TMI Blog1984 (4) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... lly assessed by the Revenue was Rs. 2,528. This, reference relates to the assessment year 1967-68 (accounting year ended April 30, 1966). For this year the total income was assessed at Rs. 20,182, after allowing development rebate of Rs. 16,695 on the additions to machinery made during the relevant accounting year. No allowance was, however, made in respect of the carry forward development rebate of Rs. 15,121 which had been unsuccessfully claimed for the assessment year immediately preceding. The assessee appealed before the AAC against the assessment for the assessment year 1967-68 and contended, inter alia, that the ITO should have allowed as carried forward unadjusted development rebate Rs. 15,121 claimed by the assessee for the assessment year 1966-67. The AAC admitted the assessee's claim and directed that the development rebate relating to the assessment year 1966-67, which could not be allowed in that year due to paucity of profits, be allowed against the assessee's income for the assessment year 1967-68. The AAC found that though the assessee had been unable to create a development rebate reserve in the year ended April 30, 1965, in view of the paucity of profits, it had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... must, but not so for claiming the rebate ; that if the total income was already less than nil, there was no scope for making any allowance as development rebate in that year; that s. 33(2)(ii) provides that the amount of development rebate, to the extent to which it has not been allowed as provided under s. 33(2)(i), shall be carried forward to the following assessment year and that if it has not been allowed at all in the preceding assessment year, the entire amount of development rebate will have to be considered in the following year. For those reasons, the Tribunal upheld the decision of the AAC. Mr. Wazir Singh, the learned counsel for the Department, first invited our attention to the historical background of the development rebate and we may notice it. Prior to April 1, 1955, under the Indian I.T. Act of 1922 (for short, called " 1922 Act "), there was no provision for the grant of development rebate. The Finance Act, 1955, introduced with effect from April 1, 1955, clause (vib) in s. 10(2) of the 1922 Act, and made provision for the grant of development rebate. Under the scheme of s. 10(2), provision was made for different types of allowances which were permitted as dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , or where the ship had been acquired or the machinery or plant had been installed before January 1, 1958, an amount equal to 75% of the development rebate to be actually allowed was debited to the profit and loss account of the relevant previous year and credited to a reserve account to be utilised by him during a period of 10 years next following for purposes of the business of the undertaking, except (1) for distribution by way of dividends or profits, or (2) for remittance outside India as profits or for the creation of any asset outside India. When the I.T. Act, 1961, was enacted, the provisions of s. 10(2)(vib) were divided into two parts, viz., ss. 33 and 34, and certain changes were made. The material provisions for our purpose in this reference are ss. 33 and 34(3)(a) of the Act. Sub-s. (1) of s. 33 grants development rebate at varying rates in respect of ships, machinery and plant on the conditions specified therein. Section 33 provides for the circumstances or conditions in which an assessee would be entitled to the development rebate as well as the maximum amount of rebate. We are not concerned in this reference with other conditions except one. Section 33(1)(a), howe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our view is thus clearly, settled that the creation of the reserve contemplated by the statutory provisions is a condition precedent for obtaining the allowance of development rebate. An assessee is not entitled to the allowance of development rebate if necessary reserve in accordance with the provisions of s. 34(3)(a) has not been made. Creation of the reserve is a sine qua non for the allowance. The main question with which we have to dial in answering this reference is whether on a true construction of the provisions of ss. 33 and 34 of the Act, it can be said that the reserve contemplated by s. 34(3)(a) must be created in the year of acquisition or installation or whether it can be created in the course of any subsequent years so long as it is created during the period of eight years from the year of acquisition or installation. The contention of the counsel for the Department is that on a plain reading of the statutory provisions, it must be construed that the reserve has to be created during the year of account being the previous year in which the ship was acquired or plant or machinery installed. Stress is laid on the word " actually allowed " occurring in s. 34(3)(a) to m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was an admitted fact that those machines had earned development rebate at the higher rate of 35%, the total of the development rebate to which the assessee was held entitled did not transgress the limit of 75% reserve created by the assessee. The Gujarat High Court expressed the opinion that those two items should be allowed to earn the higher rate of rebate at 35%. Another case relied upon by the counsel is Barar Lion Buttons (P) Ltd. v. CIT [1973] 87 ITR 44 (P H). Again it dealt with the question of reserve contemplated by s. 34(3) as a condition precedent for obtaining the allowance of development rebate, during the accounting year of installation relevant to the assessment year in that case. It was not dealing with the question of carry forward of the development rebate and the creation of the development rebate reserve in the year of installation. In the case of CIT v. 1. Thomas and