1. This reference under s. 256(1) of the I.T. Act, 1961, (hereinafter referred to as 'the Act') raises the following question for the opinion of the court :
'Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in allowing the claim of development rebate in respect of assessment year 1968-69 ?'
2. The facts briefly are these. The assessment year under reference is 1968-69, of which the relevant previous year ended on May 31, 1967. the assessed is a private limited company doing business in building materials. The assessed installed some new machinery and plant in the accounting periods relevant to the assessment years 1962-63 and 1963-64. It had, however, not created any development rebate reserve against development rebate to which it was entitled because there was a loss as per the books of the assessed. Even according to the assessments made by the income-tax authorities, there were losses for the assessments years 1962-63, 1963-64, 1964-65 and 1965-66. For the assessment year 1966-67, there was a profit of Rs. 11,195 but even for that year, no development rebate reserve was created. For the assessment year 1967-68, income was determined at Rs. 54,842 and a reserve of Rs. 47,701 was also created. Somehow or other, the claim of the assessed for development rebate was not allowed. For the assessment year 1968-69, that is the year under consideration, the assessed did create a reserve for Rs. 46,038 and that resulted in nil balance in the profit and loss account. The ITO determined the net income at Rs. 60,753 but in arriving at this figure he did not allow development rebate except to the extent of Rs. 51 only. This development rebate of Rs. 51 was as per chart filed. The ITO disallowed development rebate to the extent of Rs. 46,038. The AAC, in appeal, confirmed the disallowance on the ground that since the machinery on which the development rebate has been claimed was neither installed in the assessment year under appeal nor installed in the preceding assessment year and put to use in the assessment year under appeal the disallowance of development rebate was considered to be in order. The assessed went in second appeal before the Income-tax Appellate Tribunal (for short called 'the Tribunal'). The Tribunal held that the income-tax authorities were not justified in rejecting the claim of the assessed for the development rebate on the grounds relied the claim of the assessed for the development rebate on the grounds relied upon by them. It was observed that no doubt ordinarily development rebate is to be allowed in the year of installation or in the succeeding year, but it is equally true that if in these years the profits were not sufficient to absorb the development rebate, the unabsorbed development rebate has to be carried forward and allowed in the subsequent year till it is completely absorbed within a period of eight years but beyond that limitation there does not appear to be any limitation for the carry forward and the absorption of the development rebate within a period of eight years. It was further observed that it was not necessary that the reserve should be created in the year of installation or in the succeeding year and it was enough if the reserve was created in the year in which the development rebate was to be actually allowed that is to say, in true year in which there was positive income which could absorb the development rebate. In the present case, the Tribunal further observed, there is a further complication that apart from the claim of development rebate, the unabsorbed losses of the earlier years have been brought forward and the net result even for the assessment years 1966-67 and 1967-68 was a loss. The Tribunal gave directions to reconstruct as account of the development rebate right up to and including the assessment year 1968-69 and to allow the assessed the set-off of development rebate which is allowable by reference to the reserve created by the assessed for the year 1968-69.
3. The first main question with which we have to deal in answering this reference is whether on a true construction of the provisions of ss. 33 and 34 of the Act, it can be said that the reserve contemplated by s. 34(3)(a) must be created in the year of acquisition or installation or whether it can be created in the course of any subsequent years so long as it is created during the period of eight years from the year of acquisition or installation. For the reasons recorded in CIT v. Metal Forging (P.) Ltd. : 149ITR259(Delhi) the judgment of which is announced today, we answer that question against the Revenue and in favor of the assessed. An assessed is not bound to create development rebate reserve during the year of installation of plant or machinery if there is no profit in that year and it is sufficient if the reserve is created when there are profits and the development rebate is actually allowed.
4. The second question which is to be answered is whether the carry forward business losses would get precedence over the unabsorbed development rebate and the current year's development rebate. The Tribunal in the statement of case refers to a fact 'that there is a further complication that, apart form the claim of development rebate, the unabsorbed losses of the earlier years have been brought forward and the net result even for the assessment years 1966-67 and 1967-68 was a loss'. The Tribunal has given a direction that the ITO should construct an account of the development rebate right up to and including the assessment year 1968-69 and allow the assessed the set-off of development rebate which is allowable by reference to the reserve created by the assessed for the year 1968-69. It would, thereforee, be necessary to examine as to whether the carried forward development rebate gets priority over the carried forward losses of earlier years or vice versa.
