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Commissioner of Income-tax Vs. T.S. Venkiteswaran - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIncome-tax Reference No. 135 of 1977
Judge
Reported in[1979]120ITR675(Ker)
ActsIncome Tax Act, 1961 - Sections 33(1), 33(2) and 34(3); Indian Income Tax Act, 1922 - Sections 10(2)
AppellantCommissioner of Income-tax
RespondentT.S. Venkiteswaran
Appellant Advocate P.K.R. Menon, Adv.
Respondent Advocate K.S. Paripoornan and; G. Sivarajan, Advs.
Cases ReferredIndian Overseas Bank Ltd. v. Commissioner of Income
Excerpt:
.....tax act, 1922 - whether income-tax appellate tribunal right in holding that assessee entitled to development rebate under section 34 (3) for assessment year 1971-72 in absence of any account maintained by assessee inspite of consequential failure of assessee to create necessary reserve under section 34 (3) (a) - in view of circular issued by cbdt (central board of direct taxes) assessee entitled to benefit of development rebate - many decisions of precedent emphasized binding character of circulars - courts also bound to take note of circulars issued by cbdt - circular constituted nothing more than amplification of aspect of question of law being raised and argued before tribunal - held, assessee entitled to development rebate. - - (1) whether, on the facts and in the..........conditions are fulfilled, namely :--...... (2) in the case of a ship acquired or machinery or plant installed after the 31st day of december, 1957, where the total income of the asses-see 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-section (1) or sub-section (1a) of this section or sub-section (1) of section. 33a or any deduction under chapter via or section 280-0 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,--......' ' 34......
Judgment:

Gopalan Nambiyar, C.J.

1. This is a reference that was compelled by this court at the instance of the revenue under Section 256(2) of the I.T. Act. The questions of law which are referred are:

' (1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that the assessee is entitled to development rebate under Section 34(3) of the Income-tax Act, 1961, for the assessment year 1971-72, in the absence of any accounts maintained by the assessee, and in spite of the consequential failure of the assessee to create the necessary reserve under Section 34(3)(a) of the Act?

(2) Whether, on the facts and in the circumstances of the case and on an interpretation of section 34(3) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal is right in law in holding that the assessee is eligible for development rebate for the assessment year 1971-72, without fulfilling the condition of creating a reserve due to absence of profit

2. The assessee is an individual who owned three fishing boats. One boat had run for 4 1/2 months, another for 2 1/2 months and the third only for a period of 2 months during the course of the accounting year. A net income of Rs. 13,671 was admitted from these boats after deduction of all admissible expenses except depreciation and development rebate. Development rebate was claimed in respect of these three boats. The assessee had not, however, maintained any books of account and there was no question of any creation of reserve for development rebate. The ITO rejected the claim for development rebate on the ground that no accounts had been maintained and no reserve had been created, and so he was not entitled to the benefit of development rebate. The income was computed at Rs. 42,010. The assessee appealed to the AAC. That officer found that the expenses claimed as spent on the construction of the boats could not be verified as many of the vouchers were not made available. He held that none of the requirements for the allowance of development rebate had been made out by the assessee. He, therefore, rejected the appeal and upheld the order of the ITO. The assessee appealed further to the Appellate Tribunal. The Tribunal found that the boats were new, that during the accounting year profits were not sufficient even to set off the full amount of depreciation due, and so there was no question of creation of any reserve for development rebate. In the next year when there were profits, the assessee had maintained accounts and had created necessary reserve. For the assessment year, all the conditions necessary for the grant of development rebate had been satisfied except the creation of a reserve. This condition, according to the Tribunal, need not be fulfilled in the absence of profit. At the instance of the revenue, the questions of law have been referred.

3. Counsel for the revenue invited our attention to the provisions of Section 33(1) and (2) and Section 34(3)(a) of the I.T. Act, 1961, which read:

'33. Development rebate.--(1) (a) In respect of a new ship or new machinery or plant (other than office appliances or road transport vehicles) which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section and of section 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 year, then, in respect of that previous year, a sum by way of development rebate as specified in clause (b).

