TMI Blog1992 (8) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... Whether the Income-tax Appellate Tribunal was justified in law in allowing the assessee expenditure of Rs. 27,000 being contribution to the superannuation fund and Rs. 12,000 being contribution to the provident fund in respect of the directors of the company ? " At the instance of the assessee : " (4) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in confirming the disallowance of service line charges of Rs. 36,918 ? (5) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that on acquisition of assets of the value of more than the development rebate reserve, without making any entry in the development rebate reserve account, it could not be held that the same was utilisation of development rebate reserve for the said purpose ? (6) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessee is not entitled to weighted deduction under section 35B of the Act on expenditure of Rs. 1,15,310?" Out of these six questions, question No. 6 which is referred at the instance of the assessee was not pressed before us at the time of final ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same, it could be said that the amount in the development rebate reserve was utilised for paying dividend which was prohibited user of such reserve and, consequently, according to the Income-tax Officer, the assessee was not entitled to deduction of the said rebate as per section 34(3)(a) of the Income-tax Act, 1961, as applicable at the relevant time. The Income-tax Officer held that the development rebate reserve should be a distinct and separate reserve which can be utilised for authorised purposes only and, if it was utilised for one of the prohibited uses during the period of eight years, the Revenue was competent to withdraw the development rebate under section 155. As this had come to the notice of the Income-tax Officer before the assessment for the relevant year was finalised, following the decision of this court in CIT v. Sayaji Mills Ltd. [1974] 94 ITR 26, the Income-tax Officer called upon the assessee to show cause why rebate claimed should not be allowed and ultimately disallowed the same. The assessee carried the matter in appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner came to the conclusion, agreeing with the assessee, tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Shelat that, in order to earn development rebate, the assessee must show that development rebate reserve, after having been created, was utilised by the assessee for purposes which were not prohibited and as the Income-tax Officer had found that the utilisation of this reserve was for a prohibited purpose, he was justified in disallowing the development rebate. Mr. Shelat invited our attention to a number of judgments of the Supreme Court and other High Courts including this court in support of this contention. On the other hand, Mr. K. C. Patel, for the assessee, vehemently contended that questions Nos. 1 and 2 should be answered in favour of the assessee. He also took exception to the observations of the Tribunal found in para 15A of the judgment which has resulted in question No. 5 at his instance. So far as questions Nos. 1 and 2 are concerned, Mr. Patel submitted that the only conditions precedent for earning development rebate are to the effect that new plant and machinery must be owned by the assessee and must be wholly utilised for the purpose of business and that, for earning such development rebate at the rate provided by section 33(1)(b), the assessee was required t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Companies Act dividends have to be distributed only out of the profits of the year and any other mode of distributing dividend is prohibited. As the profits of the year were very large, there was no question of utilising the development rebate reserve for paying dividend. So far as question No. 5 was concerned, Mr. Patel submitted that it is difficult to appreciate how the Tribunal could have entertained a doubt as reflected in para 15A of the judgment that the assessee cannot urge that only because some assets have been acquired, it should be deemed that it was utilisation of development rebate reserve for that purpose and that the Tribunal agreed that something more was necessary for this purpose, and even if clear entries are not passed linking up this reserve with the acquisition of assets, some other material may perhaps be necessary. In this connection, it was urged that there was overwhelming evidence on record to show that a huge amount was in fact spent by the assessee during the relevant year for acquisition of new fixed assets and that as there was no clear earmarked fund as development rebate reserve, it would be impossible to suggest that specific entries shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f any previous year in respect of which the deduction is to be allowed under sub-section (2) of that section or any earlier previous year (being a previous year not earlier than the year in which the ship was acquired or the machinery or plant was installed or the ship, machinery or plant was first put to use ) and credited to a reserve account to be utilised by the assessee during a period of eight years next following for the purposes of the business of the undertaking, other than (i) for distribution by way of dividends or profits ; or (ii) for remittance outside India as profits or for the creation of any asset outside India. " A conjoint reading of these provisions projects the following picture: (i) Before an assessee can claim development rebate on account of installation of new machinery or plant, he must show that he has installed new machinery or plant owned by him and it is wholly used for the purpose of his business. (ii) He must debit an amount equal to 75 per cent. of the development rebate to be actually allowed on such machinery or plant to the profit and