1982 (4) TMI 58 - HC - Income Tax

Summary

Issues Involved:
1. Eligibility for development rebate under Section 34(3)(a) of the Income-tax Act, 1961.
2. Timing and creation of the development rebate reserve.
3. Compliance with procedural requirements for finalizing accounts.

Issue-wise Detailed Analysis:

1. Eligibility for Development Rebate under Section 34(3)(a) of the Income-tax Act, 1961:
The primary issue was whether the assessee was entitled to a development rebate under the provisions of Section 34(3)(a) of the Income-tax Act, 1961. The assessee, a private limited company dealing in alcohol, claimed a development rebate for fermentation tanks valued at Rs. 1,40,000. However, the Income Tax Officer (ITO) disallowed the claim on the grounds that the necessary appropriation for the development rebate reserve was not made in the profit and loss account for the year ending 31st March, 1964.

2. Timing and Creation of the Development Rebate Reserve:
The crux of the dispute revolved around whether the development rebate reserve was created within the required timeframe. The original accounts for the year ending 31st March, 1964, did not include an appropriation for the development rebate reserve. However, after the accounts were audited in November 1964 and presented to the shareholders, a resolution was passed to create the reserve in the accounts for that year. The auditor advised that it was not necessary to draw up a fresh balance-sheet, and the necessary adjustments were made in the balance-sheet for the year ending 31st March, 1965.

The Tribunal, upon remanding the case, observed that if the provision had already been made in the accounts either in that year or the next, there was no reason to deprive the assessee of the development rebate. The Tribunal ultimately held that the non-provision of the development rebate reserve before the shareholders' approval was immaterial, as the accounts were amended accordingly.

3. Compliance with Procedural Requirements for Finalizing Accounts:
The Revenue contended that the development rebate could not be allowed unless the amount was debited to the profit and loss account and credited to a reserve account before the accounts were closed. The court examined various precedents, including the Supreme Court's decision in Indian Overseas Bank Ltd. v. CIT and the Gujarat High Court's rulings, which emphasized that the necessary entries must be made before the profit and loss account is finalized.

However, the court noted a more liberal view in other cases, which allowed the creation of the reserve as long as proceedings were pending before the ITO. In this case, the assessee had taken steps to create the reserve before filing the return and long before the assessment proceedings began. The court concluded that the development rebate reserve was effectively created before the finalization of the accounts, as the shareholders' resolution and the auditor's adjustments were sufficient to meet the requirements of Section 34(3)(a).

Conclusion:
The court held that the development rebate reserve had been created in compliance with the relevant provisions before the finalization of the accounts. The resolution of the shareholders and the subsequent adjustments by the auditor were deemed sufficient to satisfy the conditions for claiming the development rebate. Consequently, the court answered the question of law in the affirmative, ruling in favor of the assessee.