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Issues Involved:
1. Whether the assessee can be denied the benefit of carry forward of development rebate. 2. Whether the Income-tax Officer should determine the development rebate and allow it to be carried forward and set off in subsequent years when profits are available and the necessary reserve is created. Issue-wise Detailed Analysis: 1. Denial of Benefit of Carry Forward of Development Rebate: The court examined the historical background of development rebate provisions under the Indian Income-tax Act, 1922, and the Income-tax Act, 1961. Initially, there was no provision for development rebate, which was introduced by the Finance Act, 1955. The development rebate was allowed as a deduction for new machinery or plant installed after March 31, 1954. The proviso required that no allowance for development rebate could be made unless the prescribed particulars for depreciation allowance were furnished by the assessee. This provision continued until 1958 when the Finance Act, 1958, introduced a new clause allowing for the carry forward of development rebate for up to eight years if not fully utilized in the year of installation. The court referenced decisions from various High Courts, including the Madras High Court in Commissioner of Income-tax v. Veeraswami Nainar and Indian Overseas Bank Ltd. v. Commissioner of Income-tax, which emphasized that development rebate should be allowed only if the reserve was created in the year of installation. The Supreme Court in Indian Overseas Bank Ltd. v. Commissioner of Income-tax affirmed this view, stating that the creation of the reserve was a condition precedent for obtaining the allowance of development rebate. The court also discussed the Explanation added to section 34(3)(a) by the Finance Act, 1966, which clarified that the deduction should not be denied merely because the amount credited to the reserve exceeded the profits of the relevant previous year. This indicated that the reserve could be created by book entries without actual funds backing it. The court concluded that the reserve must be created in the year of installation by debiting the profit and loss account and crediting the reserve account. If this is not done, the development rebate cannot be allowed, and consequently, it cannot be carried forward to subsequent years. 2. Determination and Carry Forward of Development Rebate: The court analyzed section 33(1) and section 34 of the Income-tax Act, 1961, which stipulated that development rebate should be allowed as a deduction in the computation of profits for the previous year in which the machinery or plant was installed, subject to the provisions of section 34. The conditions laid down in section 34, including the creation of a reserve, were not mere formalities but essential requirements. The court rejected the argument that the reserve could be created in any subsequent year within the statutory period of eight years. It emphasized that the reserve must be created in the year of installation before the profit and loss account is finalized. The court pointed out that the carry forward provisions under section 33(2) come into play only after the development rebate has been allowed in the year of installation. If the total income for the relevant previous year is nil or shows a loss, the development rebate to the extent not allowed is carried forward to the next year. The court highlighted that the consistent scheme of eight years for carry forward, utilization of reserve, and the period before which the machinery or plant should not be sold indicated a legislative intent to maintain a uniform period for all related purposes. Allowing the reserve to be created in subsequent years would disrupt this scheme. Conclusion: The court answered both questions in the negative and against the assessee. The assessee was required to create the reserve in the year of installation to claim the development rebate, and failure to do so meant the rebate could not be carried forward. The court also granted a certificate for appeal to the Supreme Court due to the conflict of decisions on this issue.
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