loss account of the relevant previous years. (iii) He must credit the said amount to a separate reserv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eckoned from the end of the previous year in which the sale or transfer took place or the money was so utilised. " A conjoint reading of these provisions makes it clear that once the assessee satisfies the positive conditions for earning development rebate as laid down in sections 33 and 34(3)(a) by installing the machinery in question and by utilising the same for his own business purposes and by creating the necessary development rebate reserve by debiting the amount to the profit and loss account, the assessee Would become entitled to claim development rebate and if the deeming provisions of section 155(5 ) are to be brought into force, it will have to be established by the Revenue that the development rebate reserve amount was spent by the assessee during the period of eight years after creation of the reserve for any prohibited purposes as enumerated in sub-clauses (a), (b) and (c) of clause (ii) of sub-section (5) of section 155 of the Act. It is of course true, as held by the Division Bench of this court in CIT v. Sayaji Mills Ltd. [1974] 94 ITR 26, that when the assessment for the earlier year is not finalised and, in the meantime, the Income-tax Officer comes to know abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bution by way of dividends. But, before such conclusion can be reached, it has to be shown on the evidence on record that it was that balance amount which was actually utilised by the assessee for distribution by way of dividends. If this is not established, no case would survive for the Revenue to go under section 155(5) and to the recall grant of development rebate to the assessee once all other conditions precedent for earning such rebate were established by the assessee. On the scheme of the sections as they stand, it is not possible to agree with the extreme contention of the Revenue that the development rebate reserve account should be kept intact for eight years. In fact, in fairness to the learned advocate for the Revenue, it must be stated that he submitted that even he would not subscribe to such an extreme position. But his contention was that, in order to earn development rebate, the assessee must show that he had utilised the reserve account amount only for permissible business purposes and entries in the account maintained by him must clearly indicate this fact and, in the absence of such entries, it would be impossible for the Revenue to trace movement of this fund a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elopment rebate reserve account. It was also contended that the opening balance of the general reserve account was also quite substantial even before this amount was transferred from the development rebate reserve and, therefore, the assumption on the part of the Income-tax Officer that the amount of Rs. 4,42,975 could not have been utilised for paying dividend was totally misconceived. He submitted that the balance-sheets of a last number of years were produced before the Income-tax Officer and they showed that the opening balance as on March 31, 1970, in the general reserve was Rs. 4,12,69,856 while as on March 31, 1971, the opening balance was Rs. 4,12,69,878 and, therefore, there was no need to fall back upon the amount transferred from the statutory development rebate reserve of Rs. 4,42,975 for paying Rs. 29,000 by way of dividend. Mr. Patel, therefore, submitted that, in the facts of the present case, there was no question of utilisation of the development rebate reserve for distributing dividends as wrongly assumed by the Income-tax Officer and once it is so, no question would survive for holding that the assessee was not entitled to claim development rebate. We find consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equent years for newly installed machinery and it was granted. (vii) The Income-tax Officer himself had granted for the subsequent year depreciation on these assets. (viii) Not only that but the board of directors had passed a resolution dated September 7, 1972, acknowledging the fact that fixed assets were purchased and installed during the relevant years and the entire development rebate reserve account was exhausted and, consequently, the balance amount had to be transferred to the general reserve account as no longer required for fulfilling the statutory charge of utilising the same for business purposes as required by the relevant provisions. (ix) The resolution of the board of directors was actually implemented and, accordingly, transfer entries were effected transferring the amount from the development rebate reserve account to the general reserve account. Relying on these salient features which have emerged on record and which cannot be seriously disputed, Mr. Patel submitted that, on the facts of the present case, it can easily be visualised that the balance standing in the development rebate reserve account to the tune of Rs. 4,42,975 which was transferred to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion was invited by learned counsel for the assessee to certain well-established practices in Advance Accountancy. Firstly, he took us to " Advanced Accounting " by Jamshed R. Batliboi, twenty-fifth edition 1970. Discussion by learned author at paras 3 and 4 regarding specimen transactions and how entries are to be effected was relied upon. It was to the following effect : " The following illustrative transactions will serve to emphasise the two-fold effect of each business dealing and also as to how the double effect of every business transaction is reflected by one account being debited and another account being credited. 