Co. Pvt. Ltd. [1977] 110 ITR 566 (Cal), the assessee was held not entitled to the development rebate in respect of the lifts and central air-conditioning plant as certain conditions were not fulfilled. The machinery or plant was not used wholly for the purpose of the assessee's business. This c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the same is credited to a reserve account. Ceiling of allowable deduction is provided in s. 33(2)(i). Only so much of the allowable development rebate can be deducted from a year's total income as would reduce such total income to nil. Section 33(2)(ii) provides for carry forward of the unabsorbed amount of allowable development rebate to the following assessment year or years. The amount of development rebate, to the extent to which it has not been allowed under s. 33(2)(i), can be carried forward and the development rebate to be allowed for the following assessment year has again to be such amount as is sufficient to reduce the total income of the assessee assessable for that year to nil. The balance of the unabsorbed amount can be carried forward and would be available for a period of eight assessment years. These provisions show that the allowability of the development rebate is not confined to the year of installation of plant or machinery but can be carried forward and allowed for a period of eight assessment years immediately succeeding the assessment year in respect of which the claim could be made. The unabsorbed development rebate can thus be carried forward and can be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conditions is the creation of a 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 created 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 the reserve is not a condition for making the claim for rebate unlike actual allowance of it. A Division Bench of the Calcutta High Court in the case of West Laikdihi Coal Co. Ltd. v. CIT [1973] 87 ITR 501, took the view that the whole object of granting development rebate would fail if creation of the reserve account is insisted on in the year of installation of the new plant or mac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mills (P.) Ltd. [1976] 104 ITR 682, that the ITO should in the year of installation of the plant or machinery or the first year of use, as the case may be, determine the amount of rebate allowable since the allowance, and not the determination, has been made dependent on the creation of reserve. The decision of the Bombay High Court in the case of Indian Oil Corpn. Ltd. [1972] 92 ITR 241 (Bom), was quoted with approval. The Allahabad High Court in Addl. CIT v. Vishnu Industrial Enterprises [1980] 122 ITR 919, held that the condition precedent for the creation of development rebate reserve is only at the time of actual allowance of the rebate. This condition precedent should be complied with at that time. Before an assessee claims the deduction for being actually allowed, he should create a reserve by debiting the profit and loss account and crediting the reserve account with the requisite amount of money. This can be done only in the year in which profits are earned. The scheme of carrying forward unabsorbed development rebate postulated by s. 33(2) can be achieved only if it is permissible to create reserve by making the requisite entries to the extent the income is able to absor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sufficient to cover 3/4ths of the amount of actual development rebate which is to be allowed in that year. Considering the facts of that case it was opined that though nominally the assessee is entitled to development rebate it gets no relief in this assessment year and the amount has only to be carried forward to subsequent years and will be allowed in the various assessment years depending upon the fulfilment of the requirements for the creation of the reserve in the respective previous year(s) in regard to which the development rebate is actually allowed to the assessee. The consensus of judicial opinion is against the Department. The position was clarified by the Department itself in the Board of Direct Taxes Circular No. F. 10/49/65-ITA-1, dated October 14, 1965 which explains the position regarding the creation of statutory reserve for allowance of development rebate. The Board issued Circular No. 189, dated January 30, 1976, reiterating the position regarding the creation of statutory reserve. It clarified that in a case where the total income computed before allowing the development rebate is a loss, there was no legal obligation to create any statutory reserve in that ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year in question, and the assessee was entitled to the allowance of development rebate in the year in question and to get the entire amount of development rebate carried forward to be adjusted in the subsequent year. The Andhra Pradesh High Court in the case of CIT v. Agro Insecticides Allied Industries [1981] 127 ITR 796, answered a similar question of law in favour of the assessee solely in view of the Board's Circular No. 189, dated January 30, 1976. The Allahabad High Court in Addl. CIT v. Vishnu Industrial Enterprises [1980] 122 ITR 919, also referred to these two circulars and observed that the Supreme Court in Navnit Lal C. Javeri v. K.K. Sen, AAC [1965] 56 ITR 198 and Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913, has held that the Income-tax authorities are bound by the Board's Circulars and that the same are entitled to be given effect by the courts as well. It was then held by the Allahabad High Court that these circulars supported the assessee's contention which was the same as in the present case before us. It was contended by Mr. Wazir Singh that the Supreme Court did not lay down law that all circulars issued by the Central Board of Direct Taxes are entitled to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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