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Commissioner of Income-tax Vs. Indian Iron and Steel Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 29 of 1970
Judge
Reported in[1978]111ITR843(Cal)
ActsIncome Tax Act, 1961 - Sections 34(3), 147, 148 and 155(5)
AppellantCommissioner of Income-tax
RespondentIndian Iron and Steel Co. Ltd.
Appellant AdvocateS.C. Sen and ;Ajay Mitra, Advs.
Respondent AdvocateD. Pal and ;P.K. Pal, Advs.
Cases ReferredBraithwaite & Co. (India) Ltd. v. Commissioner of Income
Excerpt:
- .....the income-tax officer had allowed development rebate of rs. 2,21,48,873 against the development rebate reserve of rs. 1,66,57,251. similarly, for the assessment year 1962-63, the totalincome as per the original assessment was rectified under section 154 of 1961 act and revised under section 250 determining the assessee's total income at rs. 8,20,77,760. in this case also while making the assessment the income-tax officer had allowed development rebate of rs. 28,79,361 against the creation of additional statutory reserve during this year to the, extent of rs. 21,57,039. in the course of the proceedings for 1962-63, the income-tax officer found that the development rebate had been irregularly allowed inasmuch as there was unauthorised utilisation of statutory development rebate reserve.....
Judgment:

Sabyasachi Mukharji, J.

1. In this reference under Section 256(1) of the Income-tax Act 1961, we are concerned with the assessments under the Income-tax Act, 1961, for the assessment years 1961-62 and 1962-63, for which the relevant accounting periods ended on 31st March, 1961, and 3Ist March; 1962, respectively. The original assessment for the assessment year 1961-62 was completed on the 30th November, 1962, and thereafter the total income was revised under Section 34 of the Indian Income-tax Act, 1922, determining the assessee's total income as Rs. 4,18,59,438. While making the assessment, the Income-tax Officer had allowed development rebate of Rs. 2,21,48,873 against the development rebate reserve of Rs. 1,66,57,251. Similarly, for the assessment year 1962-63, the totalincome as per the original assessment was rectified under Section 154 of 1961 Act and revised under Section 250 determining the assessee's total income at Rs. 8,20,77,760. In this case also while making the assessment the Income-tax Officer had allowed development rebate of Rs. 28,79,361 against the creation of additional statutory reserve during this year to the, extent of Rs. 21,57,039. In the course of the proceedings for 1962-63, the Income-tax Officer found that the development rebate had been irregularly allowed inasmuch as there was unauthorised utilisation of statutory development rebate reserve account. The reasons for initiating the proceedings under Section 147(b) of the Income-tax Act, 1961, as mentioned by the Income-tax Officer in the assessment order, were as follows :

'From the accounts for the year ended 31st March, 1962, it appears that the company transferred a sum of Rs. 3,32,88,081 from the development rebate reserve (statutory) to the general development reserve which included the reserve of Rs. 1,66,57,251 set aside in the accounts for the year ended 31st March, 1961, as mentioned above. From the general development reserve a sum of Rs. 7,19,013 was appropriated to the profit and loss account out of which dividend was declared.'

2. The Income-tax Officer, accordingly, was of the opinion that the income had escaped assessment, as a consequence of development rebate having been wrongly allowed, and proceedings under Section 148/147{b) were started and reassessments for the assessment years 1961-62 and 1962-63 were completed, withdrawing the development rebate already granted. The Income-tax Officer considered it necessary to recall the development rebate as mentioned above because, (1) there was inadequate provision in the 'statutory reserve account' and, (2) it had been utilised for a prohibited purpose, viz., declaration of dividend, etc. In his opinion, a portion of the development rebate reserve had found its way to the credit balance of profit and loss account which was ultimately used for declaration of dividend. This, according to the Income-tax Officer, constituted contravention of statutory provision which led him to believe that income chargeable to tax had escaped assessment. Thereafter, the assessee appealed against the above assessment orders. The Appellate Assistant Commissioner held that there was no basis or jurisdiction for the Income-tax Officer to re-open the assessments. According to him, the Income-tax Officer had no information in his possession which had given him jurisdiction to invoke the provisions of Section 147(b). The Appellate Assistant Commissioner, accordingly, annulled the assessment orders for the two years and restored the development rebates withdrawn.

3. There was further appeal by the revenue before the Income-tax Appellate Tribunal. The Tribunal, in the facts and circumstances of the case, held that the provisions of Section 147(b) were attracted. The Tribunalaccepted in principle, however, the assessee's contention that the general development reserve was a free reserve and although a part of it consisted of transfer from the statutory development rebate reserve, any transfer from this free reserve to the revenue account did not, in any way, concern the taxation authority. In the above premises, the following question under Section 256(1) of the Income-tax Act, 1961, has been referred to this court :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that there was no legal justification for withdrawing the development rebate already allowed to the assessee for the assessment years 1961-62 and 1962-63 ?'

