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Commissioner of Income-tax, Madras Vs. Arasan and Company - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 647 of 1978
Judge
Reported in(1984)40CTR(Mad)202; [1985]152ITR206(Mad)
ActsIncome Tax Act, 1961 - Sections 33, 34 and 34(3)
AppellantCommissioner of Income-tax, Madras
RespondentArasan and Company
Appellant AdvocateJ. Jayaramann, Adv.
Respondent AdvocateP.P.S. Janarthana Raja, Adv.
Excerpt:
.....34 reserve to be created out of profits of relevant previous year to claim development rebate - no reserve account created during relevant previous year - held, assessee cannot claim development rebate. - - the aac found that the machinery was installed as well as put to use in the previous year ending august 16, 1970, relevant to the assessment year 1971-72, but as the assessee has not created the necessary reserve in the relevant previous year, it was not entitled to the claim for development rebate for the year 1971-72. in support of the view taken by him, the aac relied on the decision of the supreme court in indian overseas bank ltd. it must be noted that the provision is in a negative form and it says 'no deduction under section 33 towards development rebate shall be allowed'..........said claim on the ground that the firm had not created the necessary reserve during the pervious year relevant to the assessment year required under s. 34(3)(a) of the i.t. act, 1961. according to the ito, the creation of a reserve in an earlier previous year is not sufficient to obtain development rebate for the subsequent year, since the creation of a development rebate in the previous year is a condition precedent for claiming the relief by way of development rebate under s. 34(3)(a). in that view, the ito rejected the assessee's claim for development rebate for the year 1971-72. 3. the assessee took the matter in appeal to the aac. the aac found that the machinery was installed as well as put to use in the previous year ending august 16, 1970, relevant to the assessment year.....
Judgment:

Ramanujam, J.

1. The assessee in this case is a firm. During the year ended August 16, 1969, relevant to the assessment year 1970-71, it claimed a development rebate of Rs. 99,802 in respect of new machineries purchased during the year. The ITO noticed that the firm purchased these new machineries which were intended for use in the workshop to be set up at Tirunelveli, but these machineries were neither installed nor used during the accounting year. It was also found that during that year, the assessee had created the necessary reserve when it made the claim for development rebate for the assessment year 1970-71. The ITO had rejected the claim for development rebate for the year 1970-71 on the ground that the machinery has neither been installed nor used during the relevant accounting year. That rejection of the claim for development rebate has attained finality as the Tribunal has upheld the rejection of the claim.

2. For the assessment year 1971-72, the assessee, while furnishing the return, did not claim development rebate as in its view it was allowable only in the previous year 1970-71. However, when the assessment for 1970-71 was completed, disallowing the claim of the assessee, the assessee by a letter dated December 6, 1972, requested the ITO to allow the claim for development rebate at least in the assessment year 1971-72. The ITO rejected the said claim on the ground that the firm had not created the necessary reserve during the pervious year relevant to the assessment year required under s. 34(3)(a) of the I.T. Act, 1961. According to the ITO, the creation of a reserve in an earlier previous year is not sufficient to obtain development rebate for the subsequent year, since the creation of a development rebate in the previous year is a condition precedent for claiming the relief by way of development rebate under s. 34(3)(a). In that view, the ITO rejected the assessee's claim for development rebate for the year 1971-72.

3. The assessee took the matter in appeal to the AAC. The AAC found that the machinery was installed as well as put to use in the previous year ending August 16, 1970, relevant to the assessment year 1971-72, but as the assessee has not created the necessary reserve in the relevant previous year, it was not entitled to the claim for development rebate for the year 1971-72. In support of the view taken by him, the AAC relied on the decision of the Supreme Court in Indian Overseas Bank Ltd. v. CIT : [1970]77ITR512(SC) and the decision of the Gujarat High Court in Surat Textile Mills Ltd. v. CIT : [1971]80ITR1(Guj) .

