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Commissioner of Income-tax, Delhi-i Vs. Metal Forging P. Ltd. - Court Judgment

LegalCrystal Citation
Subject Direct Taxation
CourtDelhi High Court
Decided On
Case NumberIncome-tax Reference No. 195 of 1975
Judge
ActsIncome Tax Act, 1961 - Sections 33, 33(1) and (2), 34, 34(3) and 256(1)
AppellantCommissioner of Income-tax, Delhi-i
RespondentMetal Forging P. Ltd.
Cases ReferredNavnit Lal C. Javeri v. K. K. Sen
Excerpt:
direct taxation - creation of reserve - sections 33, 33 (1), 33 (2), 34, 34 (3) and 256 (1) of income tax act, 1961 - when total income of assessed is nil or negative then nil amount of development rebate to be allowed - no obligation on assessed to create development rebate reserve in that year - held, assessed entitled to carry forward whole of development rebate. - - 15,121 which had been unsuccessfully claimed for the assessment year immediately preceding. section 33 provides for the circumstances or conditions in which an assessed would be entitled to the development rebate as well as the maximum amount of rebate. veeraswami nainar [1965]55itr35(mad) .it was held that the grant of the allowance is subject to the two conditions prescribed in the proviso to explanationn 2 to the.....chadha, j. 1. this reference under s. 256(1) of the i.t. act, 1961 (hereinafter referred to as 'the act'), at the instance of the department 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 holding that the assessed was entitled to the carry forward of the development rebate claimed for the assessment year 1966-67 to be adjusted against the profits of the assessment year 1967-68 ?' 2. the facts briefly are these. the assessed is a private limited company which carries on the business of iron and steel forging. for the assessment year 1966-67 (accounting year ended april 30, 1965). it had claimed a development rebate of rs. 15,121 but this was disallowed on the ground that the.....
Judgment:

Chadha, J.

1. This reference under s. 256(1) of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), at the instance of the Department 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 holding that the assessed was entitled to the carry forward of the development rebate claimed for the assessment year 1966-67 to be adjusted against the profits of the assessment year 1967-68 ?'

2. The facts briefly are these. The assessed is a private limited company which carries on the business of iron and steel forging. For the assessment year 1966-67 (accounting year ended April 30, 1965). It had claimed a development rebate of Rs. 15,121 but this was disallowed on the ground that the assessed had not created any development rebate reserve for the purpose. For this year, the assessed had suffered a net loss of Rs. 3,006 as per its books and the loss an finally assessed by the Revenue was Rs. 2,528. This reference relates to the assessment year 1967-68 (accounting year ended April 30, 1966). For this year the total income was assessed at Rs. 16,695 on the additions to machinery made during the relevant accounting year. No allowance was, however, made in respect of the carry forward development rebate of Rs. 15,121 which had been unsuccessfully claimed for the assessment year immediately preceding.

3. The assessed appealed before the AAC against the assessment for the assessment year 1967-68 and contended, inter alia, that the ITO should have allowed as carried forward unadjusted development rebate Rs. 15,121 claimed by the assessed for the assessment year 1966-67. The AAC admitted the assessed's claim and directed that the development rebate relating to the assessment year 1966-67, which could not be allowed in that year due to paucity of profits, be allowed against the assessed's income for the assessment year 1967-68. The AAC found that though the assessed had been unable to create a development rebate reserve in the year ended April 30, 1965, in view of the paucrity of profits, it had actually created the necessary reserve in its account for the year ended April 30, 1966. He held that the assessed should be allowed to carry forward the unabsorded development rebate for the assessmenr year 1966-67 for being adjusted against the profits for the assessment year 1967-68.