4. The question with which we are concerned in this case has to be considered with reference to Section 33 of the Income-tax Act, 1961, which provides that 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 purpose of the business carried on by him, there shall be allowed deduction of development rebate, in accordance with and subject to the provisions of Section 34 of the Indian Income-tax Act, in respect of the previous year in which the ship was acquired or the machinery or plant was installed, if the ship, machinery or plant was first put to use in the immediately succeeding previous year. Section 34(3) stipulates that 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 was debited to the profit and loss account of the relevant previous year and credited to the 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. There is a proviso to the above section with which we are not concerned in this case. Reference may be made to Section 155(5) of the Income-tax Act, 1961, which deals with the question of withdrawal of development rebate allowed. Section 155(5) of the Act reads as follows :

'155. (5) Where an allowance by way of development rebate has been made wholly or partly to an assessee in respect of a ship, machinery or plant installed after the 31st day of December, 1957, in any assessment year under Section 33 or under the corresponding provisions of the Indian Income-tax Act, 1922 (XI of 1922), and subsequently-

(i) at any time before the expiry of eight years from the end of the previous year in which the ship was acquired or the machinery or plant was installed, the ship, machinery or plant is sold or otherwise transferred by the assessee to any person other than the Government, a local authority,a corporation established by a Central, State or Provincial Act or a Government company as defined in Section 617 of the Companies Act, 1956 (1 of 1956), or in connection with any amalgamation or succession referred to in Sub-section (3) or Sub-section (4) of Section 33; or

(ii) at any time before the expiry of the eight years referred to in Sub-section (3) of Section 34, the assessee utilises the amount credited to the reserve account under Clause (a) of that sub-section-

(a) for distribution by way of dividends or profits; or

(b) for remittance outside India as profits or for the creation of any asset outside India; or

(c) for any other purpose which is not a purpose of the business of the undertaking ;

the development rebate originally allowed shall be deemed to have been wrongly allowed, and the Income-tax Officer may, notwithstanding anything contained in this Act, recompute the total income of the assessee for the relevant previous year and make the necessary amendment; and the provisions of Section 154 shall, so far as may be, apply thereto, the period of four years specified in Sub-section (7) of that section being reckoned from the end of the previous year in which the sale or transfer took place or the money was so utilised.'

5. In this case, the development rebate had been withdrawn mainly on the ground that the amount was transferred to the profit and loss account and really transferred to the revenue account for the purpose of payment of dividend. The Tribunal after detailed analysis of ,the account has come to the conclusion that the development reserve account was not utilised for the purpose of payment of dividend as held by the Income-tax Officer. In this case, however, the Appellate Tribunal affirmed the decision of the Appellate Assistant Commissioner. This being a finding of fact arrived at by the Tribunal and there being no justification for holding that there was no material before the Tribunal for its coming to that conclusion of fact, we are not concerned with that question of fact. Therefore, we are left with the position that there was transfer of development rebate reserve account to the revenue account for the payment of loan to the Government and the World Bank, which loan had also been incurred for the purpose of installation of the machinery of the assessee-company. The question is whether by transferring of this amount for the purpose of meeting the Government and the World Bank loan, the assessee had forfeited the right to development rebate granted to it. We have noted the provisions of the section set out above, according to which, firstly, there must be a creation of reserve account, and, secondly, that reserve account should be created for the utilisation for a period of 8 succeeding years for the purpose of the business of the undertaking other than, (i) for distribution by way of dividends orprofits; or (ii) for remittance outside India as profits or for the creation of any asset outside India. It was undisputed before the Tribunal that payment of loan incurred to the World Bank and/or to the Government was one for the business and it was a user of money for the purpose of the undertaking of the assessee. These amounts were not paid also for distribution of dividends or for remittance of profits outside India. But counsel for the revenue contended that the reserve account or the expression 'reserve' was well-known in the company's jurisprudence and it should be taken that the legislature had intended to give it the same meaning. Counsel for the revenue further contended that 'reserve' as defined in the Act meant that the reserve was for an unknown liability or contingency. In this connection counsel drew our attention to the decisions in the cases of Metal Box Company of India Ltd. v. Their Workmen : (1969)ILLJ785SC , Commissioner of Income-tax v. Century Spinning & . : [1953]24ITR499(SC) and Commissioner of Income-tax v. Hind Lamps Ltd. : [1973]90ITR487(All) . He also drew our attention to the case of Braithwaite & Co. (India) Ltd. v. Commissioner of Income-tax : [1978]111ITR729(Cal) (judgment delivered by this court on 10th and 11th September, 1973) wherein it was observed that in principle any provision for reserve made in order to meet existing liability could not constitute reserve. Counsel for revenue is undoubtedly right in urging that normally a reserve was for an unknown liability or for unspecified purpose but in this case there is no specific finding as such as to the purpose for which the reserve was created, though counsel drew our attention to the observation of the Tribunal appearing at pages 64 of the paper book wherein it was stated that the assessee did intend to make the loan repayments from out of the statutory reserve account. It is true that the assessee intended to make repayments of its loan out of the statutory reserve account but it does not appear that the creation of the reserve account was for the purpose of meeting World Bank loan as well as Government loan. It is also true that normally a reserve must be for an unspecified liability or unknown liability but in this case we are dealing with the question of a reserve account which is supposed to be used for the purpose of business of the undertaking and that reserve account is prohibited from being used for payment of dividends or remittance of profits outside India. In this context, it is doubtful, whether; the expression 'reserve account' should be construed as reserve for an unspecified contingency, as in the other cases.

6. As mentioned before, we are concerned with the withdrawal of the development rebate already allowed and that withdrawal is dependent on the happening of the two contingencies, as mentioned in Section 34(3) and Section 155(5) of the Act, that is to say, if the money has been utilised for payment of dividends to shareholders, which fact has been negatived by theTribunal or, secondly, remittance of profits outside India, which is not the fact in the instant case. The Tribunal, therefore, came to the correct conclusion.

7. The question is, therefore, answered in the affirmative and in favour of the assessee. Each party to pay and bear its own costs.

R.N. Pyne, J.

8. I agree.


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