1. Bought Goods worth Rs. 500 for cash from X. - This is a cash purchase, and the accounts concerned are both Asset Accounts the Goods Account and the Cash Account. As goods have come in, Goods Account will have to be debited, and as Cash has gone out, Cash Account will have to be credited. There is no need to open X's Account inasmuch as X has been paid cash at the time of purchase and is not therefore our creditor. 2. Bought Goods from B on credit for Rs. 600. -This is a credit purchase, and the two accounts affected are the Goods Account (Asset Account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erve Account is a provision for some known or expected loss, such as 'Reserve for Bad Debts 'Reserve for Discounts', 'Reserve for Repairs' and 'Renewals', 'Reserve for Disputed Claims', etc. It is not, therefore, surplus it is not represented by assets and it is not available for dividends. While a Reserve Fund is formed as a result of appropriating profits, a Reserve Account is created by making a charge against revenue before true profits can be ascertained. Whereas it is impossible to create a Reserve Fund except out of divisible profits, a Reserve may be provided even during periods when a loss has been sustained. If these 'Reserves' were designated 'Provisions' and were always shown by way of deduction from the particular assets the loss on which they are intended to cover, no one could then mistake a 'Provision for Bad Debts' or a 'Provision for Renewals' for a Reserve Fund. " The learned advocate for the assessee then took us to certain observations by William Pickles in his text book on Accountancy, third edition, published by the English Language Book Society and Sir Isaac Pitman and Sons Ltd., London. At page 184 of the said text book are found observations about reserv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on revaluation of assets and liabilities. (g) Capital redemption reserve fund. These matters are dealt with in more detail in Chapter XXIII but it may be stated broadly that in certain circumstances some of these profits may be considered as revenue but the better practice is to regard them as capital ; others are subject to special restrictions and treatment in accordance with the provisions of the Companies Act, 1948. (2) Revenue Reserves. -These are normally regarded as avail able for distribution through the Profit and Loss account, but are themselves divided into two classes those immediately and those not immediately so available : (i) General Reserve.-This reserve is created by setting aside profits in order to strengthen the general financial position of the business. Such profits, however, remain available for distribution and for this reason, it is often described as a 'free' reserve. In this group should be included any undistributed balance of the Profit and Loss Account (by deduction, if a debit balance ). (ii) Specific Reserve. - Under this heading are included amounts set aside out of profits for a specific purpose or because of a specific obligation, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to Company Balance-sheet and Profit and Loss Account, published in 1986 by find Law House at Pune at pages 162 and 163 was relied upon. It has been observed therein : "After the expiry of eight years or on the acquisition of new assets the amount of the development rebate reserve will be available for distribution as dividend and will be transferred to the general reserve account. The amount of development rebate is a charge to the profit and loss account ". It was submitted that till expiry of eight years or till acquisition of new assets, the development rebate reserve can be treated to be a charged reserve which would become free the moment the purpose of its creation is established. In this connection, the observations of the learned author on " Free Reserves " at page 184 were pressed into service : " Free reserves includes balance in the share premium account, capital and debentures redemption reserve and such reserve that remains after redemption of preference shares or debentures. Free reserves does not include the balance in any reserve created for repayment, if any, of future liability or depreciation in assets or for bad and doubtful debts. Any other reserve show ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome statement ; as, the setting aside or commitment of net income for dividends, the allocation of net income to a sinking fund or other appropriated surplus reserve or the transfer of net income or the balance of net income to earned surplus (retained earnings). Among corporate enterprises there is some difference of opinion as to what items are income deductions (i.e., deductions from operating revenue before the determination of net income) and what items should be regarded as net-income appropriations ; as a rule, the former are unusual expenses including losses ; the latter transactions with stockholders or an earmarking of earned surplus. In British practice, appropriations also include 'direct', ( i.e., income) taxes. See income deduction ; net income." At page 370 is found relevant discussion in connection with "reserve " : " 1. A segregation or earmarking of retained earnings (earned surplus) evidenced by the creation of a subordinate account ; appropriated surplus ; a 'true' reserve. The earmarking may be temporary or permanent, the purpose being to indicate to stockholders and creditors that a portion of surplus is recognized as unavailable for dividends. Examples : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovided by the balance carried forward from the development rebate reserve account. We have already seen earlier that this apprehension was misconceived as in fact and also in law, dividend had to be distributed out of profits and there were huge amount of profits available for meeting the amount of Rs. 29,000 by way of dividend which was distributed.. Consequently, on the facts of this case, there was no escape from the conclusion that all the conditions precedent as contemplated by section 33 read with section 34(3)(a) of the Act were satisfied by