4. The Department went in appeal before the Income-tax Appellate Tribunal (for short called 'the Tribunal'). The departmental representative urged before the Tribunal that development rebate reserve was property debitable only to the profit and loss account of the accounting year, in which development rebate was claimed by an assessed. He argued that since the development rebate amounting to Rs. 15,121 claimed by the assessed for the assessment year 1966-67 had not been backed up by the creation of the necessary development rebate reserve in the assessed's books in the year ended on April 30, 1965, the claim should not be allowed. His further argument was that in the assessment for the assessment year 1967-68, the development rebate pertaining to the immediately preceding assessment year could be allowed only under s. 33(2)(ii) of the Act, and, in his view, there was no scope for allowing carry forward development rebate unless it was admissible in the preceding assessment year to which it related. On the other hand, the assessed urged that the development rebate reserve was not created in the assessment year 1966-67 due to paucity of profits; that though no development rebate had been allowed to the assessed for the assessment year 1966-67 on the ground that it had not created any development rebate reserve for that year, the development rebate relating to that year should be allowed under s. 33(2)(ii) as carried forward development rebate in the company's assessment for the assessment year 1967-68; that the assessed was not obliged to create a development rebate reserve in a year in which it had no taxable income and that for the purpose of enabling it to carry forward the development rebate to the following years, the creation of such a reserve in the year in which the loss had been suffered was not required. A number of authorities were cited before the Tribunal.

5. The Tribunal construed the provisions of s. 33(2)(ii) read with s. 34 of the Act and came to the conclusion that for the actual allowance of development rebate, the creation of development rebate reserve is a must, but not so for claiming the rebate; that if the total income was already less than nil, there was no scope for making any allowance as development rebate in that year; that s. 33(2)(ii) provides that the amount of development rebate, to the extent to which it has not been allowed as provided under s. 33(2)(ii), shall be carried forward to the following assessment year and that if it has not been allowed at all in the preceding assessment year, the entire amount of development rebate will have to be considered in the following year. For these reasons, the Tribunal upheld the decision of the AAC.

6. Mr. Wazir Singh, the learned counsel for the Department, first invited our attention to the historical background of the development rebate and we may notice it. Prior to April 1, 1955, under the Indian I.T. Act of 1922 (for short, called '1922 Act'), there was no provision for the grant of development rebate. The Finance Act, 1955, introduced with effect from April 1, 1955, clause (vib) in s. 10(2) of the 1922 Act, and made provision for the grant of development rebate. Under the scheme of s. 10(2), provision was made for different types of allowances which were permitted as deductions in the computation of income from business. Under the newly added s. 10(2)(vib), it was provided that in respect of machinery or plant being new, which had been installed after March 31, 1954, and which was wholly used for purposes of the business carried on by the assessed, a sum by way of development rebate in respect of the year of installation equivalent to 25% of the actual cost of such machinery or plant to the assessed was to be allowed as a deduction in the computation of the income from business for the particular year. The proviso to s. 10(2)(vib), however, required that no allowance for development rebate could be made unless the particulars prescribed for the purpose of clause (vi), that is, for depreciation allowance, had been furnished by the assessed in respect of such machinery or plant. There was no provision for carry forward of the development rebate or for any setting up of development rebate reserve. An entirely new clause for the clause as it existed from April 1, 1955, onwards, was substituted by the Finance Act, 1958, with effect from April 1, 1958. Under the new clause (vib) of s. 10(2). Explanationn 1 provided that where the total income of the assessed for the year of acquisition or installation (the total income for this purpose being computed without making any allowance for development rebate) was nil or was less than the full amount of the development rebate, calculated at the rate applicable thereto under clause (vib), the sum to allowed by way of development rebate for that year under clause (vib) was to be only such amount as was sufficient to reduce the total income to nil and the amount of the development rebate, to the extent to which it had not been allowed as aforesaid, was to be carried forward to the following year, and the development rebate to be allowed for the following year was to be such amount as was sufficient to reduce the total income of the assessed for that year, computed in the manner aforesaid, to nil, and the balance of the development rebate, if any, still outstanding was to be carried forward to the following year and so on, however, that no portion of the development rebate was to be carried forward for more than eight years. The proviso to s. 10(2)(vib) laid down, inter alia, that except where the assessed was a company being a licenses within the meaning of the Electricity (Supply) Act, 1948, or where the ship had been acquired or the machinery or plant had been installed before January 1, 1958, an amount equal to 75% of the development rebate to be actually allowed was debited to the profit and loss account of the relevant previous year and credited to a reserve account to be utilised by him during a period of 10 years next following for purposes of the business of the undertaking, except (1) for distribution by way of dividends or profits, or (2) for remittance outside India as profits or for the creation of any asset outside India.

