S.S. Chadha, J.
(1) This reference under Section 256(1) of the Income-tax 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 as 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. 20,182, after allowing a development rebate of 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 Appellate Assistant Commissioner against' the assessment for the assessment year 1967-68 and 'contended; inter alia, that the Income-tax Officer should have allowed as carried forward unadjusted development rebate of Rs. 15,121 claimed by the assessed for the assessment year 1966-67. The Appellate Assistant Commissioner 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 the paucity of profits, be allowed against the assessed's income for the assessment year 1967-68. The Appellate Assistant Commissioner 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 paucity 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 unabsorbed development rebate for the assessment 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 properly debited 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 1965-67 had not been backed up by the creation of the necesssary 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 Section 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 re serve was not created in the assessment year 1966-67-due to the 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 Section 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 carryforward the development rebate to the following years, the creation of such a reserve in the year in which the/loss had been suffered was riot required. A number of authorities were cited Before the Tribunal.
(5) The Tribunal construed the provisions of Section 33(2)(ii) read with Section 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 Section 32(2)(ii) provides . that the amount .of development rebate, to the extent to which it has not been allowed, as provided under section 33(2)(i), shall be carrid. 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 those reasons the Tribunal upheld the decision of the Appellate Assistant Cormmissioner.
(6) Mr. Wazir Singh, the learned counsel for the department first invite our attention to the historical background of the development rebate and we may notice, it. Prior to April I, 1955, under the Indian Income Tax 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-Section 10(2) of 1922 Act and made provision for the grant of development rebate. Under the scheme of Section 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 Section 10.(2)(vib) it was provided that in respect of machinery or plant being new, which had been installed after the 31st day of March, 1954, and which was wholly used for the 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 per cent 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 that particular year. The proviso to Section 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 rebats 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 newclause(vib) of Section 10(2), Explanationn-1 provided that where the total income of the assessed for the year to 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 be allowed by way of development rebate for that year under clause (vib) was to be only such amount was sufficient to reduce the total income to nil and the amount if 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 soon, however, that no portion of the development rebate was to be carried forward for more than eight years. The proviso to Section 10(2)(vib) laid down, inter alia, that except where the assessed was a company being a licensee within the meaning of Electricity, Supply Act, 1948 or where -the ship had been acquired of the machinery or plant had been installed before the 1st day of January, 1958, an amount equal to 75 per cent of the development rebate to be actually allowed was debited to the profit and loss account of the relevant previous year and created to a reserve account to be utilised by him during a period of 10 years next following the purpose of the business of 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 Income-tax Act, 1961 was enacted, the provisions of Section 10(2)(vib) were divided into two parts viz. Sections 33 and 34 and certain changes were made. The material provisions for our purpose in this reference are Sections 33 and 34(3)(a) of the Act. Sub-section (1) of Section 33 grants development rebate at 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 Section 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-section (3) of Section 34 enacts that the deduction referred to in Section 33 shall not be allowed unless an amount equal to 75 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 the reserve account to be utilised by the assessed during a period of 8 years next following for the purpose of the business of the undertaking. There is a further restriction that it is to be utilised for the 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 Section 10 (2) (vi) (b) in the 1922 Act, came up for consideration-before the Madras High Court in 'Commissioner of Income-tax, Madras V. Veeraswami Nainar and others' : 55ITR35(Mad) (1). It was held that the granting of the allowance is subject to the two conditions prescribed in the proviso to Explanationn 2 to the section being satisfied They are (i) that the prescribed particulars for the purpose of granting depreciation allowance should be furnished inregard 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 per cent 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 the reserve account. This was approved by the Supreme Court in 'Indian Overseas Bank Ltd. v. Comissioner of Income-tax, Madras' : 77ITR512(SC) (2) wherein it was observed, 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 purposes other than those of the business and that amount cannot be distributed by way of dividend. The assessed in that case not. having complied with the requirements of Section 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 Section 34(3)(a) has not been made. Creation of the reserve is a sine qua non for the allowance.
