1998 (4) TMI 171 - AT - Income Tax

Summary

Issues:
1. Allowance of development rebate
2. Rate at which the development rebate will be available to the assessee

Issue 1: Allowance of development rebate
The case involved the creation and transfer of a development rebate reserve by the assessee before the expiry of eight years, leading to a dispute over the entitlement to the development rebate for the assessment year 1977-78. The AO found that the assessee had transferred the reserve to the P&L account and declared dividends exceeding the reserve amount, violating conditions under section 34(3)(a). The CIT(A) disagreed, stating that the dividend was declared after the statutory period, and became payable later. The ITAT analyzed the provisions of section 34(3)(a) requiring the creation of a reserve and restrictions on its utilization for dividends. The ITAT observed that the appropriation of funds for dividends, even if not yet paid, constituted utilization for distribution, contrary to the provisions. The ITAT disagreed with the CIT(A) and upheld the AO's decision, ruling against the assessee's entitlement to the development rebate.

Issue 2: Rate at which the development rebate will be available to the assessee
The issue related to the appropriation of funds for proposed dividends on equity shares, which the assessee argued did not constitute distribution until actual payment or shareholder approval. The ITAT rejected this argument, emphasizing that provision for dividends in financial statements is crucial for transparency and compliance with statutory requirements. The ITAT highlighted that failure to provide for proposed dividends would misrepresent the company's financial position. The ITAT interpreted the language of the section to include appropriation for dividends as utilization for distribution. Consequently, the ITAT dismissed the assessee's contention and upheld the AO's decision, emphasizing the importance of adhering to statutory provisions and financial transparency.

Conclusion:
The ITAT allowed the Revenue's appeal, ruling against the assessee's entitlement to the development rebate due to violations of section 34(3)(a) regarding the creation and utilization of the reserve for dividends. The judgment underscored the significance of adhering to statutory provisions and financial transparency in corporate financial management.