7. When the I.T. Act, 1961, was enacted, the provisions of s. 10(2)(vib) were divided into two parts, viz., ss. 33 and 34, and certain change were made. The material provisions for our purpose is this reference are ss. 33 and 34(3)(a) of the Act. Sub-s. (1) of s. 33 grants development rebate rate varying rates in respect of ships, machinery and plant on the conditions specified therein. Section 33 provides for the circumstances or conditions in which an assessed would be entitled to the development rebate as well as the maximum amount of rebate. We are not concerned in this reference with other conditions except one. Section 33(1)(a), however, allows the deduction subject to s. 34 in respect of the previous year in which the ship or machinery or plant was installed, a sum by way of development rebate as provided in clause (b). Sub-s.(3) of s. 34 enacts that the deduction referred to in s. 33 shall not be allowed unless an amount equal to 75% of the development rebate to be actually allowed is debited to the profit and loss account of the relevant previous year and credited to the 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. There is a further restriction that it is to be utilised for purposes other than for distribution by way of dividends or profits or for remittance outside India as profits or for creation of any asset outside India.

8. The corresponding provisions contained in s. 10(2)(vi)(b) in the 1922 Act came up for consideration before the Madras High Court in CIT v. Veeraswami Nainar : [1965]55ITR35(Mad) . It was held that the grant of the allowance is subject to the two conditions prescribed in the proviso to Explanationn 2 to the section being satisfied. They are : (i) the prescribed particulars for the purpose of granting depreciation allowance should be furnished in regard to the plant or machinery, and (ii) in the case of machinery or plant installed after December 31, 1957, that the assessed should have set apart 75% of the amount allowable as development rebate to a reserve account, by debiting the same to the profit and loss account of the year of account and crediting it to a reserve account. This was approved by the Supreme Court in Indian Overseas Bank Ltd. v. CIT : [1970]77ITR512(SC) , wherein it was observed, noticing the observation of the Madras High Court, that the object of the legislature in allowing a development of the assessed's business from out of the reserve refund is apparent from the terms of the proviso. The entries in the account books required by the proviso are not an idle formality. The assessed being obliged to credit the reserve fund for a specific purpose, he cannot draw upon the same for purpose other than those of the business and that amount cannot be distributed by way of divided. The assessed in that case not having complied with the requirements of s. 10(2)(vib) read with Explanationn 2, it was held not entitled to claim the allowance in question. The law in our view is thus clearly settled that the creation of the reserve contemplated by the statutory provisions is a condition precedent for obtaining the allowance of development rebate. An assessed is not entitled to the allowance of development rebate if necessary reserve in accordance with the provisions of s. 34(3)(a) has not been made. Creation of the reserve is a sine qua non for the allowance.

9. The 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. The contention of the counsel for the Department is that on a plain reading of the statutory provisions, it must be construed that the reserve has to be created during the year of account being the previous year in which the ship was acquired or plant or machinery installed. Stress is laid on the word 'actually allowed' occurring in s. 34(3)(a) to mean as actually given effect to and that the expression 'actually allowed' connotes an idea that the allowance was actually given effect to. Reliance is heavily placed on the decision of the Gujrat High Court in Addl. CIT v. Subhlaxmi Mills Ltd. [1975] 100 ITR 188. The view is expressed that the only possible conclusion that can be drawn by a process of interpretation and that too attributing a grammatical meaning to the words used, is that the reserve contemplated by s. 34(3)(a) must be created before finally making up the profit and loss account of the relevant previous year in which the machinery or plant was installed or the ship was acquired. If it is not so created by debiting the profit and loss account and crediting the necessary amount to a reserve account, the benefit of the development rebate by way of deduction from income cannot be allowed and once it is found that it cannot be allowed in the year of assessment relevant for the previous year in which the machinery or plant was installed or the ship was acquired, it cannot be allowed to be carried forward in any subsequent year. Another Division Bench of the Gujrat High Court shared the view in CIT v. Mihir Textiles Ltd. : [1976]104ITR167(Guj) . A Division Bench of the Gauhati High Court in CIT v. Kamalpur (Assam) Tea Estate (P) Ltd. , expressed respectful agreement with the observations of the Gujrat High Court in Subhlaxmi Mills Ltd.'s case [1975] 100 ITR 188. There is a difference of judicial opinion on this point among the other High Courts. This court has not so far expressed any view.

