1. The Income-tax Appellate Tribunal Bench 'B' (hereinafter called the Tribunal) has made this reference under Section 66 (1) of the Indian Income-tax Act, 1922 (hereinafter called the Act) on the ap-plications filed by the Commissioner of Income-tax, Delhi and Rajasthan and the as-sessee Messrs. Mazdoor Kisan Sahkari Samiti, village Bhadu, District Bhilwara.
2. The statement of the case submitted to this Court by the Tribunal shows that the assessee was a co-operative society registered under the Co-operative Societies Act in the year 1949. The assessee was doing business of mining mica in the State of Rajasthan from the year 1952. Up to and including the assessment year 1960-61 no assessments were made of the incomes of assessee because the tax was not payable by a co-operative society in respect of profits and gains of business carried on by it by virtue of Section 14 (3) of the Act. But there was an amendment of Section 14 (3) of the Act in the year 1960 and the exemption was confined to so much of the profits and gains of business carried on by it that did not exceed Rs. 15,000/-. This amendment came into effect from the 1st of April 1960 by the Finance Act of 1960 which received the assent of the President on 20th of April, 1960.
Section 1 (2) of that Act provided that the provisions of that Act were to come into force from 1st April, 1960. Because of this amendment, assessment proceedings were taken against the assessee for the year 1961-62, the accounting year being from 1st July, 1959 to 30th June, 1960. The assessee claimed certain deductions on account of dead rent paid by it to the State of Rajastban for that relevant year and also on account of development rebate which were disallowed. The assessee appealed to the Appellate Assistant Commissioner. There it raised one more point and that was that the business income of the assessee became taxable by the amendment of Section 14 (3) of the Act made by the Finance Act, 1960 and this amendment could not take away the vested right of the assessee exempting its business income from taxation till 1st April, 1960. The Appellate Assistant Commissioner rejected all the three grounds raised by the assessee. The assessee thereafter appealed to the Tribunal raising the same three contentions.
The point urged by the assessee that it could not be taxed in respect of profits which arose prior to 1st April, 1960 was rejected by the Tribunal on the ground that this controversy was set at rest by the Supreme Court in the case of Union of India v. Madan Gopal Kabra : 25ITR58(SC) . The assessee's claim for rebate on account of dead rent to the extent of Rs. 5,343 was also rejected on the ground that the case of this nature was considered by the Rajasthan High Court in the case of Commr. of Income-tax v. Gotan Lime Syndicate ILR (1964) 14 Raj 65 and that decision was binding on the Tribunal. The third point relating to disallowance of development rebate on Rs. 13,239 was decided in favour of the assessee on the ground that the defect of not creating necessary reserve was removed as a specific reserve of Rupees 11,000/- had been created and that as it wasthe first assessment of the co-operative society a lenient view may be taken and the development rebate should be allowed.
3. On applications filed by the Commissioner of Income-tax, Delhi and Rajasthan and the assessee, the Tribunal has referred the following questions to this Court for opinion:--
(1) Whether, on the facts and in the circumstances of the case, the assessee was liable to tax on its income earned prior to 1st April, 1960 ?
(2) Whether, on the facts and in the circumstances of the case, the amount of Rs. 5,343/- being dead rent paid by the assessee was allowable as a deduction in determining its profits for the assessment year 1961-62 ?
(3) Whether, on the facts and in the circumstances of the case, the assessee was entitled to a deduction on account of development rebate of Rs. 13,239/- for the assessment year 1961-62
4. So far as the first question is concerned, we need not discuss the matter elaborate-ly as it is well settled law that the Parliament is competent to promulgate laws which have prospective or retrospective effect and that the argument of the assessee that it was immune from taxation under Section 14 (3) of the Act before its amendment by the Finance Act, 1960 would not assist him because later on by an amendment that im-munity has been taken away and the as-sessee is to be assessed according to the law, which is in force in the assessment year. Re-ference in this connection may be made to Rai Ramkrishna v. State of Bihar : 50ITR171(SC) and Commr. of Income-tax, West Bengal v. Isthmian Steamship Lines : 20ITR572(SC) . Question No. 1 is thus answered in the affirmative.
5. So far as the second question Is concerned, payment of dead rent in this case is a sort of minimum royalty payable under the deed of lease and it has been held by their Lordships of the Supreme Court in Gotan Lime Syndicate v. Commr. of Income-tax, Rajasthan and Delhi : 59ITR718(SC) overruling the decision of the Rajasthan High Court in ILR (1964) 14 Raj 65 in the appeal from that case that rent and royalty should be deducted as revenue expenditure. This point is in a way conceded by learned Coun-sel for the Department. Question No. 2 is therefore answered in the affirmative.
