T.U. Mehta, J.
1. The respondent-company, which is a private limited company, is the assessee and during the course of the assessment of its income for the assessment year 1966-67, it claimed development rebate of Rs. 55,051 at the rate of 20% on the new machinery worth Rs. 2,75,305. During the course of the assessment, the assessee filed a revised return and claimed the development rebate at the rate of 35% on the ground that the oil engines manufactured by it fall under item No. 5 of articles and things mentioned in Schedule V, i.e., internal combustio n machines. This claim at the rate of 35% was of the rebate of Rs. 96,3 57. But since the reserve of only Rs. 55,061 was created int he account books of the assessee, the assessee limited this claim to Rs. 7 3,415. This claim was worked out as under :
Table A----------------------------------------------------------------------Name of the Worth Percentage Amount ofmachine Rs. of rebate rebate----------------------------------------------------------------------1. Boring machine 99,407 35% 34,7922. Turret Lathe 66,300 35% 23,2053. Turret Lathe 58,613 35% 20,540----------------------------------------------------------------------
2. The claim of development rebate as regards the last item of Turret Lathe worth Rs. 58,613 was limited to Rs. 15,418 so as to limit the total claim to Rs. 73,415. Since it was apparent that the assessee had not created the reserve sufficient enough to support the claim of development rebate of the uniform rate of 35% on all machines it was submitted in the alternative that the claim of development rebate should be allowed on 5 machines including the above named three machines at different rates as under :
Table B----------------------------------------------------------------------Name of machine Worth Percentage Amount ofRs. of rebate rebate----------------------------------------------------------------------1. Boring machine 99,407 35% 34,7922. Turret Lathe 66,300 35% 23,2053. Turret Lathe 58,613 20% 11,7224. Lathe 16,702 20% 3,2405. Drilling machine 2,057 20% 410----------Total 73,369----------------------------------------------------------------------
3. Thus, by this alternative claim the assessee requested the department to grant development rebate on the first two items at the rate of 35% on the basis that these machines were covered by clause (a) of section 33(1)(iii)(c)(A) of the Income-tax Act, 1961, and further requested that for the remaining machines development rebate should be granted at the usual rate of 20% In the revised return, the assessee admitted that all the five machines mentioned in the above referred Table B were the machines covered by the 5th Schedule as they were purchased for a prio rity industry and were, therefore, entitled to higher rate of development rebate at 35%. The Income-tax Officer as well as the Appella te Assistant Commissioner who heard the appeal, rejected the assessee's contention that the machines which are covered by the 5th Schedule should be differently assessed for the purpose of development rebate, and further held that since the development rebate at the higher rate of 35% was not admissible to the assessee in view of the fact that the necessary reserve contemplated by section 34 of the Act was not created, the assessee was entitled to higher rate of development rebate at 35% only not he first two machines, namely, the boring machine worth Rs. 99 407 and Turret Lathe worth Rs. 66,300. The Income-tax Officer and the Appellate Assistant Commissioner thus rejected the assessee's claim of development rebate on the remaining three machines found at Sr. Nos. 3, 4 and 5 in Table B.
4. Being aggrieved by this, the assessee approached the Appellate Tribunal which took the view that even if the assessee was not found entitled to the higher rate of development rebate at 35% on the machines mentioned at Sr. Nos. 3, 4 and 5 of Table B, it was entitled to the usual and ordinary rate of 20% which is allowed to every new machine purchased or installed in the accounting period. Thus, the Tribunal allowed the assessee's alternative claim with the result that the revenue has preferred this reference. The Tribunal has, therefore, referred the following question for our opinion :
'Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the assessee was entitled to claim development rebate at 20% of the actual cost of the third, fourth and fifth items of machinery set out in Table B of para. 2 above is contrary to the provisions of section 33(1)(iii)(c)(A)(a) (as it stood prior to amendment from April 1, 1968) read with section 34(3) of the Act ?'
5. In the above question, reference is made to section 33(1)(iii)(c)(A)(a) , as it stood before the amendment of 1968, but this clause is in pari materia with the present section 33(1)(b)(B)(i)(a) of the Act.
