1. This is a reference under Section 256(1) of the I.T. Act, 1961. The following question has been referred ;
' Whether, on the facts and in the circumstances of the case, the assessee is disentitled from carrying forward the development rebate of the earlier years to the extent of Rs. 1,77,077 as held by the Income-tax Officer or to the extent of Rs. 1,06,773 as held by the Appellate Assistant Commissioner and the Tribunal '
2. This reference relates to the' assessment year 1963-64. The assessee was incurring losses up to the assessment year 1962-63. It had installed plant and machinery and was eligible for the grant of allowance for development rebate on the said plant and machinery. Since the assessee had incurred losses, no deduction could be allowed in regard to the development rebate in the earlier years and, therefore, the amounts due for allowance as and by way of development rebate were carried forward as follows:
Assessment year Development rebate carried forward
Rs.1960-61 55,8011961-62 64,9271962-63 4,70,622
3. In addition, for the assessment year 1962-63, the assessee was declared eligible to carry forward to the assessment year 1963-64 a sum of Rs. 5,550, being the loss brought forward from the assessment year 1958-59.
4. For the assessment year 1963-64, now under reference, the assessment was completed on 26th February, 1968, on the total income of Rs. 2,18,396 after setting off the brought forward loss of Rs. 5,550. The ITO found that the assessee had credited to the development rebate reserve account a sum of Rs. 78,992. He held that this reserve was adequate to cover an allowance of development rebate only to the extent of Rs. 1,04,957. Deducting this sum of Rs. 1,04,957 from the total income determined, namely, Rs. 2,18,396, there was a balance of Rs. 1,13,439. The assessee was eligible for relief under Section 84 of the Act in a sum of Rs. 1,60,617.
5. The result was that the total income of the assessee had to be determined as nil. The ITO completed the assessment observing that the assessee was not assessable for this year. He, however, observed that the assessee was being allowed a development rebate of Rs. 1,04,957 which would cover the brought forward development rebate of Rs, 55,801 for the assessment year 1960-61 and Rs. 49,156 out of the brought forward development rebate of Rs. 64,927.
6. The result was that the following amounts of development rebate would require to be carried forward :
Assessment year Amount to be carried forwardRs.1961-62 15,771 (Rs. 64,927 minus Rs. 49,156)1962-63 4,70,6221963-64 1,29,554
7. The ITO was of the opinion that as there was a balance of Rs. 1,13,439, which was the residual total income, after the allowance of the development rebate which could have been credited as a reserve and as the assessee's creation of the reserve fell short by Rs. 34,517, the assessee would forfeit the development rebate of Rs, 46,023. He held that the assessee forfeited the claim pertaining to the assessment year 1961-62 in whole and Rs. 30,252 out of the claim due for 1962-63. He, therefore, declared that the assessee would be entitled to carry forward only the following amounts of development rebate to the assessment years succeeding 1964-65 and thereafter :
Assessment year Amount to be carried forwardRs.1962-63 4,40,3701963-64 1,29,554
8. On 5th May, 1970, the ITO purported to pass an order under Section 154 of the Act to rectify two mistakes that were alleged to have crept into the assessment order. About the first mistake, there was no controversy and as a result of the rectification, the total income of the assessee came to be determined at Rs. 2,11,730 as against Rs. 2,18,396, originally determined. The second mistake which the ITO sought to rectify was as regards the amount of the development rebate to be carried forward. The ITO was of the opinion that since the profits of the year amounted to Rs. 2,11,730, the assessee should have created a development rebate reserve to that extent. As it had created reserve only to the extent of Rs. 78,922 there was a shortfall of (Rs. 2,11,730--Rs, 78,922) Rs. 1,32,808 and the development rebate that would have been eligible for allowance, had this reserve of Rs. 1,32,808 been credited as reserve, was Rs. 1,77,077.
9. As against the original determination of Rs. 46,023 as the forfeited allowance, the ITO thus determined Rs. 1,77,077 as the forfeited allowance. The result was that the carried forward figures of development rebate for the later years underwent modification as follows :
Assessment year Amount to be carried forwardRs.1962-63 3,07,9161963-64 1,29,554
10. The assessee appealed to the AAC and contended before him that the total income of the assessee was Rs. 2,11,730 and that since the assessee had created a reserve of Rs. 78,922 it was entitled to a development rebate of Rs. 1,04,957 and the balance of the income amounted to only Rs. 1,06,773, It was claimed that it was only to this extent that the ITO could declare the claim of development rebate as forfeited.
11. The AAC accepted this contention and allowed the appeal accordingly.
12. The ITO appealed to the Tribunal. The Tribunal was also of the opinion that the order of the AAC should be confirmed. The Tribunal was of the view that the maximum development rebate that could be allowed to the assessee would be Rs. 2,11,730 so as to reduce the total income to ' nil ' and that if the assessee had created a reserve of 75 per cent. of this amount, it would have got an allowance of Rs. 2,11,730. Since the assessee had created a reserve of only Rs. 78,922 the development rebate that could actually be allowed was only Rs. 1,04,957. The balance of Rs. 1,06,773 would alone lapse. The result was that the order of the AAC was confirmed by the Tribunal.