the assessee for not only earning development rebate but for retaining it and the prohibited purposes enumerated by section 34(3)(a)(i) and (ii) were absent on the facts of the present case. There was no occasion for the Revenue to fall back upon section 155(5) of the Act. This discussion would have put an end to the controversy on questions Nos. 1 and 2 but for the fact that certain authorities were pressed into service by both the sides and hence, it would be necessary to quickly glance at them. Mr. Shelat for the Revenue invited our attention to a decision of the Madras High Court in the case of CIT v. Veeraswami Nainar [1965] 55 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the proviso, even though the amount so carried to the reserve fund might be large enough to cover both requirements." It was further stated that (at page 514); " The reserve contemplated by that provision is a separate reserve. The amount transferred to that reserve cannot be utilised for business purposes. The reserve contemplated by proviso (b) to section 10(2)(vib) of the Act is an independent reserve. The amount to be transferred to that reserve is debited before the profit and loss account is made up. That amount is required to be credited to a reserve account to be utilised by the assessee during a period of ten years ( in the present case, the period is reduced to eight years ) for the purposes of the business of the undertaking. The nature of the two reserves is different. They are intended to serve two different purposes. . . that the object of the Legislature in allowing a development of the assessee's business from out of the reserve fund is apparent from the terms of the proviso. The entries in the account books required by the proviso are not an idle formality. The assessee being obliged to credit the reserve fund for a specific purpose, he cannot draw upon the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been transferred to the general reserve, the payment of dividend for the year 1970 out of the general reserve could be considered as having utilised the amount of the development rebate reserve within the period of eight years for the purpose of section 155(5)(ii) of the Act and by an order dated December 27, 1975, he amended the order of assessment for the assessment year 1964-65 and recomputed the total income of the assessment year 1964-65 by adding back the amount of Rs. 49,354 which was originally allowed as development rebate. The petitioner-assessee filed a writ petition challenging the said order of the Income-tax Officer. Accepting the petition, the Division Bench, speaking through P. D. Desai J., held that, as the dividend was already declared and paid out of the general reserve much prior to the date on which the decision to merge the development rebate reserve with the general reserve was taken by the assessee-company, there was no occasion for suggesting that the transferred balance of the development rebate reserve could have been utilised by the assesseecompany for distributing dividend. Mr. Shelat for the Revenue contended that, on this finding of the Division Benc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g been wrongly allowed and action could be taken to rectify the mistake taking advantage of the enlarged period of limitation therein prescribed. Now, in order that the fiction can be invoked, it must be shown that the assessee had utilised the amount credited to the reserve account under section 34(3)(a) before the expiry of the period of eight years, (i) for distribution by way of dividends or profits or (ii) for remittance outside India as profits, or (iii) for the creation of any asset outside India, or (iv) for any other purpose which is not a purpose of the business of the undertaking. Section 155(5) does not expressly provide that if the special reserve, which was created under section 34(3)(a) is merged with any other reserve, the development rebate shall be straightaway deemed to have been wrongly allowed. On this reasoning, the contention of the Revenue that development rebate reserve could not be utilised for eight years and the reserve should be kept intact was repelled. It is true that the Division Bench thereafter examined a further aspect of the matter and came, to the conclusion that, in fact, the development rebate reserve account was kept intact in a separate rese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creation of a reserve fund in the relevant previous year irrespective of the result of the profit and loss account disclosed by the books of the assessee. Mere book entries will suffice for creating such a reserve fund. The debit entries and the entries relating to the reserve fund have to be made before the profit and loss account is finally drawn up. This is condition for securing the benefit of development rebate and if the condition is not satisfied, the deduction on account of development rebate cannot be claimed at all." In the light of the aforesaid settled legal position, it becomes obvious that, while effecting mere book entries on creation of a development rebate reserve, necessary debit and credit entries have to be made before profit and loss accounts are finally drawn up. If the assessee misses to take such a step, he can be said to have missed the bus so far as the claim for development rebate is concerned. On the facts of this case, such is not the situation. It is not in dispute that debit entries of requisite amounts were effected in the profit and loss account and corresponding credit entries were made in the development rebate reserve account by the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case before this court in the aforesaid case. Mr. Shelat then took us to the Calcutta High Court decision in Calcutta Tramways Co. Ltd. v. CIT [1978] 112 ITR 1041. In that case, the Calcutta High Court examined the fact situation before them wherein the assessee-company had created