6. The question which is involved in this reference is whether it is permissible for an assessee to claim development rebate at a lesser rate than what is contemplated by section 33 especially when reserve, which is referable to an item of machinery, with regard to which the development rebate is claimed, does not comply with the provisions cont ained in section 34(3)(A) of the Act with regard to the creation of a re serve. In this case, it is an admitted fact that the development reserve which is created in its account books by the assessee is not 75% of the rebate at the enhanced rate of 35% on the actual cost of machinery mentioned in Table B. The facts of the case show that initially the assessee created the reserve only at the rate of 20% on the cost of Rs. 2,75,305. This reserve was sufficient for it to earn development rebate at the uniform rate of 20% but not at the uniform enhanced rate of 35%. Realising this position, the assessee now claims that if the reserve is not sufficient for granting uniform rebate at the enhanced rate of 35 % on all the machines, the said rebate rate should be bifurcated so as to give rebate at the rate of 35% on the first two machines mentioned in Table B and at the rate of 20% on the remaining three machines mentioned in that Table.
7. It is found that the assessee's stand before the Tribunal and lower authorities was that the usual development rebate of 20% which was contemplated by clause (A) of section 33(1)(iii)(B), as it stood at the relevant time was the rule and the enhanced rebate under other clauses was an exception and, therefore, when the assessee failed to prove its case for enhanced rate on all the machines, the usual rebate of 20% under the above referred general clause ought to be given. This particular contention is not pressed by Shri Shah, who has appeared in this reference for the assessee, and rightly so, because by its revised return the assessee has determined the category of rebate which is allowable on the footing that all the machines with which we are concerned in this reference fall within the special category which earns the enhan ced rebate of 35% and it is, therefore, not open to the assessee or to us to bring any of these machines within any category different from the one which is claimed by the assessee itself.
8. Shri Shah has, however, contended that even if all the machines with which we are concerned in this case are found to be belonging to the category contemplated by the enhanced rate of development rebate of 35%, it is always open to an assessee to claim development rebate with regard to a particular machine at a rate which is less than the rate contemplated by the category within which it falls, and, hence, if reserve contemplated by section 34(3)(a) is found to be complying with the development rebate, which is so claimed, it is not open to the reven ue to reject the said claim of rebate simply because the reserve is not found to be 75% of the development rebate, which is allowable under the category in which the said machine falls. In support of this contention, Shri Shah contended that the allowance of higher rate of development rebate on the machines, which are covered by the 5th Schedule is for the benefit of the assessee, who undertakes the venture of a new industry, which is to be treated on priority basis and, therefore, it would be open to such an assessee to let go the advantage of higher development rebate with regard to any of such machines purchased or installed by it during the relevant accounting period. According to Shri Shah, therefore, the departmental authorities were not correct in rejecting the assessee's claim of development rebate at the rate of 20% on the machines mentioned at Sr. Nos. 3, 4 and 5 of Table B.
9. After considering the scheme of sections 33 and 34 of the Act, which refer to the grant of development rebate, we find ourselves unable to accept these contentions of Shri Shah. In substance what Shri Shah has contended amounts to saying that even though a particular machine falls within a specific category of cases for the purpose of earning development rebate the assessee can claim a lesser rebate by creating a reserve which falls short of the requirements of sub-section (3) of section 34. The question, therefore, is whether such a claim is permissible having regard to the requirements contemplated by section 33 and 34(3)(a).
10. The relevant portion of section 33, as it stood at the relevant time, was as under :
'(1) In respect of a new ship acquired or new machinery or plant (other than office appliances or road transport vehicles) installed after the March 31, 1954, which is owned by the assessee and is wholly used for the purposes of the business carried on by him, a sum by way of development rebate, equivalent to -....
(iii) in the case of machinery or plant installed after the March 31, 1961 -...
(c) Where the machinery or plant is installed after the April 1, 1965, -
(A) 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 assesses, where it is installed before the April 1, 1970, and.......
(B) for the purposes of any other business, -
(a) twenty per cent. of the actual cost of the machinery or plant to the assessee, where it is installed before the April 1, 1970, and
(b) fifteen per cent. of such cost where it is installed after the March 31, 1970,
shall, subject to the provisions of section 34, be allowed as 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.'
