1978 (8) TMI 19 - HC - Income Tax

Development Rebate Reserve Industrial Undertaking Instructions Issued By CBDT Supreme Court

Issues Involved:
1. Entitlement to deduction under Section 84 for the assessment year 1967-68.
2. Entitlement to allowance of development rebate on assets for the assessment year 1967-68.
3. Entitlement to deduction under Section 80J for the assessment year 1968-69.
4. Entitlement to allowance of development rebate on assets for the assessment year 1968-69.

Detailed Analysis:

1. Entitlement to Deduction under Section 84 for the Assessment Year 1967-68:
The assessee claimed relief under Section 84 of the Income-tax Act, 1961, for seven units established after 1961, arguing that each unit constituted a "new industrial undertaking." The Income Tax Officer (ITO) rejected this claim, asserting that the units were not new industrial undertakings eligible for relief. The Tribunal upheld the ITO's decision, citing that the units were part of a single collaboration agreement, lacked separate accounts, and were not independently viable. The Tribunal's decision was based on a similar judgment by the Calcutta High Court in CIT v. Textile Machinery Corporation [1971] 80 ITR 428.

However, the Supreme Court later reversed this Calcutta High Court decision in Textile Machinery Corporation v. CIT [1977] 107 ITR 195, stating that new units producing different commodities from the existing business are entitled to relief under Section 15C (corresponding to Sections 84 and 80J of the Act). The Supreme Court emphasized that the new undertaking must be a separate and distinct unit capable of existing independently. Thus, the High Court concluded that the Tribunal's denial of relief under Section 84 was erroneous.

2. Entitlement to Allowance of Development Rebate on Assets for the Assessment Year 1967-68:
The assessee claimed development rebate under Section 33 on assets valued at Rs. 68,393. The ITO denied this claim, stating that the required reserve had not been created. The Appellate Assistant Commissioner (AAC) directed the ITO to reconsider this based on instructions from the Central Board of Direct Taxes (CBDT). The Tribunal overturned the AAC's direction, mistakenly believing that the CBDT's instructions had been withdrawn.

The High Court clarified that the CBDT's instructions, which allowed for condoning genuine deficiencies in the creation of the reserve, were still valid. The Tribunal's misconception led to an incorrect decision. Therefore, the High Court held that the assessee was entitled to the development rebate as per the CBDT's instructions.

3. Entitlement to Deduction under Section 80J for the Assessment Year 1968-69:
For the assessment year 1968-69, the assessee claimed deduction under Section 80J, which replaced Section 84. The Tribunal denied this claim for the same reasons it denied the Section 84 claim for the previous year. The High Court reiterated its reasoning from the Section 84 analysis, stating that the new units were separate industrial undertakings entitled to relief. Thus, the Tribunal's decision to deny the deduction under Section 80J was erroneous.

4. Entitlement to Allowance of Development Rebate on Assets for the Assessment Year 1968-69:
The assessee claimed development rebate on assets valued at Rs. 1,60,066 for the assessment year 1968-69. The ITO denied this claim on the same grounds as the previous year. The High Court applied the same reasoning as in the 1967-68 development rebate issue, concluding that the Tribunal's denial based on a misconception of CBDT's instructions was incorrect. Therefore, the assessee was entitled to the development rebate for the assessment year 1968-69.

Conclusion:
In both cases, the High Court answered:
1. The assessee was entitled to deductions under Sections 84 and 80J for the respective years.
2. The Tribunal's denial of development rebate was incorrect, and the assessee was entitled to the rebate as per CBDT's instructions.

The High Court's decision favored the assessee on all counts.

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