10. Before dealing with the main argument we may notice some other cases relied upon by the counsel. The Gujrat High Court case reported as Addl. CIT v. Nagardas Bechardas & Bros. Pvt. Ltd. : [1976]104ITR123(Guj) , does not deal with the question posed for our opinion. The assessed in that case would have been entitled to development rebate of 35% in respect of certain machinery, but the reserve created by the assessed was less than 75% of the rebate allowable. The court held that it was not open to the assessed to claim that it should be allowed development rebate at 20% which is allowed to every new machine. On a reference to the evaluation of the machines mentioned in Table B in that case, the machines mentioned at Seriall Nos. 4 and 5 are respectively worth Rs. 16,702 and Rs. 20,570 and since it was an admitted fact that those machines had earned development rebate at the higher rate of 35% the total of the development rebate to which the assessed was held entitled did not transgress the limit of 75% reserve created by the assessed. The Gujrat High Court expressed the opinion that those two items should be allowed to earn the higher rate of rebate at 35%. Another case relied upon by the counsel is Barar Lion Buttons (P) Ltd. v. CIT (P & H). Again it dealt with the question of reserve contemplated by s. 34(3) as a condition precedent for obtaining the allowance of development rebate, during the accounting year of installation relevant to the assessment year in that case. It was not dealing with the question of carry forward of the development rebate and the creation of the development rebate reserve in the year of installation. In the case of CIT v. J. Thomas and Co. Pvt. Ltd. : [1977]110ITR566(Cal) , the assessed was held not entitled to the development rebate in respect of the lifts and central air-conditioning plant as certain conditions were not fulfillled. The machinery or plant was not used wholly for the purpose of the assessed's business. This case is also not on the point in issue in this reference.

11. We may recall the history of the legislation. The provisions relating to the development rebate seem to have been introduced for giving incentives to businessmen to develop their business by acquiring new ship or installing new machinery or plant (other than office appliances or road transport vehicles). Development rebate is not an expenditure in the strict sense of the word so as to be allowed as a deduction in income-tax asessment. It is not a part of the depreciation allowance. It is not connected with depreciation allowance which is a yearly feature. It is to be allowed only once. It is to be utilised for purpose of the business in the next eight years. It is not be utilised for distribution by way of dividend or profits or for remittance outside India as profits or for the creation of any assets outside India. The legislation intent in granting the development rebate and imposing restriction on its user is clear that the assessed should use part its profits for development purpose. This could be done only when profits have been earned by the assessed. This statue does not contemplate an illusory debit entry in the profit and loss account and a corresponding illusory credit entry in the development rebate reserve because it is incapable of being utilised for the business. If the assessed had to create the development rebate reserve in the year of installation of the machinery or plant irrespective of the fact whether the assessed has an assessable income in that year then the assessed would have to resort to fictitious book entries of creation of reserve out of its capital or to resort to borrowings for creation of the reserve. Such situation could never have been intended as the object is to enable the assessed to accumulate funds to be used for its development. The statutory provisions are not intended to place extra burden on the assessed but to confer some benefits on him.

