9911796707
TMI Blog1973 (4) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... er section 80J of the said Act and rule 19A of the Income-tax Rules, 1962. The facts leading to this petition may be briefly stated. Up to 31st March, 1964, the petitioner's business consisted mainly of distribution of petroleum products. During the accounting year ended 31st March, 1965, another company, viz., the Indian Refineries Ltd., was amalgamated with the petitioner-company by an order of the Government of India and the undertaking of that company stood transferred to the petitioner-company with effect from 1st April, 1964. Thereupon, the original name of the petitioner-company, viz., " Indian Oil Company Ltd." was changed to " Indian Oil Corporation Ltd." Under the said amalgamation order, the profits and losses from Indian Refineries Ltd. from 1st April, 1964, formed part of the profits and losses of the petitioner-company and the petitioner-company became entitled to the benefit of the development rebate allowable to that company. The position of the petitioner with regard to development rebate for assessment years (hereinafter an assessment year is referred to as " A.Y. ") is as follows: (1) For the A.Y. 1961-62 the petitioner's development rebate was determined at R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pment rebate reserve of Rs. 12 crores. There was sufficient profit during this year. In computing the total income the Income-tax Officer allowed to the petitioner development rebate to the extent of Rs. 8,37,53,014 covering the development rebate determined for A.Y. 1968-69 and A.Y. 1969-70 only. Development rebate for A. Ys. 1965-66, 1966-67 and 1967-68 aggregating to Rs. 27,13,62,131 was not allowed by the Income-tax Officer on the ground that during these years the petitioner had not created any development rebate reserve. This was obviously due to a new stand taken by the Income-tax Officer that in order to claim development rebate, the development rebate reserve must be created during the year in which new machinery and plant was installed or put to use irrespective of whether there were or there were no assessed profits during that year. (10) For A.Y. 1970-71 in the assessment order dated 24th January, 1973, the Income-tax Officer determined development rebate allowable to the petitioner for that year at Rs. 1,27,90,906. The petitioner created further development rebate reserve of over Rs. 14 crores. The development rebate reserve was actually allowed for that year and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1954, apparently as an incentive for the development of industries in the country. This allowance is in addition to the depreciation allowance and is granted to all assessees. Under the Indian Income-tax Act, 1922, section 10(2)(vib), which was introduced in 1955 provided for development rebate. The Finance Act, 1958, granted this allowance subject to the condition of creating a development rebate reserve. Under the Income-tax Act, 1961, the development rebate is granted by section 33 and conditions for allowing the development rebate are governed by section 34. The latter provision provides that in respect of installation of any machinery or plant on or after 1st January, 1958, the development rebate shall be allowed only when an amount equal to 75% of the development rebate to be actully allowed is debited to the profit and loss account of the relevant previous year and credited to a reserve account for the aforesaid purpose. The development rebate reserve account created in this way should not be utilised for a period of next 8 years following the relevant previous year either for distribution by way of dividends or profits or for remittance of profits abroad or for any other pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to reduce the total income of the assessee assessable for that assessment year, computed in the manner aforesaid, to nil, and the balance of the development rebate, if any, still outstanding shall be carried forward to the following assessment year, and so on, so however that no portion of the development rebate shall be carried forward for more than eight assessment years immediately succeeding the assessment year relevant to the previous year in which the ship was acquired or the machinery or plant installed or the immediately succeeding previous year, as the case may be .... 34. Conditions for depreciation allowance and development rebate.- (1) The deductions referred to in sub-section (1) or sub-section (1A) of section 32 shall be allowed only if the prescribed particulars have been furnished ; and the deduction referred to in section 33 shall be allowed only if the particulars prescribed for the purpose of clause (i) and clause (ii) of sub-section (1) of section 32 have been furnished by the assessee in respect of the ship or machinery or plant . . . . (3) (a) The deduction referred to in section 33 shall not be allowed unless an amount equal to seventy-five per cent. of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all not actually be allowed " unless 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 utilised by the assessee during a period of 8 years next following for the purposes of the business of the undertaking. We find considerable substance in the contention that section 33(1) provides merely for the assessment and determination of the development rebate to which an assessee is entitled or which is allowable to him. Sub-section (2) of that section also refers to allowable development rebate. Section 34 on the other hand provides for actually allowing the deduction of development rebate from assessable profits subject to the two conditions of prescribed particulars having been furnished and development rebate reserve having been created