5. Mr. K. K. Wadhera, the learned counsel for the Department, invites our attention to the various statutory provisions. We may notice these. Section 4 of the Act is the charging section and it provided that where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of the Act in respect of the total income of the previous year or years, as the case may be, of every person. Section 5 provides for the scope of total income and lays down that subject to the provisions of the Act, the total income in any previous year of a person who is a resident includes all income from whatever source derived which is received or deemed to be received in India in such year by or on behalf of such person or accrues or arises or is deemed to accrue or arise to him in India during such year. Section 14 deals with the heads of income. The income under the head 'Profits and gains of business or profession' is included in it. Part D of Chapter IV deals with it. Section 28 provides what income can be chargeable to income-tax under the head 'Profits and gains of business or profession' Under s. 29 of the Act it has been provided that the income referred to in s. 28 shall be computed in accordance with the provisions contained in ss. 30 to 43A. Under s. 33 of the Act, provision has been made for the development rebate and clause (a) of sub-section (1) of s. 33 provides that in respect of a new ship or new machinery or plant (other than office appliances or road transport vehicles) which is owned by the assessed and is wholly used for the purpose of the business carried on by him, there shall in accordance with and subject to the provisions of s. 33 and of s. 34 be allowed a deduction in respect of the previous year in which the ship was acquired or the machinery or plant was installed or, if the ship, machinery or plant is first put to use in the immediately succeeding previous years, then, in respect of that previous year a sum by way of development rebate as specified in clause (b) of s. 33(1). Section 33(2) provides that in the case of ship acquired or machinery or plant installed after December 31, 1957, where the total income of the assessed assessable 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-s. (1) or sub-s. (1A) of s. 33 or sub-s. (1) of s. 33A or any deduction under Chapter VI-A or s. 280-O is nil or is less than the full amount of the development rebate calculated at the rate applicable thereto under sub-s. (1) or sub-s. (1A), as the case may be. It further provides that the sum to be allowed by way of development rebate, to the extent to which it has not be allowed as aforesaid, shall be carried forward to the following assessment years, 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 years 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.
6. Based on these provisions, Mr. Wadhera urged that the provisions of ss. 29 to 43A should be first applied before the question of considering the carry forward and set off of business losses from the previous year under the provisions of s. 72 is taken into consideration. His submission is that under the scheme of s. 33 development rebate is to be set off in lump sum in the earlier year relevant to the previous year in which the plant or machinery was installed. The authorities under the Act are required to give development rebate for the current year and, thereforee, carry for ward and set-off the business losses from the previous year will have to be relegated to the lower order of seniority as compared to the unabsorbed development rebate of the current year. Reference was also made to the provisions contained in s. 72(1) and (2). He contended that because of the specific provisions of s. 32(2), before cirrent year's development rebate can be given effect to and deducted by virtue of the scheme of clauses (1) and (2) of sub-s. (2) of s. 33, priority has to be given to the unabsorbed development rebate over the current year's development rebate and hence by virtue of the specific provisions of s. 33(2) of the Act, unabsorbed development rebate from the previous and the current year's development rebate will get priority over the carry forward business loss and unabsorbed depreciation from the previous year.
7. As noticed by us in I.T.R. No. 195/75 (CIT v. Metal Forgings P. Ltd.  ITR 259, Parliament in s. 33 has made specific statutory provisions for the purpose of granting incentives to business who invest on new ships or new plant or machinery or in modernising plant and equipment. In order to earn development rebate, the assessed has to satisfy certain specified conditions which are provided under s. 34 of the Act and the unabsorbed development rebate can be carried forward only for eight years as provided by the Act. The development rebate in the case of the use to which it was put. Sub-s. (2) of s. 33, in the case of a ship acquired or the machinery or plant installed after December 31, 1957, requires the computation of the 'total income' of the assessed assessable 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' is required to be computed first without making any allowance under sub-s. (1) or subs (1A) of s. 33 or sub-s 33 or sub-s. (1) of s. 33A or any deduction under Chapter VI-A or ss. 280-O. If the legislative intent was to compute the total income first without making any allowance deduction under s. 72, then it would have been so expressed. The total income as defined in s. 2(45) of the Act means the total amount of income referred to in s. 5, computed in the manner laid down in the Act. The manner of computation laid down by the Act forms an integral part of the definition of total income. This specially defined concept of total income has to be applied while construing and then working out the provisions of ss. 33(2) and 72 of the Act. The statutory requirement is to first compute the total income in the manner laid down in the Act and on computing the total income, the allowability of development rebate is thereafter to be considered. In the computation of the total income under the head 'Profits and gains of business of profession', in the same year of assessment, loss for one head can be set off against the income of another head. The requirement of ss. 70 and 71 is that both intre-head adjustment and inter-head adjustment must be during the same year of assessment. Section 72 deals with carry forward and set-off of business losses. There are certain conditions governing carry forward of the business loss but we are not concerned with those restrictions here. The loss may be carried forward and set off against the profits and gains in a subsequent year of any business, profession or vocation. If the loss cannot be wholly so set off, the amount of loss not set off can be carried forward to the following assessment year and so on. Thus in computation of total income, the carry forward losses have also to be taken note of. In other words, by virtue of the provisions contained in s. 72 of the Act before arriving at the figure of total income, the carry forward business losses have to be set off and it is only after the set-off of carry forward business losses from the previous year that an amount of profits and gains of business or profession which is one of the heads of total income in view of s. 14, can be arrived at. After arriving at the figure of total income in this manner, then only the development rebate is to be allowed as a deduction. If this set-off of carry forward business loss is not done before arriving at the total figure of income in the manner contemplated by sub-s. (2) of s. 33, then the direct impact of s. 72 could not be given effect to. The total income of the assessed for the year under consideration has to be worked out by first giving effect to the carry forward losses.