12. The statute does not by any express words or by necessary implication require that the development rebate reserve must be created in the year of installation of the plant or machinery. The essential condition specified in s. 34(3)(a) is that an amount equal to seventy-five per cent of the development rebate to be actually allowed should be debited to the profit and loss account of the relevant previous year and the same is credited to a reserve account. Ceiling of allowable deduction is provided in s. 33(2)(i). Only so much of the allowable development rebate can be deducted from a year's total income as would reduce such total income to nil. Section 33(2)(ii) provides for carry forward of the unabsorbed amount of allowable development rebate to the following assessment year or years. The amount of development rebate to the extent to which it has not been allowed under s. 33(2)(i), can be carried forward and the development rebate to be allowed for the following assessment year has again to be such amount as is sufficient to reduce the total income of the assessed assessable for that year to nil. The balance of the unabsorbed amount can be carried forward and would be available for a period of eight assessment years. These provision show that the allowability of the development rebate is confined to the year of installation of plant or machinery but can be carried forward and allowed for a period of eight assessment years immediately succeeding the assessment year in respect of which the claim could be made. The unabsorbed development rebate can this be carried forward and can be allowed against income accruing in the succeeding years subject to a total of eight years.

13. It is pertinent to note the words 'to be allowed' is s. 33(2)(i) and the words 'allowed' in s. 33(2)(ii). There words 'allowed' are significant when constructed along with provisions contained in s. 34(3)(a). The deduction referred to in s. 33 is not to 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 fund. In our view, this condition precedent is for fulfilllment in the years in which the development rebate or its portions are actually allowed. The words 'actually allowed' have to be restricted to the quantum of the development rebate in fact allowed in a particular assessment year for which a reserve account has to be created and debited to the profit and loss account of the relevant previous year. The relevant previous year is the year defined in s. 3. It is generally the financial year immediately preceding the assessment year. It shows that the assessed is obliged to set apart and credit an amount equal to seventy-five per cent of the development rebate that would be actually allowed to him in a particular assessment year as a reserve and debit it to the profit and loss account of the relevant previous year. The words 'relevant previous year' refer not to the year of installation of the new plant or machinery, but to the year or years in which either the whole of the development rebate or a portion thereof is actually allowed.

14. When the case came up for hearing before the Tribunal, the views of the Madras, Calcutta and Bombay High Courts were available and relied upon by the Tribunal in coming to its conclusion. A Division Bench of the Madras High Court in the case of Radhika Mills Ltd. v. CIT : [1969]74ITR661(Mad) , took the view that the allowance of development rebate was always in respect of the year of installation but the creation of the requisite reserve depends on and goes to reduce the available total income of the year or the following year. If there is no such total income or if it is a loss, there can be no allowance of rebate bit it is to be carried forward to the following year. No development rebate can actually be allowed unless the two conditions are satisfied. One of the conditions is the creation of development rebate reserve. Regarding this condition, the Madras High Court took the view that it will not be sufficient compliance with the condition if no reserve created to the extent required and mere book entire without reserve are made. Debiting in the profit and loss account and crediting in the reserve account is not theoretical but on the basis of actual reserve created. The basis of the actual reserve created is the total profits as per the completed assessment and not book profit. The entries as required by the condition are a sine qua non and are not an idle formality for it is only then that it will be possible to keep tract of the development rebate reserve for enforcing the particular inhibitions against its user. Previous creation of the reserve is not a condition for making the claim for rebate unlike actual allowance of it. A Division Bench of the Calcutta High Court in the case of West Laikdihi Coal Co. Ltd. v. CIT : [1973]87ITR501(Cal) , took the view that the whole object of granting development rebate would fail if creation of the reserve account is invited on in the year of installation of the new plant or machinery whether or not the assessed had the funds to create such an account. It took the view that the development rebate had to be claimed in the year of installation or use of the machinery or plant but the condition of creation of development rebate reserve had to be fulfillled in the year or years that the development rebate or portions there of are actually allowed. the Calcutta High Court held that an assessed is not obliged to create a reserve fund in any year, if he had no taxable income in that year for the purpose of carrying forward the development rebate to the following years. The Bombay High Court in Indian Oil Corporation Ltd. v. S. Rajagopalan, ITO : [1973]92ITR241(Bom) , held that if in the assessment year relevant to the year of installation or use of new machinery or plant, the total assessed income of the assessed is nil, the assessed cannot naturally be expected to have created an actual and non-illusory reserve equivalent to 75 per cent. of the development rebate to be allowed and that such reserve can only be made out of assessed profits. There can be on obligation on the part of the assessed to create a reserve as a condition merely for carrying over the development rebate without it being actually allowed to him by setting off the rebate against the assessed profits. The Bombay High Court expressed the view that it is not possible to accept the contention of the Revenue that the assessed must create the reserve in the year of installation or use of the plant or machinery, irrespective of any profits, as a condition precedent to the actual allowance of development rebate in the subsequent years in which there are assessed profits, and that the assessed was not obliged to create a reserve in order to be eligible for allowance of development rebate if there was no taxable income in the relevant years according to its assessment. Relying on these three cases, the Tribunal came to the conclusion that 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.