as conditions precedent to the actual allowance of the development rebate. As to the first condition it does not appear from section 34(1) as to when the particulars should be furnished. It stands to reason that they should be furnished before the completion of the assessment for the year in respect of which the claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctual allowance of development rebate in the subsequent years in which there are assessed profits. If this contention is accepted the assessee may have to resort to borrowing for creation of the reserve in order to be entitled to development rebate at some future date. In such event what he will be utilising for the purpose of his business under section 34(3)(a) will be the loan and not the amount of the development rebate. There will also be no question of distributing an illusory fund by way of dividend or profits or for remitting it outside India as would be created if a mere book entry were made. Mr. Joshi on behalf of the respondents contended that the Explanation to section 34(3)(a) suggests the creation of a reserve account exceeding the amount of the profits of the previous year. He contended that this supports the contention of the respondents that the reserve must be created irrespective of profits in the year of installation or use. We, however, find the Explanation has been added as a precautionary provision for the removal of doubts. There can be cases where an assessee may credit to the reserve account an amount in excess of the assessed profits for the year in which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e year of installing but the creation of the requisite reserve depends on and goes to reduce the available total income of that year or the following year. If there is no such total income or it is a loss, there can be no allowance of rebate but it is to be carried forward to the following year. No development rebate can actually be allowed unless two conditions are satisfied. One of the conditions is the creation of development rebate reserve. Regarding this condition, the Madras High Court took the view that it will not be sufficient compliance with the condition if no reserve is actually created to the extent required and mere book entries without actual reserve are made. Debiting in the profit and loss account and crediting in the reserve account is not theoretical but on the basis of actual reserve created. The basis of the actual reserve is the total profits as per the completed assessment and not book profits. The entries as required by the condition are a sine qua non and are not an idle formality for it is only then that it will be possible to keep track of the development rebate reserve for enforcing the particular inhibitions against its user. Previous creation of reserv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose specified in the statute. That statute envisages allowance of the development rebate in instalments over a number of years depending on the assessable income of an assessee. The words " relevant previous year " refer not to the year of the installation of the new machinery or plant, but to the year or years in which either the whole or a part of the development rebate is actually allowed. The assessee would create a reserve fund out of the development rebate to be actually allowed to him, in any particular year, and not by incurring loans or otherwise and utilise the reserve account for a period of 10 (now 8) years for the purpose of the business of the assessee's undertakings only. The Calcutta High Court held that an assessee is not obliged to create a reserve fund in any year if he has no taxable income in that year for the purpose of carrying forward development rebate to the following years. It followed the judgment of the Madras High Court in Radhika Mills Ltd. v. Commissioner of Income-tax. We agree with the judgments of the Madras and the Calcutta High Courts referred to by us hereinabove when they lay down that an assessee is not obliged to create development reb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e revenue to trace the fund debited as part of the development rebate in the profit and loss account and credited to a reserve account. Unless this condition was complied with, development rebate could not be claimed. In our opinion, this case is an authority only for the proposition that a reserve created for the Banking Companies Act is not available as a development rebate reserve and that as no development rebate reserve had been created in that case the rebate could not be claimed. This judgment followed the earlier judgment of the Madras High Court in Veeraswami Nainar's case referred to by us hereinabove. This judgment has also no bearing on the facts of the case before us. We must also point out that Veeraswami J. (as he then was) was a party to this judgment as well as to the subsequent judgment in the case of Radhika Mills Ltd., wherein the Madras High Court held that it will not be sufficient compliance with the condition of claiming the development rebate if no reserve is actually created to the extent required and mere book entries are made without actual reserve. The basis of the actual reserve created is the total profits as per the completed assessment. The entries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... far exceeding the amount of the development rebate of Rs. 36,144 claimed. An entry allowed to have been made after the end of the assessment year was held not to have complied with the condition of creation of development reserve in the relevant year. This was not a case where no development rebate was created because there were no profits. The decision is therefore irrelevant for deciding the case before us. The learned judges of the Gujarat