only one reserve, viz., renewals and replacement reserve which could have included the develop ment rebate reserve amount. In the light of this factual position, it was held that the renewals and replacement reserve did not constitute a reserve as contemplated by section 34(3) so as to justify allowance of development rebate under section 33. It is obvious that by creation of any other reserve, whatever may be the excess balance therein would not meet the requirements of the statute which are in the nature of conditions precedent for earning such development rebate. This judgment falls in line with the Supreme Court decision in Indian Overseas Bank Ltd. v. CIT [1970] 77 ITR 512 and does not take the case of the Revenue any further. We were then taken to Leader Engg. Works v. CIT [1980] 124 ITR 44 (P H). In that case, the Punjab and Haryana High Court was concerned with an entirely different fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n after the purpose is exhausted within the eight-year period which is permitted, such fictitious reserve which was merely a shadow of the reserve from the accounting point of view, should be kept hanging and uncredited. This aspect was not considered by the Division Bench and, consequently, it is not possible to endorse the view taken by the said Division Bench. Even otherwise, on the construction of the relevant provisions, we respectfully concur with the view expressed by the Division Bench of this court in Vikram Mills Ltd. v. CIT [1976] 105 ITR 423. In fact, we are bound by the said view and even otherwise, the learned advocate for the Revenue could not persuade us to take a different view and to concur with the dissenting view of the Punjab and Haryana High Court. If he had been able to so persuade us, we would have been required to refer the matter to a larger Bench.But such a contingency does not arise in view of our respectfully concurring with the view of the Division Bench of this court in Vikram Mills Ltd. v. CIT [1976] 105 ITR 423. Mr. Shelat then took us to Surat Textile Mills Ltd. v. CIT [1971] 80 ITR 1 (Guj). The legal position in that case was highlighted to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of the business of the undertaking and that reserve account is prohibited from being used for payment of dividends or remittance of profits outside India. As, factually, it was not found that monies were utilised for payment of dividends to shareholders outside India, the development rebate which was earned was not liable to be withdrawn. This judgment was relied upon by Mr. Patel for the assessee in support of his contention that, if factually, it is found that the amount represented by the development rebate reserve and equivalent amount and even more amount was spent for installing fixed assets, there would remain no case for the Revenue to invoke section 155(5) of the Act. Mr. Patel next invited our attention to another judgment of the Division Bench of the Calcutta High Court in CIT v. Indian Iron and Steel Co. Ltd. [1978] 113 ITR 810. In that case, another Division Bench of the Calcutta High Court was concerned with a fact-situation in which the assessee had created a development rebate reserve account and had spent amounts' from that reserve for the purpose of repayment of a loan. In the light of this fact situation, it was held that there was no violation by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee for distribution by way of dividend or profit and the withdrawal of the development rebate was not justified. The fact situation in the present case is almost parallel to the fact situation which obtained before the Calcutta High Court in the aforesaid case. This decision was rightly pressed into service by the learned advocate for the assessee. In view of the aforesaid discussion, there is no escape from the conclusion that the Revenue had made out no case for withdrawal of development rebate from the assessee for the concerned year. Questions Nos. 1 and 2, therefore, require to be answered in the affirmative, in favour of the assessee and against the Revenue. That leaves out of consideration the aspect reflected by question No. 5 which has been referred for our opinion at the instance of the assessee. That question flows from the observations of the Tribunal in para 15A of its judgment. So far as these observations are concerned, no exception can be taken to the view expressed by the Tribunal while agreeing with Mr. Desai for the Revenue that the assessee cannot urge that only, because some assets have been acquired, it should be deemed that there was utilisatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be answered in favour of the assessee and against the Revenue as it is fully covered by the decision of a Division Bench of this court in CIT v. Karamchand Premchand Pvt. Ltd. [1985] 152 ITR 94. This decision was rendered in the case of this very assessee for earlier years. In that case, the Division Bench, speaking through S. L. Talati I., took the view that when the shareholders of the company desired to remunerate the three directors for extra work rendered by them, such remuneration intended to be paid as salary to the directors can be treated to be amount paid to employees of the company and, therefore, expenditure thereon can be treated as permissible expenditure on the employees. It, therefore, becomes obvious that Rs. 27,000 being contribution to the superannuation fund and Rs, 12,000 being contribution to the provident fund in respect of the directors of the company who were treated as employees had to be considered as allowable expenditure. Question No. 3 is, therefore, answered in the affirmative, in favour of the assessee and against the Revenue. Question No. 4. -This question centres round the claim for deduction of Rs. 36,918 said to have been spent by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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