TMI Blog1976 (3) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... sum of pound 1,00,000 to the renewals and replacement account by debit to the applicant's general revenue account for the year 1961 constitutes credit to a 'reserve account' as contemplated by section 34(3) of the Income-tax Act, 1961, so as to justify allowance of development rebate under section 33 of this Act ? " Mr. Ginwalla has drawn our attention to the agreement entered into between the assessee-company and the Government of the State of West Bengal incorporated in the Calcutta Tramways Act, 1961. The material portions of clause 4(1) of this agreement read as follows : " 4(1). The company shall apply its revenue in the manner following that is to say : (a) Firstly, paying all expenses of maintaining and working the undertaking including debenture interests ; (b) Secondly, paying all Indian and United Kingdom taxes payable by the company ; (c) Thirdly, setting aside in each accounting year in a renewals and replacement reserve account, the sum of 80,000 pound sterling or such greater sum as the directors of the company for the time being may in consultation with the Government consider necessary in the light of experience and in view of the compensation (sic) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 34(3)(a) of the Income-tax Act does contemplate a " reserve fund " which has to be set apart under a separate head and which could only be used for the purpose of business of the assessee other than : (a) for distribution by way of dividends and profits ; (b) for remittance outside India as profits or for, creation of any asset outside India. In the other reference the amount equal to seventy five per cent. of the development rebate to be actually allowed has been shown in the balance-sheet to have been expressly debited from the " shareholders' account " and added back under the same account. There the sum of pound 9,473 has been kept under sub-head " special accounts " under " shareholders' account ". The point to be decided here is whether this sum of pound 9,473 could also be deemed to have been credited as " reserve " in the " renewals and replacement account ". There is no doubt that the actual meaning of " renewals and replacement account " is that the amount lying in such account is set apart when renewals and replacements of a plant or machinery are required for the purpose of carrying on the business. It cannot, therefore, be said that the amount set apart under thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the gross profits arrived at under section 4, the whole of the development rebate admissible under the Income-tax Act, i.e., the amount, seventy-five per cent of which comes to Rs. 7 lakhs. The error the Tribunal fell into was in mixing up the development rebate reserve to which the company had to appropriate Rs. 7 lakhs in P. L. account and the development rebate of Rs. 8.87 lakhs allowable to it under section 6 of the Act. Thus, it is made clear by the Supreme Court that under the Bonus Act the company is entitled to deduct bonus out of the gross profits of the company. In that case, the entire sum of Rs. 8.87 lakhs should have been allowed under section 6 of the Bonus Act. But in section 34(3)(a) of the Income-tax Act only seventy-five per cent. of the said sum of Rs. 8.87 lakhs has to be set apart in a " reserve account " to enable the assessee to get the development rebate. The Supreme Court has, therefore, held that there was no justification for the Tribunal to allow Rs. 7 lakhs instead of Rs. 8.87 lakhs as development rebate, inasmuch as, under section 6(b) of the Bonus Act, the company is entitled to deduct, out of the gross profits arrived at under section 4, the who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equirements of section 17 of the Banking Companies Act, 1949, as well as proviso (b) to section 10(2)(vib) of the Indian Income-tax Act of 1922, which happens to be substantially identical with the provision of section 34(3) of the Income-tax Act, 1961. It was the assessee's case that it should be entitled to a development rebate inasmuch as the amount required to be deposited in a reserve account under the Income Income-tax Act of 1922 has been included in the " reserve fund " created by the assessee under section 17 of the Banking Companies Act. The development rebate in the Supreme Court case was claimed on the basis of a reserve fund of rupees six lakhs in compliance with section 17 of the Banking Companies Act. Maintenance of such a reserve is mandatory on the part of every banking company. Under the said Act, the reserve of a sum equal to not less than twenty per cent. shall have to be created out of the net profits of each year. Mr. Ginwalla has contended that the amount to be transferred to "reserve account " under proviso (b) to section 10(2)(vib) is to be debited before the profit and loss account is made up or completed, whereas, under the Banking Companies Act, the rese ..... 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