13. It is this order that has given rise to the present reference on the question set out already.
14. The relevant provisions in the I.T. Act on the basis of which the assessee's claim has to be considered are Sections 33 and 34, Section 33 provides forthe grant of development rebate in respect of new machinery or plant which is owned by the assessee and is wholly used for the purpose of the business carried on by him. In such a case, in accordance with and subject to the provisions of Sections 33 and 34 of the Act, the assessee will be allowed a deduction in respect of the previous year in which the machinery or plant was installed. Sub-section (2) of Section 33 provided that in the case of machinery or plant installed after 31st December, 1957, where the total income of the assessee assessable for the assessment year relevant to the previous year in which the machinery or plant was installed or the immediately succeeding previous year, as the case may be, was nil or was less than the full amount of the development rebate calculated at the rate applicable thereto, then the sum to be allowed by way of development rebate for that assessment year shall be only such amount as is sufficient to reduce the said total income to nil and the development rebate to the extent to which it was not allowed could be carried forward to the following assessment year and the development rebate to be allowed for the following assessment year will be such amount as would be sufficient to reduce the total income of the assessee assessable for that assessment year to nil and so on. Section 34(1) of the Act provided that the deductions referred to in Sub-section (1) or Sub-section (1A) of Section 32 would be allowed only if the particulars prescribed for the purpose were furnished by the assessee in respect of the machinery or plant. Sub-section (3) of Section 34 further provided that the deduction referred to in Section 33 could not be allowed unless 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 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. The assessee, as a condition for retaining the allowance, cannot use the said amount reserved, for distribution by way of dividends or for remittance outside India as profits or for the creation of any asset outside India. The result of these provisions is as under. The assessee has to furnish the necessary particulars of the plant and machinery installed and also to credit to a reserve a sum equal to 75 per cent. of the amount to be allowed as deduction. The reserve cannot be drawn upon for certain purposes for a period of eight years.
15. In the present case, the assessee had created a reserve of Rs. 78,922. There is no dispute that the assessee was granted the development rebate appropriate to the said reserve. The question that now arises for consideration is the extent of the forfeiture of the allowance consequent on the assessee's failure to create the requisite reserve. As mentioned already, the assessee had a profit of Rs. 2,11,730 which was assessed as the totalincome. It had credited to the development rebate reserve a sum of Rs. 78,922. The contention urged on behalf of the revenue is that as the assessee was left with a balance of Rs. 1,32,808, it would lose or forfeit the allowance of the appropriate amount of development rebate with reference to this sum of Rs. 1,32,808 which it could have created as reserve, but which it did not. The amount so liable to be forfeited, according to the department, is
4Rs. 1,32,808 X
=Rs. 1,77,077. 3
the contention forthe assessee was that, after the credit of Rs. 78,922, what the assessee was obliged to create as reserve, was only such amount as would have left the total income to nil after adjustment of the development rebate to that extent. In the present case, after deducting Rs. 1,05,229, which is the' development rebate granted, from the total income of Rs. 2,11,730, there was a balance of Rs. 1,06,501. In order to be eligible for the allowance of Rs. 1,06,501, the assessee had to create only 3/4ths of this amount as reserve and, therefore, the failure of the assessee to credit the necessary amount to the reserve account would involve the consequence of forfeiture of Rs. 1,06,501 and not anything more. The error in the working of the department is to consider that the entire balance out of the total income after deducting the amount credited to the reserve should itself have been credited as a reserve. If this was done, Rs. 1,77,077 would be the development rebate, part of which would have only to be carried forward. What the assessee could get as allowance of development rebate is only such amount as would leave the total income at nil and that amount is Rs. 1,06,501. Therefore, in the working given above, it was necessary to create such an amount as reserve so as to get an allowance of Rs. 1,06,501. The assessee cannot be penalised for not creating a larger reserve than 75% of Rs. 1,06,501.
