1997 (10) TMI 25 - HC - Income Tax

Summary

Issues Involved:

1. Claiming of development rebate by the assessee for the assessment year 1971-72.
2. Creation of requisite reserve for development rebate.
3. Rectification of the assessment order under section 154 of the Income-tax Act, 1961.
4. Interpretation of section 34(3) of the Income-tax Act, 1961.
5. Applicability of the Board's circulars and judicial precedents.

Issue-wise Detailed Analysis:

1. Claiming of Development Rebate by the Assessee for the Assessment Year 1971-72:
The assessee, a company, claimed a development rebate of Rs. 1,14,359 during the assessment year 1971-72 for a new machinery purchase. The Income-tax Officer initially disallowed the claim due to the absence of a requisite reserve. However, the Appellate Assistant Commissioner waived this requirement based on the Board's circular dated October 14, 1965, as the company incurred a loss with no assessable income. The Income-tax Officer later allowed the development rebate for the assessment year 1972-73, including the carried forward amount from 1971-72.

2. Creation of Requisite Reserve for Development Rebate:
For the assessment year 1972-73, the assessee claimed a development rebate of Rs. 9,62,422 and created a reserve of Rs. 7,22,000. The Income-tax Officer allowed the claim but later realized that the reserve created was only adequate for the 1972-73 claim and not for the carried forward amount from 1971-72. The Officer proposed to revise the assessment to withdraw the excess development rebate of Rs. 1,14,114, as no reserve was created for 1971-72.

3. Rectification of the Assessment Order Under Section 154 of the Income-tax Act, 1961:
The Income-tax Officer rectified the mistake under section 154, disallowing the development rebate for 1971-72 due to the absence of a reserve. The Appellate Assistant Commissioner upheld this rectification, stating that the original allowance was a patent mistake. The Tribunal, however, found that the assessee created an excess reserve in the subsequent year, sufficient to cover the shortfall, and thus, there was no excessive rebate by mistake.

4. Interpretation of Section 34(3) of the Income-tax Act, 1961:
Section 34(3)(a) stipulates that 75% of the development rebate must be debited to the profit and loss account of the relevant previous year and credited to a reserve account. The court noted that this condition is a pre-requisite for claiming the development rebate. The assessee did not create the requisite reserve in the years 1971-72 or 1972-73, leading to the rectification by the Income-tax Officer.

5. Applicability of the Board's Circulars and Judicial Precedents:
The Tribunal relied on the Board's circulars, which allowed the shortfall to be made up in subsequent years. The court noted conflicting views among various High Courts and the Central Board of Direct Taxes' inconsistent positions. The court observed that the rectification under section 154 was not justified due to the lack of a clear judicial precedent at the time of the original assessment and the conflicting interpretations.

Conclusion:
The court held that the Income-tax Officer was not justified in invoking section 154 to rectify the assessment for 1972-73. The Tribunal's decision to allow the development rebate based on the subsequent creation of the reserve was upheld. The question of law was answered in the affirmative and against the Revenue, with no order as to costs.