11. The above-quoted clauses of section 33 show that for the purpose of granting development rebate, different categories of cases are contemplated and one category is of the articles or things specified in the Fifth Schedule. Another category is general category which governs other businesses. So far as the previously mentioned category of the articles falling in the Fifth Schedule is concerned, higher rate of development rebate is contemplated while so far as the latter type of category is concerned, lower rate of development rebate is contemplated . Therefore, it follows that when a particular machinery is fund to be falling within a particular category, it is not permissible to place that machine for the purpose of development rebate under the category to which it does not belong. So far as this case is concerned, the assessee has admitted by its revised return that all the five machines, which are mentioned in Table B are falling in the category of articles a nd things specified in the Fifth Schedule and are, therefore, entitled to the enhanced development rebate of 35%. If that be so, none of these can be carred to the general category which contemplates the machines purchased or used 'for the purpose of any other business' and, therefor e, all the five machines mentioned in Table B should be considered as co vered only by the category which earns the higher rebate at the rate of 35%.
12. Now, the grant of development rebate under section 33 is governed by the provisions contained in section 34. Sub-section (1) of section 34 says that deductions referred to in section 33 shall be allowed only if the particulars prescribed for the purpose of clauses (i) and (ii) of sub-section (1) of section 32 have been furnished by the assessee in respect of the relevant machinery or plant. This is one condition for earning development rebate. In this case, we are not concerned with this condition. Another condition is the one contemplated by sub-section (3)(a) of section 34 the relevant portion of which is in the following terms :
'(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 the period of eight years next following for the purposes of the business of the undertaking, other than -
(i) for distribution by way of dividends or profits; or
(ii) for remittance outside India as profits or for the creation of any asset outside India.'
13. Thus, according to this sub-section 34, no development rebate under section 33 can be granted unless it is found that a reserve equal to 75% if the rebate 'to be actually' allowed under section 33 is created by the assessee concerned. This condition of sub-section (3)(a) of section 34 is a condition precedent for earning development rebate under section 33, and being a condition precedent, it is required to be strictly construed, because development rebate is a special concession or relief granted by the Act which cannot bed earned unless the statutory condition attached to it is satisfied. The fact that the machines belong to a priority industry and are covered by the Fifth Schedule is of no relevance so long as the conditions specified in section 34 are not full y complied with. The question, therefore, is whether the respondent-asse ssee here has complied with the condition of the creation of 75% of the development rebate 'to be actually' allowed to it under section 33 with regard to all the machines mentioned in Table B.
14. As stated above the assessee has created the reserve of only Rs. 55,061. This amount is 75% of the amount of Rs. 73,415 and, therefore, the maximum development rebate which the assessee can claim would be of the amount of Rs. 73,415. But it is an admitted fact that this amount of Rs. 73,415 does not permit the assessee to earn the development rebate at the uniform rate of 35% on all the five machines mentioned in Table B. The claim of the assessee is that even if the uniform rate of 35% is not available to it on all the five machines, it should be allowed rebate at a lesser rate on the last three items of the machines mentioned in Table B, because the assessee is willing to forgo the advantage of the higher rate of development rebate contemplated for the articles and things mentioned in the Fifth Schedule. This contention of the assessee is not permissible, because if once it is found that a particular machine falls within a particular category for the purpose of earning development rebate, an assessee can not earn any rebate on that machine if he has not complied with the con dition precedent of creating a reserve of an amount equal to 75% of the development rebate which is to be actually allowed to him. Sub-section 3(a) of section 34 specifically provides for the creation of a reserve which has reference to the rebate which is' to be actually allowed' to the articles and things specified in the Fifth Schedule The answer is, the rebate at the rate 35%. The next question is whether the assessee has created the reserve of 75% of this rebate. If the answer is in the negative, it follows that the assessee has not complied with the condition precedent contemplated by sub-section (3)(a) of section 34 and would, therefore, fail in getting any rebate with regard to the machine concerned. It is true that the reserve contemplated by section 34(3)(1) is not to be created machine-wise. It may be created in lump covering all machines. But the lump sum figure of reserve must be sufficient to cover all the categories of rebates which are 'to be actually allowed' under section 33. In other words, it is not open to an assessee first to create a reserve of an amount he thinks proper, and then to ask the assessing authority to allow only such rebate which is found just sufficient to cover the reserve so created. This is so because the creation of the necessary reserve is a condition precedent to the earning of any rebate under section 33 and if that condition precedent is not satisfied, there is not scope for making an adjustment regarding the rate of rebate allowable under section 33. It is the creation of reserve which is to be adjusted to the rate of rebate which is applicable to the machine concerned and not vice versa.