4. Aggrieved by the said decision of the AAC, the assessee went before the Tribunal. The Tribunal, however, held that the assessee was entitled to claim the development rebate for the year 1971-72 as it had created a reserve in the earlier previous year, though not in the previous year in which the installation or the use of the machinery has taken place. According to the Tribunal, since the necessary reserve for the very same machinery had been made in the earlier previous year, it is not necessary to create a reserve out of the profits of the current previous year so as to enable the assessee to claim development rebate and that, therefore, the assessee should be taken to have compiled with the requirement of s. 34(3) as it had already created a reserve for 75%, though not for the year 1971-72, in respect of which the assessee claimed the development rebate.

5. Aggrieved by the decision of the Tribunal, the Revenue has sought and obtained a reference to this court on the following question :

'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee has compiled with the requirements of section 34(3) when it credited the reserve for the assessment year 1970-71 and, therefore, the assessee's claim of development rebate of Rs. 99,900 should be allowed in the assessment year 1971-72 ?'

6. From the facts set out above, it will be clear that this case involved a true and proper interpretation of s. 34(3). Section 34 sets out the conditions for the grant of depreciation allowance and development rebate. Section 34(3)(a) is as follows :

'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 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.' (Provisos omitted).

7. The provision contemplates the grant of development rebate only in cases where the assessee debits an amount equal to 75% of the development rebate to the profit and loss account of the relevant previous year and credits it to a reserve account to be utilised by the assessee during the period of eight years next following for the purpose of business of the undertaking other than for distribution by way of dividends or profits or for remittance outside India as profits or for creation of assets outside India. It must be noted that the provision is in a negative form and it says 'no deduction under section 33 towards development rebate shall be allowed' unless the conditions set out therein are satisfied. Therefore, the condition of debiting an amount equal to 75% of the development rebate to the profit and loss account of the relevant previous year and crediting of the same to a reserve account for utilisation during a period of eight years next following for the purpose of the business undertaking, is a condition precedent for the grant of relief by way of development rebate. In this case, admittedly, the assessee has not debited any amount to the profit and loss account, much less and amount equal to 75% of the development rebate to be allowed for the year 1970-71 and credited it to a reserve account. The Tribunal has taken the view that the debiting of the requisite amount to the profit and loss account and crediting it to a reserve account in the earlier previous year, is sufficient compliance with s. 34(3)(a). The condition contemplated by the section is debiting an amount of 75% of the development rebate to be actually allowed to the profit and loss account of the relevant previous year and the section does not take into account the debit of any amount to the profit and loss account in the earlier pervious year. We are of the view that it will be a clear misreading of the provision if we say that the creation of a reserve towards development rebate in the earlier previous year is sufficient compliance with the said provision. When the statute has provided a condition for the great of development rebate and the creation of a development rebate in the relevant previous year, it is not correct on the part of the Tribunal to construe the relevant previous year as including or taking in an earlier previous year.

8. The provision in s. 34(3)(a) came up for consideration before this court in Indian Overseas Bank Ltd. v. CIT : [1967]63ITR733(Mad) . In that case, s. 10(2)(vib), provision (b) of the Indian I.T. Act, 1922, which corresponds to s. 34(3)(a) of the I.T. Act, 1961, was considered. In that case, the assessee claimed development rebate for the year 1959-60. That was rejected on the ground that one of the conditions requisite for the allowance of the claim under proviso (b) to Explanation to s. 10(2)(vib) was not compiled with. When the matter came before this court, the assessee contended that it had set apart a sum of rupees six lakhs during the assessment year out of its net profits of the year and that fund so set apart not only satisfied the requirements of s. 17 of the Banking Companies Act, but also the requisites of the said Explanation to s. 10(2)(vib). This court held that such a creation of a general reserve may not be sufficient compliance with the statutory provision and the claimant for development rebate should satisfy two conditions that 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 a reserve account to be utiised by the assessee during a period of ten years next following for the purpose of the business of the assessee and in that case those two conditions have not been satisfied for the assessee has created a general reserve and not the specific for reserve for development rebate. In that case, the court has specifically pointed out that the requirement of clause (b) to proviso to the Explanation to s. 10(2)(vib) is not an idle formality but is intended to enable the Revenue to trace the movement of the fund debited as part of the development rebate in the profit and loss account and credited to a reserve account and unless this is done and if the fund so set apart is not so debited or credited, it will be difficult for the Revenue to say whether the fund has been utilised in the manner directed by the section as a condition for deduction by way of development rebate. The court, therefore, was unable to accept the contention of the assessee in that case that because it set apart for the accounting year as reserve fund a sum larger than what was required under the provisions of the Banking Companies Act and the excess was sufficient to cover the proportionate development rebate required to be set apart to qualify for deduction, it was entitled to the claim for deduction.

