1979 (7) TMI 73 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement to development rebate under section 34(3) of the Income-tax Act, 1961, in the absence of accounts and reserve creation.
2. Eligibility for development rebate without fulfilling the condition of creating a reserve due to the absence of profit.

Issue-wise Detailed Analysis:

1. Entitlement to Development Rebate under Section 34(3) of the Income-tax Act, 1961, in the Absence of Accounts and Reserve Creation:

The primary issue was whether the assessee was entitled to a development rebate under section 34(3) of the Income-tax Act, 1961, despite not maintaining any accounts and consequently failing to create the necessary reserve. The assessee owned three fishing boats and claimed a development rebate for these boats. However, the Income Tax Officer (ITO) rejected the claim, citing the absence of maintained accounts and the lack of a reserve creation. The Appellate Assistant Commissioner (AAC) upheld this decision, noting that the expenses claimed could not be verified due to the absence of vouchers. The Income-tax Appellate Tribunal, however, found that the boats were new and that there were insufficient profits to set off the full amount of depreciation, thus negating the need for a reserve creation. The Tribunal concluded that the condition of reserve creation need not be fulfilled in the absence of profit.

2. Eligibility for Development Rebate Without Fulfilling the Condition of Creating a Reserve Due to Absence of Profit:

The second issue was whether the assessee was eligible for a development rebate without fulfilling the condition of creating a reserve due to the absence of profit. The Tribunal had ruled in favor of the assessee, stating that the lack of profit negated the necessity for creating a reserve. The revenue contended that the conditions precedent for the grant of development rebate, as specified in sections 33(1) and (2) and 34(3)(a) of the Act, required strict compliance, including the maintenance of accounts and reserve creation. The revenue cited various case laws supporting this strict compliance view.

However, the assessee's counsel argued that the requirement for maintaining accounts and creating a reserve was obligatory only when the business had earned profits, not when it incurred a loss. The counsel referred to a circular issued by the Central Board of Direct Taxes (CBDT), which clarified that in cases where the total income computed before allowing the development rebate is a loss, there was no legal obligation to create any statutory reserve in that year. This circular was deemed binding by the court, as emphasized in recent decisions, including Rajarajeswari Weaving Mills' case and the Full Bench decision in CIT v. B. M. Edward, India Sea Foods.

Conclusion:

The court concluded that the assessee was entitled to the development rebate in light of the CBDT circular, which clarified that no reserve creation was required in a year where the total income computed before allowing the development rebate was a loss. The court emphasized the binding nature of such circulars and ruled in favor of the assessee, answering the questions of law in the affirmative, i.e., in favor of the assessee and against the revenue. There was no order as to costs, and a copy of the judgment was directed to be communicated to the Tribunal as required by law.