(b) The sum referred to in clause (a) shall be-

(A) in the case of a ship, forty per cent, of the actual cost thereof to the assessee;

(B) in the case of machinery or plant,--

(i) where the machinery or plant is installed for the purposes of business of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule,--

(a) thirty five per cent, of the actual cost of the machinery or plant to the assessee, where it is installed before the 1st day of April, 1970, and

(b) twenty-five per cent, of such cost, where it is installed after the 31st day of March, 1970;

(ii) where the machinery or plant is installed after the 31st day of March, 1967, by an assessee being an Indian company in premises used by it as a hotel and such hotel is for the time being approved in this behalf by the Central Government-

(a) thirty-five per cent, of the actual cost of the machinery or plant to the assessee, where it is installed before the first day of April, 1970, and

(b) twenty-five per cent, of such cost, where it is installed after the 31st day of March, 1970;

(iii) where the machinery or plant is installed after the 31st day of March, 1967, being an asset representing expenditure of a capital nature on scientific research related to the business carried on by the assessee,--

(A) thirty five per cent, of the actual cost of the machinery or plant to the assessee, where it is installed before the 1st day of April, 1970, and

(b) twenty-five per cent, of such cost, where it is installed after the 31st day of March, 1970; (iv) in any other case,--

(a) twenty per cent, of the actual cost of the machinery or plant to the assessee, where it is installed before the 1st day of April, 1970, and

(b) fifteen per cent, of such cost, where it is installed after the 31st day of March, 1970.

(lA)(a) An assessee, who, after the 31st day of March, 1964, acquires any ship which before the date of acquisition by him was used by any other person shall, subject to the provisions of section 34, also be allowed as a deduction a sum by way of development rebate at such rate or rates as may be prescribed, provided that the following conditions are fulfilled, namely :--

(i) such ship was not previous to the date of such acquisition owned at any time by any person resident in India ;

(ii) such ship is wholly used for the purposes of the business carried on by the assessee ; and

(iii) such other conditions as may be prescribed ; (b) An assesses who instals any machinery or plant (other than office appliances or road transport vehicles) which before such installation by the assessee was used outside India by any other person shall, subject to the provisions of section 34, also be allowed as a deduction a sum by way of development rebate at such rate or rates as may be prescribed, provided that the following conditions are fulfilled, namely :--......

(2) In the case of a ship acquired or machinery or plant installed after the 31st day of December, 1957, where the total income of the asses-see 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-section (1) or sub-section (1A) of this section or sub-section (1) of section. 33A or any deduction under Chapter VIA or section 280-0 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,--......' ' 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 assessee during a period of eight years next following for the purpose 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 :

Provided that this clause shall not apply where the assessee is a company, being a licensee within the meaning of the Electricity (Supply) Act, 1948 (54 of 1948), or where the ship has been acquired or the machinery or plant has been installed before the 1st day of January, 1958 : Provided further that where a ship has been acquired after the 28th day of February, 1966, this clause shall have effect in respect of such ship as if for the words ' seventy-five ', the word ' fifty' has been substituted.

Explanation.--For the removal of doubts it is hereby declared that the deduction referred to in section 33 shall not be denied by reason only that the amount debited to the profit and loss account of the relevant previous year and credited to the reserve account aforesaid exceeds the amount of the profit of such previous year (as arrived at without making the debit aforesaid) in accordance with the profit and loss account.'

Our attention was also called to the provisions of Section 10(2)(vi)(b) of the 1922 Act, which reads as follows:

' 10. (2) Such profits or gains shall be computed after making the following allowances, namely :--......

(vi) in respect of depreciation of such buildings, machinery, plant or furniture being the property of the assessee, a sum equivalent, where the assets are ships other than ships ordinarily plying on inland waters, to such percentage on the original cost thereof to the assessee as may in any case or class of cases be prescribed and in any other case, to such percentage on the written down value thereof as may in any case or class of cases be prescribed;

and where the buildings have been newly erected, or the machinery or plant being new, not being machinery or plant entitled to the development rebate under clause (vib), has been installed, after the 31st day of March, 1945, and before the 1st day of April, 1956, a further sum (which shall however not be deductible in determining the written down value for the purposes of this clause) in respect of the year of erection or installation equivalent,--......... (b) in the case of other buildings to ten per cent, of the cost thereof to the assessee.'

4. The substance of the argument of counsel for the revenue was that the conditions precedent for the grant of development rebate had been clearly provided for in the concerned section in the Act and these require the maintenance of the accounts and the creation of a reserve by the assessee. As this had not been done, the argument was that the assessee would in no circumstances be entitled to the benefit of development rebate.