8. The carry forward business losses under s. 72(2) read with s. 72(1) get precedence over the unabsorbed development rebate and the current year's development rebate. We are fortified in this view by a Division Bench of the Gujarat High Court in Monogram Mills Co. Ltd. v. CIT  135 ITR 122. The question was posed in a reference as to the order of priority among current year's depreciation, carried forward development rebate, current year's development rebate, carried forward losses from earlier years and unabsorbed depreciation. The Gujarat High Court dealt at great length with the statutory provisions and the meaning to be assigned to the material words 'total income'. After placing reliance on Cambay Electric Supply Co. Ltd. v. CIT : 113ITR84(SC) , it was expressed (p. 130 of 135 ITR) :
'Though there is no direct authority priority to be given as between carried forward business loss, unabsorbed depreciation and carried forward development rebate under the provisions of s. 72(1), s. 32(2) and s. 33(2) of the 1961 Act, there is a direct authority of the Supreme Court relating to the priority to be given at the time of setting off of carried for ward business loss and unabsorbed depreciation, in Cambay Electric Supply Industrial Co. Ltd. v. CIT : 113ITR84(SC) . In that case, the Supreme Court was concerned with the provisions of s. 80E of the 1961 Act, as it then stood. Under that section special deduction was to be given at the rate of 8% on profits and gains attributable to the business of generation and distribution of electricity. The question was whether in arriving at the figure on the basis of which 8% deduction was to be calculated, the unabsorbed depreciation and unabsorbed development rebate were to be deducted. There the Supreme Court pointed out that the important words in s. 80E(1) are those that appear in parenthesis, viz., 'was computed in accordance with the other provisions of the Act' and since it was income from business, the same, in view of s. 29, had to computed in accordance with ss 30 to 43, which would include s. 41(2) (providing for the balancing charge), s. 32(2) (providing for carry forward of depreciation) and s. 33(2) (providing for carry forward of development rebate), but what is really material is that in this decisions the Supreme Court also pointed out that s. 72(1) has a direct impact upon the computation under the head 'Profits and gains of business or profession '. Tulzapurkar J., speaking for the that it was not possible to accept the view that s. 72 had no bearing on, or was unconnected with, the computation of the total income of an assessed under the 'profit and gains of business or profession'. Actually, s. 72(1) provides that there where the net result of computation under the head 'Profit and gains of business profession' is a loss and such loss cannot be or is not wholly set off against the income under any head of income in accordance with the provisions of the chapter, shall be carried forward to the following assessment year and shall be set off against the profits and gains, if any, of any business or profession for that assessment year. thereforee, s. 72(1) has a direct impact upon the computation under the head 'Profits and gains of business or profession.' In other provisions of the Act, cannot be arrived at without working our the net result of computation under the 'Profits and gains of business or profession.''
9. The correct order of priority was then given as under :
(1) current year depreciation because that is the first change on the receipts in the profits and loss account ;
(2) carry forward business losses under section 72(2) read with section 72(1) ;
(3) unabsorbed depreciation by virtue of the provisions of section 32(2) ;
(4) unabsorbed development rebate because of the provisions of clauses (1) and (2) of section 32(2) and current year's development rebate.
10. The Madras High court in CIT v. Coromandel Steel Ltd. : 130ITR856(Mad) , came to a similar conclusion. Their Lordship help that first comes the deduction of depreciation of the current year; then as between unabsorbed business loss carried forward and unabsorbed depreciation loss has priority over unabsorbed depreciation and has to be allowed. Unabsorbed development rebate comes to for consideration only after these two allowances. The same view is shared by the Karnataka High Court in Mysore Paper Mills Ltd. v. CIT : 117ITR132(KAR) .
11. A subsidiary point may also be noticed before concluding the discussion. For the assessment year 1966-67, there was a profit of Rs. 11,195 but even for that year no reserve as created. Information is not available on the record as to the unabsorbed losses of the earlier years brought forward for the assessment year 1966-67. It is, however, not disputed by Shri C. S. Aggarwal, the learned counsel for the assessed, that the failure to create a reserve in spite of there being sufficient profits available, confiscates the right to claim the development rebate. Such is the law laid down by the Madras High Court in Radhika Mills Ltd. v. CIT : 74ITR661(Mad) . The extent of confiscation will, however, be the amount of development rebate that could have been allowed vis-a-vis the total income has reduced by the development rebate actually allowed as a deduction as per the amount of development rebate reserve created. If the profit of Rs. 11,195 for the assessment year 1966-67 is set off by the unabsorbed losses for the earlier years, then the failure to create a reserve would not entail any confiscation as the unabsorbed losses of the earlier years get precedence over the development rebate.
12. I answer the reference in the affirmative to the extent indicated, i.e., against the Department and in favor of the assessed with no order as to costs.
1. As per my discussion in my order in the case of commissioner of Income-tax, Delhi-I, New Delhi v. M/S. Metal Forgings Private Limited (ITR No. 195 of 1975) - : 149ITR259(Delhi) , I agree with the conclusion of S .S. Chadha J.