6. Coming to question No. 3, the relevant provisions of law are contained in Section 10 (1) and (2) (vi-b) which runs as follows:--
'10. Business.-- (1) The tax shall be payable by an assessee under the head 'Profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him.
(2) Such profits or gains shall be computed after making the following allowances, namely:--
(vi-b) in respect of a new ship acquired or new machinery or plant installed after the 31st day of March 1954, which is wholly used for the purposes of the business carried on by the assessee, a sum by way of development rebate in respect of the year of acquisition of the ship or of the installation of the Machinery or plant,
(i) in the case of a ship acquired after the 31st day of December, 1957, forty per cent. and in the case of a ship acquired before the 1st day of January, 1958, twenty-five per cent. of the actual cost of the ship to the assessee; and
(ii) in the case of machinery or plant installed before the 1st day of April, 1961, twenty-five per cent, and in the case of machinery or plant installed after the 31st day of March, 1961, twenty per cent. of the actual cost of the machinery or plant to the assessee;.....
Provided that no allowance under this clause shall be made unless-
(a) The particulars prescribed for the purpose of Clause (vi) have been furnished by the assessee in respect of the ship or machinery or plant; and
(b) except where the assessee is a company being a licensee within the meaning of the Electricity (Supply) Act, 1948 (LIV of 1948), or where the ship has been acquired or the machinery or plant has been installed before the 1st day of January, 1958, 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 him during a period of ten years next following for the purposes of the business of the undertaking except -
(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, and if any such ship, machinery or plant is sold or otherwise transferred by the assessee to any person other than the Government or for any consideration not connected with any amalgamation or succession referred to in Clause (vi-c) at any time before the expiry of ten years from the end of the year in which it was acquired or installed, any allowance made under this clause shall be deemed to have been wrongly allowed for the purposes of this Act:
Provided further that no allowance under this clause shall be made in respect of any machinery or plant which consists of office appliance or road transport vehicles;'
7. The argument of Mr. Sumerchand Bhandari on behalf of the Department is that under the first proviso to Section 10 (2) (vi-b), the assessee could not claim development rebate' as an amount equal to 75% of the development rebate to be actually allowed was not debited to the profit and loss account of the relevant previous year, that is the year ending on 30th June, 1960 and credited to a reserve account till the time the assessee had submitted his return for assessment for the year 1960-61. He has gone even so far as to argue that the relevant debit and credit entries relating to the reserve should have been made before the close of the accounting year ending on 30th June, 1960.
8. Now the profit and loss account of the year previous to the year of assessment is usually prepared only after the close of the previous year because before the close of the year, an assessee cannot say definitely the amount of profit and loss which has accrued to him during that year. The preparation of profit and loss account sometimes entails the valuation of the stock in trade in stock at the end of the year and it may take some time to make this valuation. Thus there is no force in the argument that the debit and credit entries with regard to the reserve fund should have been made before the close of the accounting year. The question therefore is: upto what time the assesses should be permitted to make debit and credit entries for the reserve fund ?
The plain meaning of the proviso is that an assessee shall be permitted allowance in respect of development rebate only if he makes the debit and credit entries as mentioned in the proviso. But no time limit is placed for making such entries in the account-books. They may be made at any time till the assessment proceedings are completed. It is of course true that an amount equal to 75% of the development rebate is to be 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 ten years next following. But this does not mean that this requirement cannot be satisfied except by making the relevant debit and credit entries in the account books before the return has been submitted. Under certain circumstances, the assessing authority may permit the assessee to make debit and credit entries in the profit and loss account of the relevant previous year even after the return has been submitted.
We do not mean to say that if the assessee has failed to make such entries before the return has been submitted, he can claim as a matter of right that he should there-after be permitted to make the relevant debit and credit entries so as to entitle him to claim development rebate. But in the circumstances of a given case, the assessing authority may permit an assessee to make the relevant entries in the profit and loss ac-count of the previous year and grant the assessee the benefit of provision 10 (2) (vi-b). What has happened in this case is that the assessee claimed that he had purchased new machinery amounting to Rs. 52,957 during the accounting period and he further submitted before the Income-tax Officer that a reserve of Rs. 8,000 had been created and that the balance of the reserve is to be created in the next year's general meeting. The Income-tax Officer took the view that the scrutiny of the Profit and Loss Account and a perusal of the copy of the report of the annual general meeting held on 20th November, 1960, clearly showed that no reserve whatsoever had been created against development rebate as contemplated under Section 10 (2) (vi-b).