9. The said decision of this court has been affirmed by the Supreme Court in Indian Overseas Bank Ltd. v. CIT : [1970]77ITR512(SC) . In that case, the Supreme Court had held that the grant of development rebate was a secession subject to the fulfilment of the conditions prescribed by the statute and the creation of a reserve fund under section 17 of the Banking Companies Act was not sufficient compliance with the proviso, even though the amount so carried to the reserve fund might be large enough to cover both requirements. The Supreme Court also pointed out that the conditions prescribed by proviso (b) to s. 10(2)(vib) of the Indian I.T. Act, 1922, is not an idle formality and, therefore, unless a separate reserve fund has been created for the purpose of s. 10(2)(vib) in the relevant previous year as contemplated by that section, the relief by way of development rebate cannot be claimed.

10. In CIT v. Aruna Sugars Ltd. : [1980]123ITR619(Mad) , this court specifically considered the question that has arisen before it. The facts of that case are more or less similar to the facts before us. In that case also, the debit of an amount equal to 75% of the development rebate to the profit and loss account of the relevant previous year had been made in a particular year and credited to a reserve in a particular year. But in that year, the assessee did not get development rebate for the reason that the machinery was not put in use during year. When the machinery was out in use in the next year, there was no debit of amount towards development rebate allowable in the profit and loss account in the next year and credited to reserve in the next year. But, none the less, the assessee claimed development rebata based on the reserve created in the earlier pervious year. After construing the provision in s. 34(3)(a), this court categorically held that the assessee is not entitled to claim development rebate in the subsequent year based on the creation of such a reserve in the earlier previous year. The court has pointed out (p. 625) :

'Section 34 prescribe conditions for depreciation allowance and development rebate allowable under s. 33. Section 34(3) provides that the deduction referred to in s. 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 8 years next following for the purpose of the business of the undergtaking. The business purpose would not include, (a) distribution by way of dividends, or (b) remittances outside India of profits, or (c) for the creation of any asset outside India. There is an Explanation which provides that the deduction referred to in s. 33 should 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. The Explanation was brought in to provide for cases where an assessee did not have adequate profits to create the necessary amount as a reserve. This provision enabled the creation of a reserve of the requisite amount in the absence of profits or adequate profits to cover the reserve. However, what is clear from the whole provision is that the reserve is to be created out of profits of the relevant previous year and credited to a reserve account to be utilised by the assessee for the business. In the present case, there is no such debit to the profit loss account of the relevant previous year. The Tribunal was, therefore, in error in directing the ITO to give the allowance. The presence of a larger amount in the development rebate reaserve in an earlier year cannot be taken as satisfying the specific requirement of s. 34(3)(a), viz., of a debit to the profit and loss account of the relevant privious year.'

11. We are in entire agreement with the view expressed in that case.

12. The same view has also taken by the Kerala High Court in CIT v. Malayala Manorama & Co. Ltd. : [1983]143ITR29(Ker) .

13. The learned counsel for the assessee, however, refers to the decision of the Bombay High Court in CIT v. Caltex Oil Refineries (India) Ltd. [1975] 119 ITR 216 and of the Karnataka High Court in International Instruments (P) Ltd. v. CIT : [1980]123ITR11(KAR) . It is no doubt true that these decisions proceed on the basis that the creation of a development rebate in the earlier year will be taken as a basis for the claim for development rebate in the succeeding year. But, in our view, those decision have not kept in view the condition set out in s. 34(3)(a). However, having regard to the view taken by this court on the interpretation of s. 34(3)(a) and also of the Supreme Court in India Overseas Bank Ltd. v. CIT : [1970]77ITR512(SC) , we cannot accept the said decision refrred to by the learned counsel for the assessee as laying down the correct legal position. We have, therefore, to answer the question in the negative and against the assessee. The Revenue will get costs from the assessee. Counsel's fee Rs. 500.


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