15. Subsequent to the decision of the Tribunal in this case, the question has been considered by various High Courts. A view has been taken by the Orissa High Court in CIT v. Orissa Flour Mills (P.) Ltd. : [1976]104ITR682(Orissa) , that the ITO should in the year of installation of the plant or machinery or the first year of use, as the case may be, determine the amount of rebate allowable since the allowance, and not the determination, had been made dependent on the creation of reserve. The decision of the Bombay High Court in the case of Indian Oil Corporation Ltd. [1972] 92 ITR 241 , was quoted with approval. The Allhabad High Court in Addl. CIT v. Vishnu Industrial Enterprises : [1980]122ITR919(All) , held that the condition precedent for the creation of development rebate reserve is only at the time of actual allowance of the rebate. This condition precedent should be complied with at that time. Before an assessed claims the deduction for being actually allowed, he should create a reserve by debiting the profit and loss account and crediting the reserve account with the requisite amount of money. This can be done only in the year in which profits are earned. The scheme of carrying forward unabsorbed development rebate postulated by s. 33(2) can be achieved only if it is permissible to create a reserve by making the requisite entries to the extent the income is able to absorb the rebate. The full reserve may not be create in a single year. Depending on the availability of income, it may take more than one year to create the reserve to the full extent of the development rebate which is allowable and which had already been determined. The Andhra Pradesh High Court in CIT v. Agro Insecticides and Allied Industries : [1981]127ITR796(AP) , held that the assessed was not could to create the statutory reserve in the year in which it did not make profits and hence the assessed could not be denied the benefit of development rebate merely because the reserve was not created during the year of installation of the machinery.

16. A question arose in reference before another Division Bench of this court in Addl. CIT v. Markanda Engineers : [1982]136ITR111(Delhi) , as to whether the Tribunal was right in giving directions that the unabsorbed development rebate sufficiently covered by the reserve created by the assessed should be carried forward and allowed under s. 33(2)(ii) of the Act in the year in which there was positive income. The assessed was held entitled to carry forward the unabsorbed development rebated at 35 per cent. for being set off in the subsequent year. The question as to whether the statutory condition has to be fulfillled in respect of each of the assessment years in which the assessed may claim actual allowance of development rebate and to the creation of the reserve in the relevant previous year was not directly in issue but some observation in favor of the assessed in this case were made. It was noticed (at page 117 of the report) that s. 34(3) which deals with the creation of the reserve is very guarded and careful in is language. It does not require an assessed to create a reserve equivalent in amount to 3/4 the 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 itself, nor does it say that the reserve should be created in the one or the other of the two years. On the contrary, it only requires an assessed to crate a reserve equal to 75 per cent. of the development rebate to be actually allowed. Since the development rebate may be 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 3/4the of the amount of actual development rebate which is to be allowed in that years. Considering the facts of that case it was opined 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 subsequently years and will be allowed in the various assessment years depending upon the fulfilllment of the requirements for the creation of the reserve in the respective previous years(s) in regard to which the development rebate is actually allowed to the assessed.

