1989 (3) TMI 2 - SC - Income Tax

Development Rebate - Whether Tribunal was right in holding that the assessee cannot be denied the benefit of carry forward of development rebate -Whether Tribunal was justified in directing that the Income-tax Officer should determine the development rebate and such development rebate should be allowed to be carried forward and set off when profits are available and if in that year the assessee fulfils the necessary requirements for such allowance like creation of adequate reserve

Summary

Issues:
- Whether the assessee can be denied the benefit of carry forward of development rebate?
- Whether the Income-tax Officer should determine the development rebate and allow it to be carried forward and set off when profits are available?

Analysis:
The case involves an appeal by a limited company against the High Court's judgment regarding the denial of development rebate benefit. The assessee claimed a development rebate for the assessment year 1962-63, which was rejected by the Income-tax Officer due to the failure to create a reserve as required by section 34 of the Income-tax Act, 1961. The Appellate Tribunal favored the assessee, leading to the questions being referred to the High Court. The High Court ruled against the assessee, stating non-compliance with the conditions of section 34(3) of the Act.

The main contention in the appeal is whether a reserve must be created in the previous year of machinery installation for claiming the development rebate. Section 33 allows for a development rebate subject to the provisions of section 34. The court highlighted that the creation of a reserve fund in the relevant previous year is essential, as clarified by an Explanation added by the Finance Act, 1966. The Explanation mandates the creation of a reserve fund irrespective of the profit earned in that year, emphasizing the importance of book entries for creating such a reserve.

The assessee relied on previous cases and argued that the reserve need not be created in the year of installation if there was no taxable income. However, the court emphasized that the creation of a reserve in the year of machinery installation is mandatory to claim the development rebate. The court rejected the argument that illusory entries suffice, emphasizing the need for actual fund existence for business purposes. The court aligned with the High Court's view on the significance of "actually allowed" in section 34(3)(a) and affirmed the ruling in favor of the Revenue.

In conclusion, the Supreme Court upheld the High Court's decision against the assessee, emphasizing the necessity of creating a reserve in the previous year of machinery installation to claim the development rebate. The court dismissed the appeal, with no order as to costs, based on the provided considerations and legal interpretations.