(9) The main question which we have to deal in answering this reference is whether on a true construction of the provisions of Sections 33 and 34 of the Act, it can be said that the. reserve contemplated by Section, 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 down on the word 'actually allowed' occurring in Section 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 Gujarat High court in 'Additional Commissioner of Income-tax, Gujarat V. Subhalaxmi Mills Ltd.' 100 I.T.R. 188(3). 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 Section 34(3)(a) must be created before finally making of 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 a 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 Gujarat High Court shared this view in 'Addl. Commissioner of Income-tax v. Mahir Textiles Ltd.' : 104ITR167(Guj) (4). A, Division Bench of Gauhati High Cdurt in 'Commissioner of Income-tax, Assam v. Kamalpur (Assam) Tea Estate (P) Ltd.' (5) expressed respectful agreement with the observations of the Gujarat High Court in Subhalaxmi Mills Ltd.'s case (supra). There is a difference of judicial opinion on this point by 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. Gujarat High Court case reported as 'Addl. Commissioner of Income-tax V. Nagardas Bechardas & Bros. Pvt. Ltd.' : 104ITR123(Guj) (6), does not deal with the question posed for our opinion. The assessed in that case would have been entitled to development rebate to 35 per cent in respect of certain machinery, but the reserve created by the assessed was less than 75 per cent of the rebate allowable. The Court held that it was not. open to the assesses to claim that it should be allowed development rebate @20 per cent which is allowed to every new machine. On .reference to the evaluation of the machinery mentioned in Table B in that case, the machines mentioned at Seriall Nos. 4 and 5 .represented the worth of Rs. 16,702 and Rs. 20,570, and it was an admitted fact that those machines had earned development rebate at the higher rate of 3.5 per cent, the total of the development rebate, to which the assessed was held entitled did not transgress the limit of 75 per cent reserve created by the assessed. The Gujarat High Court expressed the opinion that those two items should be allowed to earn the higher rate of rebate at 35 per cent. Another case relied upon by the counsel is 'Barar Lion. Buttons (P) Ltd. v. Commissioner of Income-tax, Patiala' (7). Again it dealt with the question of reserve contemplated by Section 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 'Commissioner of -Income-tax, West Bengal v. J. Thomas and Co. Pvt. Ltd.' : 110ITR566(Cal) (8) the assesee 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 legislation. The provisions relating to the development rebate seems 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 relate is not an expenditure in the strict sense of word so as to be allowed as a deduction in the income-tax assessment 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 to 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 legislative intent in granting the development rebate and imposing restrictions on its .user is clear that the assesses should use part of its profit for development purposes. This could be done only when profits have been earned by the assessed. The Statute 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 has 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 borrowing 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 accessary 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 Section 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. Celling of allowable deduction is provided in Section 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 debate to the following assessment year or years. The amount of development rebate, to the extent to which it has not been allowed under Section 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 or the assessed assessable for that year to nil. The balance of the unabsorbed amount can becarried forward and would be available for a period of eight assessment years. These provisions show that the allowability of the development rebate is not 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 thus be carried forward and can be allowed against income accounting in the succeeding years subject to a total of eight years.
(13) It is pertinent to note the words 'to be allowed' in Section 32(2)(i) and the words 'allowed' in .Section 32(2)(ii). The words 'allowed' are significant when construed along with the provisions contained in Section 34(3)(a). The deduction referred to in Section 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 his condition precedent is for fulfillment in the year or years the development rebate or its portions are actually allowed. 'The words 'actually plowed' 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 Section 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 view of Madras, Calcutta and Bombay High Courts were available and relied upon by the Tribunal in coming to its conclusion. A Division Bench of Madras High Court in the case of Radhika Mills Ltd. vs. Commissioner of Income-tax, Madras : 74ITR661(Mad) (9), 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 that year or the following year, if there is no such total income or it. is a loss, there can be no allowance of rebate but 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 is actually created to the extent required and mere book entries without actual 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 profits. 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 track 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 Calcutta High Court in the case of
'WEST Laikdihi Coal Co., Ltd., Calcutta, vs. Commissioner of Income-tax, West Bengal II'
: 87ITR501(Cal) (10) took the view that the whole object of granting development rebate would fail if creation of the reserve account is insisted on in the year of installation of the new plant or machinery whether or not the assesses had the funds to create such an account. It took the view that the development rebate bad to be claimed in the year of installation or use of the machinery or plant but the condition of creation of development rebate reserve has to be fulfillled in the year or years that the development rebate or portions thereof are actually allowed. The Calcutta High Court held that an assessed is not obliged to create a reserve fund in any year, if he has 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. Income-tax Officer, Companies Circle 11(1), Bombay And Others'.
: 92ITR241(Bom) (11) 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 no 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 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 commissioner of. Income-tax, Orissa v. Orissa Flour Mills (P) Ltd. : 104ITR682(Orissa) (12), that the Income-tax Officer 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 allowance since the allowance and not the determination, has been made dependent on the creation of the reserve. The decision of the Bombay High Court in the case of Indian Oil Corp. Ltd. (supra) was quoted with approval. The Allahabad High Court in 'Addl. Commissioner of Income-tax v. Vishnu Industrial Enterprises' 122 LT.R.919 (13) 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 creating the reserve account with 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 Section 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 created 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 has already been determined. The Andhra Pradesh High Court in 'Commissioner of Income-tax, A.P. Iii v. Agro Insecticides and Allied Industries' : 127ITR796(AP) (14) held that the assessed was not bound 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 a reference before another Division Bench of this Court in 'Addl. Commissioner of Income-tax, Delhi-III v. Markanda Engineers,' 136 I.T.R. (15), 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 Section 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 rebate at 35 percent for being set off in the subsequent years. The question as to whether the statutory condition has to be fulfillled in respect of each of the assessment years in which the assesses 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 observations in favor of the assessed in this case were made. It was noticed (at page 117 of the report) that Section 34(3) which deals with the creation of the reserve is very guarded and careful in its language. It does not require an assessed to create a reserve equivalent in amount to 3/4the 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 create 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 Section 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. Considering the facts of that case it was opined that though normally the assesses 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 varidus assessment years depending upon the fulfillment of the requirements for the creation of the reserve in the respective previous year or years in regard to which the development rebate is actually allowed to the assessed.
(17) The consensus of judicial opinion is again 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 102 I.T.R. 90 (16) which explains the position regarding the creation of statutory reserve for allowance of development rebate. The Board issued Circular No. 189 dated January 20, 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 Judge of the Gujarat High Court rendering the opinion in Subhlaxmi Case (supra), 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.