17. The consensus of judicial opinion is against the Department. The position was clarified by the Department itself in the Board of Direct Taxes Circular No. F 10/49/65-ITA-I, dated October 14, 1965 [1976] 102 ITR 90 which explains the position regarding the creation of statutory reserve for allowance of development rebate. The Board issued Circular No. 189, dated January 30, 1976, reiterating the position regarding the creation of statutory reserve. It clarified 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,as no development rebate would actually be allowed in that year. With great respect to the learned Judges of the Gujarat High Court rending the opinion in Subhlaxmi's case [1975] 100 ITR 188, we express our inability to share their view.

18. For the above reasons, I answer the reference against the Department with no order as to costs.

GOEL J.

1. The question as to whether in a case where the total income computed before allowing development rebate is nil or is a minus figure, there is any obligation on the assessed to create a statutory reserve in that year for the allowance of development rebate was explained by the Central Board of direct Taxes in its two Circulars. Circular No. F. 10/49/65-IT A-I. dated October 14, 1965, [1976] 102 ITR 90, states as under :

'(a) In the case of certain industrial undertakings, particularly those in which there is Government participation either by way of capital, loan or guarantee, and where there are certain obligations by law or agreement about the maintenance of reserve for development purposes, the development rebate reserve may be treated as included in the said reserve though not specifically created as a development rebate reserve.

(b) 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.

(c) Where there was no deliberate contravention of the provisions, the Income-tax Officer may condone genuine deficiencies subject to the same being made good by the assessed through creation of adequate additional reserve in the current year's book in which the assessment is framed.'

2. The Board thereafter issued Circular No. 189, dated January 30, 1976, in the matter. Paragraph 5 of that Circular is as under (See [1976] 102 ITR 90 :

'5. The Board have re-examined the issues involved and are of the opinion that except the clarification given in part. (a) of paragraph I above, which stands superseded by the aforesaid decision of the Supreme Court [Indian Overseas Bank Ltd. v. CIT : [1970]77ITR512(SC) , the clarifications given in paragraphs (b) and (c) of paragraph 1 above hold good.'

3. As per these circulars the total income of the assessed being nil, there was no legal obligation on the part of the assessed to create the statutory reserve in the year of installation, i.e., the assessment year in question, and the assessed was entitled to the allowance of development rebate in the year in question and to get the entire amount of development rebate carried forward to be adjusted in the subsequent year. The Andhra Pradesh High Court in the case of CIT v. Agro Insecticides & Allied Industries : [1981]127ITR796(AP) , answered a similar question of law in favor of the assessed solely in view of the Board's Circular No. 189, dated January 30, 1976. The Allahabad High Court in Addl. CIT v. Vishnu Industrial Enterprises : [1980]122ITR919(All) , also referred to these two circulars and observed that the Supreme Court in Navnit Lal C. Javeri v. K. K. Sen, AAC : [1965]56ITR198(SC) and Ellermamn Lines Ltd. v. CIT : [1971]82ITR913(SC) , has held that the income tax authorities are bound by the Board's Circulars and that the same are entitled to be given effect by the courts as well. It was then held by the Allahabad High Court that these circulars supported assessed's contention which was the same as in the present case before us.

4. It was contended by Mr. Wazir Singh that the Supreme Court did not lay down law that all circulars issued by the Central Board of Direct Taxes are entitled to be given effect to and that these circulars relating to judicial discretion of the ITO cannot be given effect to by the courts. No finding need be given in that regard. However, the fact remains that these circulars are admittedly operative and applicable to the case of the assessed. The question referred is thus of academic interest. Besides that, the question involved in the present case was earlier answered by another Bench of this court against the Revenue in Addl. CIT v. Markanda Engineering (ITR No. 135/75, decided on January 29, 1982) : [1982]136ITR111(Delhi) . It was held therein that in a case in which in the year of installation of machinery or plant, etc., the total income as computed by the ITO is nil or is a minus figure, the development rebate to be actually allowed being nil in such a case, there is no obligation on the part of the assessed to create any development rebate reserve in that year and the assessed is entitled to carry forward the whole of the development rebate. Following that decision, I agree with the conclusion of S.S. Chadha J. that the assessed was entitled to carry forward the development rebate claimed for the assessment year 1966-67, to be adjusted against the profits of the assessment year 1967-68.


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