TMI Blog1973 (4) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... by the respondents against the petitioner and for other reliefs. The questions that arise for determination in this petition pertain to development rebate provided for in section 33 of the income-tax Act, 1961 (hereinafter referred to as " the Income-tax Act "), the conditions for allowance of such development rebate prescribed by section 34 and computation of capital employed in an industrial undertaking under 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, form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 68-69 the development rebate was determined at Rs. 2,97,74,791. There were no profits. Therefore the development rebate was allowed to be carried forward. Actually on the expectation of a profit, the petitioner created a development rebate reserve of Rs. 3 crores which was however written back. (9) For A.Y. 1969-70 the development rebate was determined at Rs. 5,39,78,223. For that year the petitioner had created development 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 irresp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during that year in order to be eligible for allowance of development rebate in subsequent years out of profits or whether the petitioner would be eligible for allowance of development rebate if it created development reserve during the years in which there were assessed profits. The development rebate was introduced for the first time in the Finance Act, 1955, in respect of machinery or plant installed after 31st March, 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 deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for that assessment year under sub-section (1) or sub-section (1A) shall be only such amount as is sufficient to reduce the said total income to nil ; and (ii) the amount of the development rebate, to the extent to which it has not been allowed as aforesaid, shall be carried forward to the following assessment year, and the development rebate to be allowed for the following assessment year shall be such amount as is sufficient 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " actually allowed " in section 34(3)(a) which means actually deducted out of profits under the provisions of section 33(2). He pointed out that in section 34(1) the expression " shall be allowed " has been used in respect of conditions which must be satisfied before the development rebate is actually allowed and that sub-section (3)(a) provides that the deduction referred to in section 33 " shall not be allowed " meaning thereby " shall 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ligation on the part of the assessee to create a reserve as a condition merely for carrying over the development rebate without it being actually allowed to him by setting off the rebate against the assessed profits. We are unable to accept the contention of the respondents that the assessee must create the reserve in the year of installation or use of the plant or machinery, irrespective of any profits, as a condition precedent to the actual 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 am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the commercial or book income or of the assessed income. This question does not fall to be determined in this matter. The question before us arose directly before a Division Bench of the Madras High Court consisting of Veeraswami J. (as he then was) and Ramaprasada Rao J. in the case of Radhika Mills Ltd. v. Commissioner of Income-tax. The Madras High Court took the view that the allowance of development rebate was always in respect of the 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 acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the year of installation or use of the machinery or plant. But the condition of creation of development rebate reserve is to be fulfilled in the year or years that the development rebate or portions thereof are actually allowed. A condition for the actual allowance of the development rebate is the creation of development rebate reserve in the year in which it is actually allowed. The assessee can utilise this reserve account only for the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itions with regard to the creation of a development reserve were not complied with and development rebate could not be allowed. The said High Court further held that even if it were assumed that reserve was created under the Banking Companies Act, it could not be said to be available for any other purpose. The High Court observed that the provision for creation of development rebate reserve was not a mere formality, but was intended to enable the 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) wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the end of the assessment year in which development rebate was claimed. The development rebate was actually allowed by the Income-tax Officer but was later disallowed by the department as a result of a notice under section 154 for rectification. The Gujarat High Court also disallowed the rebate. We must point out that this was a case in which no development rebate reserve was created during the assessment year 1960-61, although there was a profit 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 Andhr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entries before the assessment was completed. The Income-tax Officer disallowed the rebate and appeals to the Appellate Assistant Commissioner and the Tribunal failed. The High Court, however, took the view that as the entries had been allowed to be made before the assessment was finalised by the Income-tax Officer, the assessee was entitled to the benefit of the rebate. We are not concerned with this aspect of the matter in our case. We are however 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in a ship shall be computed in accordance with sub-rule (5). (2) The aggregate of the amounts representing the values of the assets as on the first day of the computation period, of the undertaking, or of the business of the hotel to which the said section 80J applies shall first be ascertained in the following manner :- (i) in the case of assets entitled to depreciation, their written down value ; (ii) in the case of assets acquired by purchase 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of each undertaking the aggregate of the liabilities of the assessee shall be deducted. The assessee in this case owns 4 industrial undertakings. The result of such interpretation would be that from the assets of each industrial undertaking the entire borrowings of the assessee in respect of all the industrial undertakings are to be deducted for arriving at the capital employed in an industrial undertaking. On the face of it, this is an absurd proposition. If you 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into the judgment of the Supreme Court in Indian Overseas Bank Ltd. v. Commissioner of Income-tax words which do not exist in it. It has been held by the Supreme Court in the case of T. S. Balaram, Income-tax Officer v. Volkart Brothers that a mistake apparent on the face of the record must be an obvious and patent mistake and not something which can be established by long drawn process of reasoning on points on which there may conceivably be two opinions. A decision 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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