespective of whether its books should show profit or loss; (b) that where the amount of reserve created falls short of the amount for which the assessed is eligible for development rebate the assessed would not be entitled to any development rebate at all and the question of allowing him an amount of development rebate proportionate to the amount of the reserve created is inconsistent with the statutory provisions; and (c) that what the Act requires is the creation of a reserve in the year in which the amount is to be actually allowed and that this requirement cannot be said to be fulfillled even if (a) there is already existing in the books of the assessed a development rebate reserve sufficient to cover the amount of the claim made by the assessed in any particular year having been created even in earlier years, or (b) the assessed creates, in the particular year in which the allowance is claimed a reserve just sufficient to make up the deficit and to supplement reserves that had been created in the earlier years but which are found to be inadequate. In our opinion, it is not necessary to touch upon any of these aspects for disposing of the reference which has been placed before us. So far as this reference is concerned, the statutory provisions are quite clear. The development rebate actually allowed to the assessed in the assessment year 1969-70 was nil and, thereforee, the assessed was not under an obligation to create any reserve at all during this period. The assessed is, thereforee, entitled to carry forward the unabsorbed development rebate at 35%. This has to be carried forward and set off in the subsequent years. Whether and, if so, in what years the amount can be so set off would depend upon the future assessments of the assessed and no opinion can be expressed at this stage as to when and in what manner the development rebate so carried forward can be allowed to the assessed in future years.
13. We answer the question referred to us as already indicated. Since there is no appearance on behalf of the assessed, we make no order as to costs.