1976 (2) TMI 26 - HC - Income Tax

Summary

Issues Involved:
1. Jurisdiction of the Income-tax Officer to amend the assessment order for the assessment year 1964-65.
2. Compliance with the conditions prescribed in section 34(3)(a) regarding the development rebate reserve.
3. Validity of the merger of the development rebate reserve with the general reserve.
4. Application of section 155(5) and section 154 for rectification of the assessment order.

Detailed Analysis:

1. Jurisdiction of the Income-tax Officer to amend the assessment order for the assessment year 1964-65:
The petitioner-company challenged the jurisdiction of the Income-tax Officer (respondent) to amend the assessment order for the assessment year 1964-65. The respondent issued a notice on April 14, 1975, stating that there was a mistake apparent from the record, asserting that the development rebate of Rs. 49,354 was wrongly allowed. The respondent relied on section 155(5) of the Income-tax Act, 1961, which allows for recomputation of total income if the development rebate reserve is utilized within eight years for purposes other than those specified in section 34(3)(a). The petitioner contended that the conditions for exercising such power were not satisfied, as the amount credited to the development rebate reserve was not utilized for prohibited purposes within the specified period.

2. Compliance with the conditions prescribed in section 34(3)(a) regarding the development rebate reserve:
Section 34(3)(a) mandates that 75% of the development rebate allowed must be credited to a reserve account and utilized for the business of the undertaking within eight years, excluding certain purposes such as distribution by way of dividends. The petitioner-company argued that the dividend was paid out of the general reserve before the merger of the development rebate reserve with the general reserve and that the general reserve was sufficient to cover the dividend payment. Hence, the development rebate reserve was not utilized for prohibited purposes within the eight-year period.

3. Validity of the merger of the development rebate reserve with the general reserve:
The petitioner-company merged the development rebate reserve with the general reserve effective from December 31, 1971, after the eight-year period expired. The respondent contended that this merger violated section 34(3)(a). The court held that the merger occurred after the eight-year period and that the dividend was paid from the general reserve before the merger. Therefore, the merger did not contravene section 34(3)(a), as the development rebate reserve was not utilized for prohibited purposes within the specified period.

4. Application of section 155(5) and section 154 for rectification of the assessment order:
Section 155(5) allows for recomputation of total income if the development rebate reserve is used for prohibited purposes within eight years. Section 154 permits rectification of mistakes apparent from the record. The court concluded that since the development rebate reserve was not utilized for prohibited purposes within the eight-year period, section 155(5) was not applicable. Consequently, the respondent had no jurisdiction to amend the assessment order under section 154 read with section 155(5).

Conclusion:
The court found that the conditions for invoking section 155(5) were not met, as the development rebate reserve was not utilized for prohibited purposes within the eight-year period. The merger of the development rebate reserve with the general reserve occurred after the period expired and did not contravene section 34(3)(a). Therefore, the Income-tax Officer lacked the jurisdiction to amend the assessment order for the assessment year 1964-65. The petition was allowed, and the impugned order dated December 27, 1975, was declared invalid and unenforceable.