TMI Blog1973 (7) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... o petitions the petitioner had created some development rebate reserve and claimed development rebate under section 33 of the Income-tax Act. Apart from other plant and machinery installed by the petitioner during these years, it had also installed some rolling mill rolls. It is admitted that during these four years the petitioner had not created the development rebate reserve after taking into consideration the rolling mill rolls installed by it and it had not claimed any rebate in respect of the same. The petitioner explains that the omission was due to the fact that it was not the practice of the income-tax authorities then to allow development rebate in respect of rolling mill rolls and that the income-tax authorities did not include these rolls in the expression " plant and machinery ". It appears that some sugar mills contended that rolling mill rolls installed by them were as much plant and machinery as any other item of plant and machinery. The contention was considered by the Central Board of Direct Taxes, Government of India, who on 16th November, 1968, issued a circular which is exhibit A to the petition and directed all Income-tax Officers to allow development rebate on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year's books within the time allowed by the Income-tax Officer. The petitioner states that after the circular, exhibit A, and on the basis of the circular, exhibit B, the petitioner claimed development rebate on the rolling mill rolls for the four years covered by these two petitions and for that purpose created additional development rebate reserves and made the necessary provision in the accounts of the respective assessment years. The petitioner filed revised returns and the Income-tax Officers granted it the additional development rebate for the four years. However, on 7th February, 1972, the petitioner received a notice under section 154 of the Income-tax Act whereby the Income-tax Officer proposed to rectify the assessment for the years 1965-66, 1966-67 and 1967-68 on the ground that the development rebate was wrongly allowed on the rolling mill rolls in view of the Supreme Court judgment in the case of Indian Overseas Bank Ltd. v. Commissioner of Income-tax. This notice is exhibit G to the petition. After the petitioner was heard, the income-tax authorities made an order dated 28th February, 1972, purporting to rectify the assessment orders for these three years. The said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bay, has made two affidavits, one dated 13th June, 1973, and the other dated 14th June, 1973. The first affidavit is in reply to Miscellaneous Petition No. 190 of 1972 and seeks to support the rectification orders challenged in the petition. The second affidavit was made in the same petition under circumstances which we shall set out later in the judgment. No affidavit has been filed in Miscellaneous Application No. 226 of 1973. Section 154 of the Income-tax Act relates to rectification of mistakes. It provides that with a view to rectifying any mistake apparent from the record, the Income-tax Officer may amend any order of assessment. Mr. Palkhivala on behalf of the petitioner contended that there was no error or mistake apparent from the record at all and there is, therefore, no occasion for amending the original assessment orders in these two petitions. He invited our attention to the case of T. S. Balaram, Income-tax Officer v. Volkart Brothers, wherein the Supreme Court held that a mistake apparent on the record must be an obvious and patent mistake and not something which could be established by a long drawn process of reasoning on points on which there may be conceivably t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In that case the assessee-company had claimed development rebate and contended that it had set apart a sum of Rs. 6,00,000 during the assessment year out of its net profits which not only satisfied the requirements of section 17 of the Banking Companies Act, but also the requisites of the Indian Income-tax Act, 1922, with regard to the creation of development rebate reserves. The Madras High Court held that, as the assessee while setting apart the sum of Rs. 6,00,000 had not expressed the purpose for doing so, the conditions with regard to the creation of a development rebate reserve were not complied with and development rebate could not be allowed. The High Court further held that even if it were assumed that the 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 a 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e must point out that that was a case in which no development rebate 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. 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 a development rebate reserve in the relevant year. 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 decision 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 could not be granted to the assessee in the case before it because of the non-compliance with the requisite conditions as to creation of a development rebate reserve. The learned judges of the Gujarat High Court also took the view that section 154 of the Income-tax Act was attracted as there was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion was delivered by their Lordships of the Supreme Court in an appeal from the judgment of the Madras High Court in Indian Overseas Bank Ltd. v. Commissioner of Income-tax. The question that fell for determination by their Lordships of the Supreme Court was whether a reserve under section 17 of the Banking Companies Act, 1949, was a reserve within the meaning of section 10(2)(vib), proviso (b), of the Income-tax Act, and their Lordships were of the opinion that such a reserve could not be treated as a reserve for development rebate under section 10(2)(vib), proviso (b) of the Act. The question with which we are concerned was not debated before their Lordships and all that their Lordships said was that the requirements of the proviso had to be complied with. So far as the present case is concerned, the requirements have been complied with. The only argument stressed before us is that the requirements should be complied with before the close of the accounting year or before making up of the profit and loss account. In our opinion it was open to the assessee to make these entries at any time before the assessment was completed. The entries only become final as and when they are acce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the learned judges who have delivered that judgment, we are unable to agree with the view taken by them......But we have been unable to read those observations in the same light........ " Reviewing the above decisions we find that the Supreme Court has not decided in Indian Overseas Bank Ltd. v. Commissioner of Income-tax that the profit and loss account originally prepared and passed by a company cannot be subsequently amended by it and that the Income-tax Officer has no power to allow development rebate if the entries are made after the filing of the original return of income or even at a subsequent date in cases of bona fide mistake. We have expressed our own view about the judgment of the Gujarat High Court in Surat Textile Mills Ltd. v. Commissioner of Income-tax and the views of the Punjab and Haryana High Court and Allahabad High Court with regard to the construction of the Supreme Court judgment by the Gujarat High Court. We have also set out the view of the Andhra Pradesh High Court. Mr. Palkhivala on behalf of the petitioner did not argue before us as to what was the correct position in law on a true interpretation of section 34 as to the proper time for creating a de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -tax Officers and they are bound, in the execution of the Act, to carry out those instructions. The reference of Mr. Palkhivala is to the circular dated 16th November, 1968, exhibit A to the petition, and dated 21st November, 1958, exhibit B to the petition. It is not contended by the respondents that the circular, exhibit A, is limited to sugar mills. It is admitted that it applies to rolling mill rolls by whomsoever installed. Similarly, it is admitted that the application of the circular dated 21st November, 1958, is not confined to tea companies. It is admitted that it is a circular of general application. At this stage we may refer to the affidavit of Miss D. V. Bapat, dated 14th June, 1973. The arguments in this case began on 13th June, 1973, and after Mr. Palkhivala had finished his arguments and Mr. Joshi had partly argued that this affidavit was tendered. We have refused to take it on the file on the ground that it was tendered at a late stage and the petitioner had had no opportunity of dealing with it either by an affidavit in rejoinder or in the arguments. The affidavit not being on the file we need not actually deal with it. But we propose to deal with it none the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to allow development rebate in respect of such rolls. The mistake was not only bona fide, but arose from the previous stand taken by the income-tax authorities themselves. The case of the petitioner, in our opinion, falls squarely within the circular of 21st November, 1958. Mr. Palkhivala invited our attention to section 119 of the Income-tax Act which provides that the Board may from time to time issue such orders, instructions and directions to other (other than Appellate Assistant Commissioner in the exercise of his appellate functions) income-tax authorities as it may deem fit for the proper administration of this Act, and such authorities and all other persons employed in the execution of the Act shall observe and follow such orders, instructions and directions of the Board. Mr. Palkhivala contended that the circulars, dated 16th November, 1968, exhibit A to the petition, and 21st November, 1958, exhibit B to the petition, were issued under section 119 of the Income-tax Act and were binding on the Income-tax Officers. Mr. Joshi for the respondents conceded that they were binding on the Income-tax Officers, but contended that they were not binding on the court and that the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not considered by it. In view of the two judgments of the Supreme Court referred to hereinabove we hold that the circulars dated 16th November, 1968, exhibit A to the petition, and 21st November, 1958, exhibit B to the petition, would be binding on the Income-tax Officers and must be given effect to by this court. While so holding we must, however, strike a note of caution that the binding nature of circulars issued by the Central Board of Revenue must be confined to tax laws and that also for the purpose of giving administrative relief to the taxpayer and not for the purpose of imposing a burden on him. In view of the above finding as to the binding nature of the circulars we hold that there is no mistake at all and, in any event, there is none apparent from the record and the income-tax authorities are not entitled to rectify the assessment in respect of the development rebate allowed by them to the petitioner. There remains one more point which arises only in Miscellaneous Petition No. 190 of 1972. Belpahar Refractories Ltd. is a subsidiary of the petitioner. The petitioner had received a deposit of Rs. 20,00,000 from this subsidiary company on 21st December, 1962, which wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so much of any dividend paid or deemed to be paid to him out of the profits and gains derived by a company from an industrial undertaking to which section 84 applies and is attributable to that part of the profits and gains on which income-tax is not payable by the company under section 84. Section 84 pertains to income of newly established industrial undertakings or trade. There is therefore, no dispute about the fact that the amount of Rs. 20,00,000 was rightly taxed in the assessment year 1963-64. The contention of Mr. Palkhivala is that the amount of Rs. 14,12,954 out of the said dividend of Rs. 17,29,647 was exempt from tax under the then section 85 of the Income-tax Act in the hands of the petitioners as it was a dividend from a newly established undertaking. Mr. Joshi has pointed out that section 2(22)(e), proviso (iii), states that " dividend " does not include any dividend paid by a company which is set off by the company against the whole or part of any sum previously paid by it and treated as a dividend within the meaning of section 2(22)(e) to the extent to which it is set off. Mr. Joshi contended that in view of the fact that this amount of Rs. 17,29,647 was set off ..... X X X X Extracts X X X X X X X X Extracts X X X X
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