16. In a way, this problem has been dealt with by this court in Radhika Mills Ltd. v. CIT : 74ITR661(Mad) . In that case, the assessee installed machinery and plant in three years. For the year ended 31st March,1958, there was no assessment. For the previous year ended 31st March,1959, the assessee made a profit of Rs. 89,034 and set apart Rs. 7,719 as development rebate reserve. The assessment was completed for that year, but at a loss of Rs. 60,693. In the next year, namely, the year ended 31st March, 1960, the assessee made a profit and set apart Rs. 67,621 as development rebate reserve, though having regard to the cost of the new machinery and plant installed, a sum of Rs. 58,227 would have sufficed. The ITO did not grant any development rebate though Rs. 2,64,908 and Rs. 1,26,061 would, if the conditions are complied with, respectively, be allowable for the assessment years 1958-59 and 1959-60, but allowed forthe assessment year 1960-61 a sum of Rs. 77,703. The ground for disallowance for the earlier years was that there was no assessment for the assessment year 1958-59 and that there was no claim made for the assessment year 1959-60. The AAC upheld the computation as made by the ITO, and the Tribunal sustained the disallowance for the assessment year 1958-59 on a new plea raised by the revenue before it, namely, that the provision for carrying forward of development rebate itself was introduced only with effect from 1st April, 1958, and that, therefore, there could not be any carry forward from 1958-59. For the second year, namely, 1959-60, the Tribunal held that the necessary particulars had been furnished by the assessee and that as, the assessee had created the necessary amount to the reserve in that year, it would be entitled to development rebate of Rs. 10,292 which was brought forward from the earlier year and adjusted against the profits of the assessment year 1960-61. As no corresponding credit had been reserved for the balance of the claim for rebate for the assessment year 1959-60, the Tribunal sustained the order of the AAC holding that Rs. 1,18,342 could not be allowed in that year. The question before this court was, whether the assessee was entitled to have the unadjusted development rebate of Rs. 2,64,908 and Rs. 1,18,342 in respect of the machineries installed in the accounting years ending on 31st March, 1958, and 31st March, 1959, set off against the profits of the year ended 31st March, 1960, and to carry forward the whole or part of the unadjusted rebate to the later years. In considering this question, the learned judges observed at p. 666 as follows:
' The actual allowance of the claim will depend upon compliance with the requisites of clauses (a) and (b) of the proviso (to Section 10(2)(vib) of the Indian Income-tax Act, 1922), as already explained by us. If in the assessment year relevant to the year of installation, the total assessed income of the assessee from all heads is nil, the assessee cannot naturally be expected to have created an actual reserve equivalent to 75 per cent. of the development rebate to be allowed. He is not penalised for his inability but, in such an event, the development rebate to be allowed will have to be, provided he has furnished the necessary particulars before completion of assessment, computed by the revenue and carried forward to the following year so that it may first, as a priority item, be to the extent possible and warranted by the actual reserve set apart in that year, set off against his total assessed income of such year. It should be noted that such allowance in each year, as indicated by us, can only be made with reference to and to the extent warranted by the actual reserve created and the balance of the rebate to the extent not covered by reserve because the assessed total income is nil or inadequate, should be carried forward to the next year '.
17. Applying the principles so enunciated above, the learned judges dealt with the facts in that particular case and observed at p. 667 as follows :
'The assessment for the assessment year 1959-60 showed a loss. No question of debiting to the profit and loss account and crediting to the reserve account therefore arises. The assessee would, therefore, be entitled to carry forward the entire development rebate for that year to the following year, namely, the sum of Rs. 1,26,061. But since, notwithstanding the loss as per the assessment, the assessee had in that year created a reserve of Rs. 7,719 it would be entitled to an allowance of development rebate to the extent of Rs 10,292 to be set off first against the total assessed income of the following assessment year 1960-61. Similarly, the balance of the development rebate carried forward from the assessment year 1959-60 would, to the extent warranted by the reserve created in the assessment year 1960-61, be then eligible to set off as against the balance of the total assessed income of that year.'
18. The principle laid down is that the assessee would be eligible for such amount of development rebate as is appropriate to the reserve created out of the profits of that year and that the balance remaining unadjusted would have to be carried forward. On that occasion, there was no need for this court to go into the question as to whether there would be any forfeiture, if the assessee failed to create such a reserve in full, as this point was not taken. It is that question which is now before us. Consistently with the intendment of the statute, the amount to be allowed as development rebate can only be the proportionate figure based on the reserve created by the assessee; to the extent that the assessee failed to create the reserve so as to reduce the total income to nil, the assessee would be ineligible to carry forward the unabsorbed development rebate. If this were not the position, the assessee would be able to pass over the creation of the reserve even when there are profits, with a view to gaining some other advantage. The assessee would have to forgo the allowance if there is a failure to create the requisite reserve, so that with the allowance of development rebate the income assessable is reduced to nil. Understood in this light in the present case, the assessee would lose the benefit to carry forward the unabsorbed development rebate only to the extent of Rs. 1,06,501. To deny the benefit to a larger extent is not warranted by the statute. The assessee cannot be penalised or made to suffer for what he is not expected to do.
19. The result is that the question referred to us is answered as follows; The assessee is disentitled from carrying forward the development rebate only to the extent of Rs. 1,06,501.
20. A sum of Rs. 1,06,773 is mentioned as the development rebate in the order of the Tribunal, perhaps by mistake. Anyway, the Tribunal willexamine the figures and arrive at the correct amount to be carried forward. The reference is answered accordingly with costs. Counsel's fee Rs. 500.