TMI Blog1976 (3) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit and loss account of the partnership firm was first prepared, no provision for development rebate reserve was made nor was a reserve created at that time. But, some time prior to the filing of the return, the exact date not being known, development rebate reserve was created by drawing up what was referred to by the assessee as the general profit and loss account of Samvat year 2023. When the profit and loss account was first prepared, the net profit amounting to Rs. 1,13,960.70 was distributed amongst the five partners by making the necessary havala entries in the books of account. At the time when what is referred to as the general profit and loss account for Samvat year 2023 was drawn up some time before the return was filed, entries were made and the amount of the development rebate reserve was proportionately debited to the accounts of the partners and was credited to the development rebate reserve account. An amount of Rs. 61,692 being the amount of the reserve was credited in this manner. It may be mentioned that the amount was debited to the capital accounts of the different partners. At the time of assessment the Income-tax Officer held that the reserve was not created ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us for our opinion. As has been pointer out by the Allahabad High Court in Commissioner of Income-tax v. Modi Spinning Weaving Mills Co. Ltd., during the last few years a number of cases have come up before the courts involving the consideration of proviso (b) to section 10(2)(vib) of the Indian Income-tax Act, 1922, equivalent to section 34(3) of the Income-tax Act, 1961. Section 10 of the Act of 192 2 provides by sub-section (1), that tax shall be payable by an assessee under the head "Profits and gains of business, profession or vocation" in respect of the profits or gains of any business, profession or vocation carried on by him. Sub-section (2) of section 10 provided that such profits or gains shall be computed after making the allowance mentioned therein. Under clause (vib) of section 10, sub-section (2), provision was made for allowance by way of development rebate and under the proviso to section 10(2)(vib) it was laid down that no allowance under this clause shall be made unless, inter alia, an amount equal to 75 per cent. 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 res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eated. On these facts, it was held, that the assessee was not entitled to the development rebate. The grant of this rebate was a concession subject to the fulfilment of the conditions prescribed under the proviso, and the creation of a reserve fund under section 17 of the Banking Companies Act was not sufficient compliance with the proviso eventhough the amount so carried to the reserve fund might be large enough to cover both requirements. Hegde J., delivering the judgment of the Supreme Court, observed at page 514 of the report: "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 for the purposes of the business of the undertaking. The nature of the two reserves are different. They are intended to serve two different purposes. As observed by the Madras High Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls Ltd.'s case was followed by this High Court in Additional Commissioner of Income-tax v. Shri Subhlaxmi Mills Ltd. At page 204 of the report it was observed : In Surat Textile Mills Ltd. v. Commissioner of Income-tax a Division Bench of this High Court has held that under clause (b) of the proviso to section 10(2)(vib) of the 1922 Act, the amount to be transferred to the reserve contemplated by that clause must be debited before the profit and loss account is made up and, secondly, the transfer to the reserve fund should be made at the time of making up of the profit and loss account. We agree with that conclusion because that conclusion follows from the decision of the Supreme Court in Indian Overseas Bank Ltd. v. Commissioner of Income-tax and the earlier decision in Commissioner of Income-tax v. Veeraswami Nainar ." Thus, the view which this High Court has taken following the observations of the Supreme Court in Indian Overseas Bank Ltd.'s case is consistent, viz., that in the case of development rebate, one of the conditions precedent to the allowance of that development rebate is that the amount to be transferred to the reserve contemplated by law must be debited befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh High Court reached while interpreting section 10(2)(vib), proviso (b), and we are entirely in agreement with that decision." The revenue Urged before the Punjab and Haryana High Court that the requirements of the proviso to section 10(2)(vib) should be complied with before the close of the account year or before the making up of the profit and loss account but the High Court repelled that contention and held that it was open to the assessee to make these entries at any time before the assessment is completed. With respect, we are unable to agree with the learned judges of the Punjab and Haryana High Court and for the reasons which have been stated in Surat Textile Mills Ltd.'s case we read the decision of the Supreme Court in Indian Overseas Bank Ltd. v. Commissioner of Income-tax in the same manner as has been set out in Surat Textile Mills Ltd.'s case and we see no reason to differ from the view taken by this court in Surat Textile Mills Ltd.'s case which was followed in Shri Subhlaxmi Mills Ltd.'s case . Before the Allahabad High Court in Commissioner of Income-tax v. Modi Spinning and Weaving Mills Co. Ltd., the decision of this court in Surat Textile Mills Ltd.'s case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said amount to a separate development rebate reserve account. In view of the decisions of our High Court in Surat Textile Mills Ltd.'s case and in Shri Subhlaxmi Mills Ltd.'s case, Mr. Patel for the assessee contended that all that he has done in the instant case is making adjustment entries by crediting the requisite amount to the development reserve account and debiting the accounts of the partners after the net profit of Samvat year 2023 was transferred to the individual accounts of the partners by the necessary havala entries. The question then arises whether it is open to any person to reopen his accounts in this manner. In Commissioner of Income-tax v. A. Gajapathy Naidu, the Supreme Court held that the question of reopening of accounts is not relevant in the matter of ascertaining when a particular income accrued or arose. At page 119 of the report, Subba Rao J., as he then was, delivering the judgment of the Supreme Court observed: "No power is conferred on the Income-tax Officer under the Act to relate back an income that accrued or arose in a subsequent year to another earlier year on the ground that the said income arose out of an earlier transaction. Nor is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company. We are unable to accept this contention of his. The moment the net profit for Samvat year 2023 was ascertained at Rs. 1,13,960.70 and that amount was distributed amongst the partners of the firm Pro rata according to their shares, the profit and loss account was made up and it was closed so far as Samvat year 2023 was concerned. Subsequent entries debiting the 'partners' capital accounts Pro rata for the purpose of creating a development rebate reserve of Rs. 61,692 was in effect and substance an item of expenditure on the one hand so far as the firm was concerned and a pro rata contribution to the development rebate reserve so far as the partners individually were concerned. So far as a partnership firm is concerned, once the share of the profit of each partner is ascertained and the havala entries are made crediting the account of each partner with the share of profit coming to him, the profit and loss account for that year is made up and it cannot be said that thereafter anything further requires to be done for making up that profit and loss account. The requirement of section 34(3) of the Act of 1961 is that the profit and loss account must be debited with the amount o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the amount of the net profit is ascertained, at no subsequent time can the amount be debited to the profit and loss account by making further necessary entries. In this case that moment of time passed when the partners made up the profit and loss account and ascertained the figure of amount of profit at Rs. 1,13,960.70 and distributed that amount amongst the partners by making the necessary havala entries in the books of account of the firm. It is obvious that if the amount of the development rebate reserve of Rs. 61,692 had been debited to the profit and loss account before it was finally made up, the amount of net profit available for distribution amongst the partners would have been reduced correspondingly but that was not done and it was the amount of Rs. 1,13,960.70 without making provision for the development rebate reserve that was distributed amongst the partners. On the facts of this case, as found by the Tribunal, it is obvious in the light of the decisions of this court in Surat Textile Mills Ltd.'s case and Shri Subhlaxmi Mills Ltd.'s case, that the partners failed to comply with the requirements of section 34(3) of the Act of 1961, by making the appropriate entries ..... X X X X Extracts X X X X X X X X Extracts X X X X
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