He also observed that no amount at all had been debited to the profit and loss account on account of development rebate. He also observed that in the earlier years, the assessee had created some general reserve and that the reserve of Rs. 8,000 had also been created as a general reserve. Under these circumstances, the Income-tax Officer held that the assessee's claim for grant of development rebate could not be entertained. In our view, before completing the assessment, the Income-tax Officer could have, had he thought it proper, treated the reserve of Rs. 8,000 as a reserve contemplated under Section 10 (2) (vi-b) proviso (b). We do not mean to say that he was bound to do so. But had he been persuaded to take a lenient view, he could have treated the reserve of Rs. 8,000 as a reserve mentioned in proviso (b) (i) under Section 10 (2) (vi-b). For. at that stage, the assessee had clearly manifested its intention to create a development reserve and had stated that Rs. 8,000 which were put as a general reserve be treated as development reserve.
The Appellate Assistant Commissioner took the same view, but the Tribunal thought otherwise and took the view that as it was the case of first assessment of the assessee which was a co-operative society, the development rebate of Rs. 13.239 be allowed as a specific reserve had been created. Learned Counsel on behalf of the Department has laid much stress on the point that in the order of the Tribunal, it is mentioned that the defect was removed in the account year ended 30th June, 1962 as a specific reserve of Rs. 11,000 was created in that year. He has submitted that we should not read this order as if the amount of Rs. 11,000 was debited to the profit and loss account of the relevant previous year. He has also laid stress on another passage occurring in the statement of the case in which it is mentioned that in the year of account ending 80th June, 1962, the machinery development fund was created and an amount of Rupees 11,000 was credited in that account.
These passages do not signify that Rupees 11,000 were not debited to the profit andloss account of the relevant previous year. The Tribunal has clearly said that the defect was removed and the defect that was noticed by the Income-tax Officer and the Appellate Assistant Commissioner was that an amount equal to 75% of the development rebate was not debited to the profit and loss account oil the relevant previous year and credited to a reserve account. When it is said that the defect has been removed, the Tribunal clearly meant that the relevant entries in the profit and loss account relating to the relevant pre-vious years had been made. This being the position, we do not consider that the Tribunal was not empowered to allow the develop-ment rebate in this case.
9. Learned Counsel for the Department has relied on Commr. of Income-tax, Madras v. Veeraswami Nainar : 55ITR35(Mad) and Indian Overseas Bank Ltd. v. Commr. of Income-tax, Madras : 63ITR733(Mad) , In Veeraswami's case : 55ITR35(Mad) , the view taken is that the reserve should be made at the time of making the profit and loss account and that it was not open to the assessee to readjust the account by making the reserve at a later period of time. In our humble opinion, this case has taken too strict a view of law. We have already pointed out that in the account-books of the accounting year ended 30th June, 1960, the assessee could not have made any entry crediting the reserve fund because by the 30th June, 1(560, the assessee may not have been able to ascertain exactly its profit and loss position. The entry was to be made some time later on.
Even according to the Madras High Court it could have been done till the date of preparation of profit and loss account. In our humble opinion, the development rebate may be allowed even if the entry is made later on, before the completion of the assessment proceedings because the proviso only says that the assessing authority is to see before allowing the development rebate that relevant entries as contemplated in the first proviso to Section 10 (2) (vi-b) of the Act are there before the rebate is allowed.
10. In Indian Overseas Rank's case : 63ITR733(Mad) the assessee company claimed development rebate with the contention that it had set apart a sum of Rs. 6 lakhs during the assessment year out of its net profits. It was held that as the assessee had not expressed the purpose for doing so, the conditions prescribed by Clause (b) to the proviso to Section 10 (2) (vi-b) were not complied with and development rebate was not allowable. We ourselves acknowledge that there must be relevant debit and credit entries in the profit and loss account and a creation of a development reserve fund, and unless these conditions are satisfied, the development rebate cannot be allowed. But the question is upto what stage the assessee can be permitted to do so and in our humble opinion, if the assessing authority considers it proper, it may allow the making of the entries before the assessment is complete.
We may also point out that the Andhra Pradesh High Court in Veerabhadra Iron Foundry v. Commr. of Income-tax, A. P. : 69ITR425(AP) has taken the view that there is no provision in the Act under which the reserve fund account should be credited with the amount of development rebate before the close of the accounting year and that, as the assessee made the necessary entries before the assessment was finalised by the Income-tax Officer, the assessee was entitled to the benefit of the rebate. In our humble opinion, this view is correct.
In this case the ruling of the Madras High Court in : 55ITR35(Mad) (supra) was considered and it was observed that the learned Chief Justice of the Madras High Court had indicated in that case by implication that the benefit of the development rebate could be given to an assessee who had made the necessary book entries by the time he produced his account books before the Income-tax Officer. Whether there is such indication in the judgment of the Madras High Court, or not, we are humbly of the view that the Income-lax Officer may allow development rebate in a given case even if debit and credit entries in the profit and loss account and entry relating to reserve fund are made after the return has been submitted but before the assessment is completed finally. In this view of the matter, our answer to question No. 3 is in the affirmative. The reference is answered accordingly.