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Issues Involved:
1. Whether the Tribunal was justified in law in holding that conditions for allowing development rebate were not fulfilled in the case of the assessee. Issue-wise Detailed Analysis: 1. Tribunal's Justification on Development Rebate Conditions The primary issue revolves around whether the Tribunal correctly held that the conditions for allowing development rebate were not met by the assessee. The assessee, a registered partnership firm, filed its return for the assessment year 1968-69 on August 18, 1969. The relevant previous year was Samvat year 2023 (November 13, 1966, to November 2, 1967). During this period, machinery worth Rs. 2,73,771 was installed. Initially, no provision for development rebate reserve was made in the profit and loss account. However, before filing the return, a development rebate reserve was created by adjusting the partners' accounts. The Income-tax Officer disallowed the claim since the reserve was not created before the books were closed. The Appellate Assistant Commissioner reversed this decision, allowing the appeal based on the Rajasthan High Court's decision in Commissioner of Income-tax v. Mazdoor Kisan Sahkari Samiti, which permitted entries after filing the return. The Tribunal, however, relied on decisions from the Gujarat High Court in Surat Textile Mills Ltd. v. Commissioner of Income-tax and the Madras High Court in Commissioner of Income-tax v. Veeraswamy Nainar, concluding that the reserve must be debited before finalizing the profit and loss account. Thus, the Tribunal upheld the revenue's appeal, leading to the present reference. Legal Provisions and Judicial Interpretations The judgment delves into the legal framework under the Indian Income-tax Act, 1922, and the Income-tax Act, 1961. Section 10(2)(vib) of the 1922 Act and section 34(3) of the 1961 Act stipulate that the development rebate reserve must be debited to the profit and loss account of the relevant previous year and credited to a reserve account for business purposes within a specified period. The Supreme Court in Indian Overseas Bank Ltd. v. Commissioner of Income-tax emphasized that the reserve must be created before making up the profit and loss account. This interpretation was echoed in Surat Textile Mills Ltd. v. Commissioner of Income-tax and Additional Commissioner of Income-tax v. Shri Subhlaxmi Mills Ltd., where it was held that the reserve must be debited before finalizing the profit and loss account. Divergent Views from Other High Courts The Punjab and Haryana High Court in Commissioner of Income-tax v. Sardar Singh Sachdeva and the Allahabad High Court in Commissioner of Income-tax v. Modi Spinning & Weaving Mills Co. Ltd. took a more liberal view, allowing entries to be made before the assessment is completed. However, the Gujarat High Court disagreed, adhering to the strict interpretation that the reserve must be created at the time of making up the profit and loss account. Reopening of Accounts The judgment also addresses the issue of reopening accounts. The Supreme Court in Commissioner of Income-tax v. A. Gajapathy Naidu and Commissioner of Income-tax v. Swadeshi Cotton & Flour Mills P. Ltd. held that reopening accounts does not align with the scheme of the Income-tax Act. The Gujarat High Court applied this principle, rejecting the assessee's argument that subsequent adjustment entries were permissible. Conclusion The Gujarat High Court reaffirmed its stance from Surat Textile Mills Ltd.'s case and Shri Subhlaxmi Mills Ltd.'s case, holding that the development rebate reserve must be debited before finalizing the profit and loss account. Since the assessee failed to comply with this requirement, the Tribunal was justified in disallowing the development rebate. The court answered the referred question in the affirmative, against the assessee and in favor of the revenue, and ordered the assessee to pay the costs of the reference to the Commissioner.
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