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Issues: Challenge to order under section 263 of the Income Tax Act regarding withdrawal of development rebate set off. Interpretation of provisions related to development rebate reserve creation.
In this judgment, the High Court of Karnataka considered a writ petition challenging the order of the Commissioner of Income Tax (CIT) dated October 26, 1974, issued under section 263 of the Income Tax Act, 1961. The order directed the withdrawal of the development rebate set off allowed in the assessment for 1973-74, which related to the development rebate carried forward from the assessment year 1968-69. The CIT's basis for interference was the absence of a development rebate reserve created in the year of installation of new machinery, as required under the Act. The assessee contended that the CIT's view was erroneous and contrary to departmental circulars. The Court noted that in the assessment year 1968-69, the assessee had incurred a loss before any allowance of development rebate, thus no reserve was created due to lack of profits. Subsequently, in certain assessment years, development rebate was computed but not allowed due to insufficient profits. It was only in the assessment year 1973-74 that there was adequate profit to set off a portion of the carried forward development rebate, and a specific reserve was created as required by section 34 of the Act. The Income Tax Officer (ITO) had set off the unabsorbed development rebate to the extent of available profits in 1973-74 and directed the remaining amount to be carried forward. The Court considered the decision of the Madras High Court in Radhika Mills Ltd. v. CIT, which supported the assessee's position, but the CIT did not accept it. The Court found the CIT's view untenable, citing precedents from the High Courts of Bombay and Calcutta that aligned with the Madras High Court's ruling. The Court highlighted that section 33(2) of the Act allows for the carry forward of unabsorbed development rebate for up to eight years, irrespective of the creation of a specific reserve in the year of new machinery installation. The Court also referenced a circular by the Central Board of Direct Taxes clarifying that no statutory reserve creation was required in a year of loss before allowing development rebate. The circular was issued in response to previous court decisions and withdrawals of earlier instructions. The Court concluded that the CIT's grounds for interfering with the ITO's order were not valid, and thus quashed the Commissioner's order, with each party bearing their own costs.
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