1997 (7) TMI 66 - HC - Income Tax

Summary

Issues Involved:
1. Requirement of creating a development rebate reserve during the year of machinery installation.
2. Interpretation of Sections 33 and 34 of the Income-tax Act, 1961.
3. Impact of the Supreme Court judgment in Shri Shubhlaxmi Mills Ltd. v. Addl. CIT.
4. Retrospective amendment by Section 11 of the Finance Act, 1990.
5. Applicability of CBDT Circular No. 189, dated January 30, 1976.

Issue-wise Detailed Analysis:

1. Requirement of Creating a Development Rebate Reserve During the Year of Machinery Installation:
The Tribunal held that the assessee was not required to create a development rebate reserve during the year of machinery installation if it did not make profits. This decision was based on the interpretation of relevant sections of the Income-tax Act and CBDT Circular No. 189, dated January 30, 1976.

2. Interpretation of Sections 33 and 34 of the Income-tax Act, 1961:
Section 33(1)(a) provides for development rebate on new machinery, subject to conditions in Section 34. Section 34(3)(a) mandates that 75% of the development rebate must be credited to a reserve account. The Tribunal's decision was influenced by the Andhra Pradesh High Court ruling in CIT v. Agro Insecticides and Allied Industries [1981] 127 ITR 796, which stated that the reserve need not be created in a year without profits.

3. Impact of the Supreme Court Judgment in Shri Shubhlaxmi Mills Ltd. v. Addl. CIT:
The Supreme Court in Shri Shubhlaxmi Mills Ltd. v. Addl. CIT [1989] 177 ITR 193 held that creating a reserve in the year of installation was mandatory, even in the absence of profits. This judgment was initially contrary to the Tribunal's decision but was later nullified by legislative amendment.

4. Retrospective Amendment by Section 11 of the Finance Act, 1990:
Section 11 of the Finance Act, 1990, amended Section 34(3)(a) retrospectively from April 1, 1962, allowing the creation of the reserve in any subsequent year with profits. This amendment aimed to alleviate taxpayers' hardships and overruled the Supreme Court's decision in Shri Shubhlaxmi Mills' case.

5. Applicability of CBDT Circular No. 189, dated January 30, 1976:
The Tribunal relied on CBDT Circular No. 189, which clarified that the reserve need not be created in a year without profits. This circular was consistent with the Andhra Pradesh High Court's decision and the subsequent legislative amendment.

Conclusion:
The High Court concurred with the Tribunal and the Allahabad High Court's reasoning in CIT v. Raza Buland Sugar Co. Ltd. [1993] 202 ITR 191. It held that the Tribunal did not err in law by ruling that the assessee was not required to create the development rebate reserve in a year without profits. The question was answered in the affirmative, against the Department and in favor of the assessee.