15. Shri Shah contended for the assessee that since an enhanced rate of rebate is a concession made for the benefit of the assessee, it should always be open to the assessee to forgo a part of that concession and ask the assessing authority to grant rebate at a lesser rate. Presuming that this is so, before making any such request to the assessing authority, the assessee has first to show that he has created the reserve contemplated by law, i.e., the reserve which is 75% of the rebate which is 'to be actually allowed' to him by reference to the category of the rate which is applicable to his case under section 33. Therefore if the assessee int his case had created the reserve of 75% of the rebate of 35 % of the cost and had thus complied with the requirements of section 34(3)(A), it might have been open to it to say that it did not want the full rebate of 35% and wanted to forgo a part of it which, we are sure, no assessee is going to do.
16. In this connection, it should be noted that, recently, in Additional Commissioner of Income-tax v. Shri Subhlaxmi Mills Ltd., this court has held that before any development rebate can be allowed as a deduction, the conditions laid down in section 34 of the Income-tax Act, 1961, must be satisfied. It is further observed that these requirements of section 34 are not mere idle formalities and must be met first, and only then the rebate can be allowed. During the course of this decision, this court has agreed with the following observations of the Madras High Court in Commissioner of Income-tax v. Veeraswami Naina :
'It will follow that in order that an assessee can claim an allowance by way of development rebate under section 10(2)(vib) he should comply with the conditions contained in the proviso thereto as otherwise, under the express terms of that proviso, he would not be entitled to the allowance. Where he fails to satisfy the conditions requisite for obtaining the allowance, it will not be for the court to embark upon what the general object of the exemption was, and whether the conditions imposed were of a theoretical or technical nature, which in the interests of justice, should be dispensed with. We are, therefore, of opinion that the assessee, not having set apart in his accounts 75 per cent. of the amount claimable as development rebate, could not claim the benefit of section 102(2)(vib) of the Act.'
17. The above referred decision of Madras High Court is approved by the Supreme Court in Indian Overseas Bank Ltd. v. Commissioner of Income-tax wherein Hegde J., delivering the judgment for the court, observed that the creation of reserve contemplated by clause (b) to the proviso to section 10(2)(vib) is a condition precedent for obtaining the allowance of development rebate.
18. In view of this, the assessee's contention should fail, not because it is claiming the development rebate at a lesser rate than what it is entitled to, but because it has filed to comply with one of the condition precedent contemplated by section 34 of the Act, namely, creation of sufficient reserve to earn development rebate contemplated by section 33.
19. On reference to the valuation of the machines mentioned in Table B, we find that the machines mentioned at Sr. Nos. 4 and 5 are respectively worth Rs. 16,702 and Rs. 20,570. Since it is an admitted fact that these machines have earned development rebate at the higher rate of 35% and since we find that if development rebate on the cost of these machines is calculated at the rate of 35% the total of the development re bate, to which the assessees would be entitled, decided ones not transgress the limits of the amount of 75 per cent. reserve created by the assessee, we are of the opinion that these two items can be allowed to earn the higher rate of rebate at 35%. So far as the Turret worth Rs. 58,613 which is mentioned at Sr. No. 3 in the Table B is concerned, it does not admit the development rebate of 35% because if this is done, the reserve created by the assessee is not found to be sufficient. Under the ci rcumstances, we find that the assessee cannot claim any development rebate on the cost of this machine.
20. In view of this, our answer to the question which is referred to us is that the assessee was not entitled to claim development rebate at 20% of the actual cost of the three machines mentioned in Table B. The assessee was, however, entitled to development rebate at the enhanced rate of 35% on machines mentioned at Sr. Nos. 4 and 5 of Table B. We, therefore, dispose of this reference accordingly without any order as to costs.