High Court took the view that in the case of Indian overseas Bank Ltd. the Supreme Court had decided that unless the reserve was created in the very same accounting year, development rebate should not be granted, agreeing with the view of the Madras High Court and overruling the decisions of the Andhra Pradesh and the Rajasthan High Courts. The Gujarat High Court held that in view of the aforesaid decision of the Supreme Court the benefit of the development rebate cannot be granted to the assessee in the case before them because of the non-compliance with the requisite conditions as to creation of development rebate reserve. The learned judges also took the view that section 154 of the Income-tax Act was attracted as there was a mistake appare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concerned with the observation of the Andhra Pradesh High Court that the necessity for creation of a reserve fund account arises only when the trade results in profit. This view supports the view we are taking in this case. In the case of Commissioner of Income-tax v. Sardar Singh Sachdeva, the Punjab and Haryana High Court held that it was not necessary that entries about development rebate should be made in the accounts on or before the last day of the accounting year or even before the preparation of the profit and loss account. It is open to the assessee to make the entries at any time before the assessment is completed. The entries become final only when the assessment is made. Till then they are in a fluid state and any defect or error in them could be corrected. Our attention was also invited to the case of Commissioner of Income-tax v. Modi Spinning & Weaving Mills Co. Ltd., decided by the Allahabad High Court, wherein it was held that the company can make the necessary entries creating development rebate reserve at any time before the return of income is filed under the Income-tax Act. Even if the entries are made thereafter during the pendency of the assessment proceedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and not entitled to depreciation, their actual cost to the assessee ; (iii) in the case of assets acquired otherwise than by purchase and not entitled to depreciation, the value of the assets when they became assets of the business ; (iv) in the case of assets being debts due to the person carrying on the business, the nominal amount of those debts ; (v) in the case of assets being cash in hand or bank, the amount thereof ..... (3) From the aggregate of the amounts as ascertained under sub-rule (2) shall be deducted the aggregate of the amounts, as on the first day of the computation period, of borrowed moneys and debts due by the assessee (including amounts due towards any liability in respect of tax), not being,- (a) in the case of an assessee being a company the amount of its debentures, if any, and (b) in the case of any assessee (including a company), any moneys borrowed from an approved source for the creation of a capital asset in India, if the agreement under which such moneys are borrowed provides for the repayment thereof during a period of not less than seven years ...... " The petitioner contends that under rule 19A(3) the capital of a new industrial undertaking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... want to arrive at the capital employed by an assessee in a particular industrial undertaking, you cannot arrive at it by deducting from the assets of that particular undertaking the liabilities not only of that industrial undertaking, but also of three other industrial undertakings. This is mathematically absurd. What you want to find is the capital employed in an industrial undertaking. This cannot be mathematically done by deducting from its assets the liabilities of other undertakings. One will, therefore, have to give a reasonable interpretation to sub-rule (3) by adding after the words "borrowed moneys and debts due by the assessee ", the words " in respect of the industrial undertaking in which the capital employed is to be computed ". We accordingly hold that, on a true interpretation of rule 19A, in respect of each undertaking, the liabilities of the assessee in respect of that industrial undertaking only are to be deducted from the aggregate value of the assets of the same industrial undertaking. The controlling words in sub-rule (1), viz., "for the purpose of section 80J the capital employed in an industrial undertaking .... shall be computed.... " must govern sub-rules ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on a debatable point of law is not a mistake apparent from the record. We, however, consider it unnecessary to decide this contention of the petitioner in view of the fact that we have decided this matter on merits.
In the result, the petition succeeds and the petitioner will be entitled to the following reliefs :
Four rectification notices all dated January 11, 1973, for assessment years 1962-63, 1965-66, 1966-67 and 1967-68 (exhibit " N " collectively), two undated rectification notices for assessment years 1968-69 and 1969-70 (part of exhibit " P " collectively), and the undated notice of demand for Rs. 6,23,80,888 for assessment year 1970-71 (part of exhibit " J ") are quashed.
The 1st respondent is directed to allow development rebate for the assessment years 1969-70 and 1970-71 in accordance with this judgment and to compute the capital employed in each of the relevant industrial undertakings under rule 19A also in accordance with this judgment.
The 1st respondent will be at liberty to issue fresh notices of demand, if any, in accordance with law and the above directions.
The respondents will pay to the petitioner the costs of this petition. X X X X Extracts X X X X X X X X Extracts X X X X
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