TMI Blog1976 (3) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 32 shall be allowed only if the prescribed particulars have been furnished ; and the deductions referred 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 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 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; ........." Deduction referred to in the said section 34(3)(a) is allowed to a company as development rebate for the purpose of giving incentive to carry on, or to continue to carry on, business in respect of new ship acquired or new machinery or plant installed which is owned by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the assessee which was executed on August 30, 1951. Reference has been made to clause 4(1) of the said agreement set out in the First Schedule to the Act. Clause 4(1) reads as follows : " 4. (1) The company shall apply its revenue in the manner following, that is to say :-- (a) Firstly, paying all expenses of managing, maintaining and working the undertaking, including debenture interest ; (b) Secondly, paying all Indian and United Kingdom taxes payable by the company ; (c) Thirdly, setting aside in each accounting year in Renewal and Replacement Reserve Account, the sum of eighty thousand pound sterling or such greater sum as the directors of the company for the time being may in consultation with the Government consideration necessary in the light of experience and in view of the expansion of the undertaking or increase price ; (d) Fourthly, setting aside in each accounting year in a fund (hereinafter called the shareholders ' account' the following sums :-- (i) pound 87,457 together with (ii) four per cent. upon any additions outside share capital raised by the company with the consent of the Government after the date of agreement ; (e) Fifthly, accu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is not entitled to development allowance under section 34(3)(a) cannot be accepted inasmuch as, on a proper construction of the said sub-section, there is no mandatory requirement for setting apart an amount equal to seventy-five per cent. of the development rebate to be actually allowed under a separate or independent head. The statute requires that if an assessee claims development rebate under section 33 such amount should be credited to a reserve account to be utilised by the assessee during a period of eight years next following, for the purpose of the assessee's business. The only two exceptions which disentitle the assessee to get advantage of the development allowance are stated in the said sub-clause which are as follows : Firstly, the assessee will not get the advantage of such rebate if the development reserve is utilised for distribution by way of dividends or profits within the said eight years. Secondly, the income-tax authorities will deny the assessee development allowance if the money set apart in the reserve account for remittance outside India as profits or for the creation of any asset outside India during the said eight years. Section 34(3)(a being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eserve fund should be made at the time of making up the profit and loss account." The Supreme Court has construed section 17 of the Banking Companies Act, 1949, and in that context has made the aforesaid observations. In that case, the appellant, a public limited company, carrying on banking business claimed allowance, by way of development rebate under proviso (b) of section 10(2)(vib), amounting to Rs. 1,37,836 in the computation of its business income. Admittedly, there also no separate reserve fund as required by proviso (b) to section 10(2)(vib) had been created. Under the Indian Income-tax Act, 1922, also the grant of rebate is made subject to conditions prescribed in proviso (b) to section 10(2)(vib). The Supreme Court has made the observation at page 514 : " The creation of the reserve contemplated by this provision is a condition precedent for obtaining the allowance of development rebate." But the learned judges have arrived at the said conclusion on the basis of the express provision in section 17 of the Banking Companies Act, 1949, which reads as follows : ' Every banking company incorporated in India shall maintain a reserve fund, and shall, out of the net profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... defined in the Income-tax Act. William Pickles in his book of " Accountancy ", at page 184, has defined " reserves " as " amounts" set aside out of profits and other surplus which are not designed to meet any liability, contingency, commitment or diminution in value of assets known to exist at the date of the " balance sheet ". In the Shorter Oxford Dictionary, " reserve " has been understood as " to keep for future use or enjoyment ", " to using or enjoying at once ", " to keep back or held over to a later time or place or for further treatment ", " to set apart, kept for another ". Relying upon Metal Box Company of India Ltd. v. Their Workment [1969] 73 ITR 53 (SC), Mr. Sengupta on behalf of the revenue has made the distinction between " reserve " and provision The Supreme Court in that decision has made it clear that provision as distinguished from " reserve " provides for a known liability of which the amount can be determined with substantial accuracy. There is no scope for such distinction in the present case before us inasmuch as the development rebate reserve account is not to be set apart for a known liability. Section 34(3)(a) read with section 155(5) allows the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shareholders' account of the assessee's business only a sum of pound 2,006 was left. But in this particular case, even after payment of dividend and other liabilities, the shareholders' account comprised much larger sum than the sum of pound 9,473 which must be held to have been included in the reserve account in compliance with section 34(3)(a) of the Act. Reference has been made by Mr. Ginwalla to Clayton's case : Devaynes v. Noble [1816] 35 ER 781 in support of the well-settled proposition of law " it is the sum first paid in, that is first drawn out ". He has applied this principle in support of the assessee's case that there is sufficient money in the shareholders' account out of which the said sum of pound 9,473 could be separately spent. In our view, apart from the said propositions of law it is obvious that although the assessee-company has not set apart pound 9,473 as a reserve account under a separate head such as development reserve, the sum required to be set apart for the purpose of development allowance has not been completely merged in the shareholders' account. On the contrary, it is a clear admission in the balance-sheet that the said sum of pound 9,473 would be a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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