5. Counsel relied in support of his proposition on the decisions in R. Venkatasubramaniam's case : [1973]91ITR220(Mad) , Addl. CIT v. South India Carbonic Gas Industries Ltd. : [1977]109ITR700(Mad) and Addl. CIT v. Shri Subhlaxmi Mills Ltd. [1975] 100 ITR 188 and certain other decisions, all of which have taken the view that the conditions for earning development rebate mentioned in the section have to be strictly complied with and, in the absence of the same, the assessee would not be entitled to the benefit of the provision. As against this, counsel for the assessee relied upon the decisions in Radhika Mills Ltd.'s case : [1969]74ITR661(Mad) , West Laikdihi Coal Co. Ltd.'s case : [1973]87ITR501(Cal) and India* Oil Corporation Ltd.'s case : [1973]92ITR241(Bom) . These decisions would hold that the maintenance of accounts and creation of reserve is obligatory only where the business has earned profits, and not where it has ended in a loss during the accounting year. It might have been necessary for us to investigate into the correctness of the rival views and to express our opinion one way or the other on the controversy agitated.

6. But counsel for the assessee brought to our notice that there was a circular issued by the Board of Revenue which had application on this aspect of the case. The circular will be seen printed at page 90 of 102 ITR (St.). It is circular No. 189, dated 30th January, 1976, issued by the Central Board of Direct Taxes. The relevant portion of the circular reads as follows ;

'Reference is invited to Board's Circular F. No. 10/49/65-ITA.I dated 14th October, 1965, which, inter alia, explained the position regarding the creation of statutory reserve for allowance of development rebate as follows :

(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 assessee through creation of adequate additional reserve in the current year's books in which the assessment is framed.

2. The Supreme Court, in the case of Indian Overseas Bank Ltd. v. Commissioner of Income-tax : [1970]77ITR512(SC) , had occasion to consider the validity of the position as explained at (a) above. In that case, the bank had not created any development rebate as such, although the books of accounts disclosed a substantial reserve under Section 17 of the Banking Companies Act of 1949. On the claim of the bank that reserve had been created for purposes of claiming development rebate, the Supreme Court held that the reserve contemplated under the Income-tax Act was altogether an independent reserve and since the taxpayer had not complied with the requirements for the creation of special development rebate reserve, it was not entitled to claim the allowance in question. The Supreme Court also observed that the entries in the account books were not idle formalities. Thus, the instructions of the Board set out above in so far as part (a) is concerned became inoperable. However, the position explained in parts (b) and (c) above were not specifically considered by the Supreme Court in that decision, Taking note of the decision of the Supreme Court in Indian Overseas Bank's case : [1970]77ITR512(SC) as well as a subsequent pronouncement of the Gujarat High Court in the case of Surat Textile Mills Ltd. : [1971]80ITR1(Guj) the Board had withdrawn in 1972 the aforesaid circular dated 14th October, 1965, to the extent it was superseded by the aforesaid Supreme Court decision and the judgment of the Gujarat High Court in Swat Textile Mills Ltd.......

5. The Board have re-examined the issues involved and are of the view that except the clarification given in part (a) of para. 1 above, which stands superseded by the aforesaid decision of the Supreme Court, the clarifications given in parts, (b) and (c) of para. 1 above hold good'.

7. In view of the circular issued by the CBDT, counsel for the assessee contended that the assessee was clearly entitled to the benefit of development rebate. Our attention was called to the recent decisions of this court in Rajarajeswari Weaving Mills' case : [1978]113ITR405(Ker) and the Full Bench decision of this court in I.T.R. No. 56 of 1976 (since report-in C1T v. B. M. Edward, India Sea Foods : [1979]119ITR334(Ker) ). These decisions have emphasised the binding character of the circulars and stated that the courts are also bound to take note of the circulars issued by the CBDT or by the CBR. We have little doubt that, in view of the circular to which our attention has been called by counsel for the assessee, the assessee is entitled to the development rebate.

8. Counsel for the revenue objected to our placing reliance on the circular at this stage when it had not been relied upon before any of the authorities below, namely, the ITO, the AAC and the Income-tax Appellate Tribunal. But we are satisfied that the circular constituted nothing more than the amplification of an aspect of the question of law that was being raised and argued before the Tribunal and the questions of law which have been sent up by the Tribunal for the opinion of this court. It answers the elaboration of the term ' question of law' made by the Supreme Court in Scindia Steam Navigation Co, Ltd.'s case : [1961]42ITR589(SC) . In that view, we answer the question of law referred to us in the affirmative, i.e., in favour of the assessee and against the revenue. There will be no order as to costs.

9. A copy of this judgment under the seal of this court and the signature of the Registrar will be communicated to the Tribunal as required by law.


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