1971 (2) TMI 31 - HC - Income Tax

Whether the assessee was entitled to a development rebate on the costs of the moulds installed by the assessee held that, assessee cannot claim the rebate when such reserve was not created

Summary

Issues:
1. Entitlement to development rebate on costs of moulds installed by the assessee during specific assessment years.
2. Compliance with provisions of section 34(3) of the Income-tax Act, 1961 regarding creation of a reserve account.
3. Interpretation of the conditions for obtaining the allowance of development rebate.
4. Classification of the amount spent on moulds as revenue or capital expenditure.

Detailed Analysis:

1. The primary issue in this case was whether the assessee was entitled to a development rebate on the costs of the moulds installed during the assessment years 1962-63 and 1963-64. The assessee, a private limited company manufacturing glass buttons, claimed development rebate on the costs of the moulds but did not comply with the provisions of section 34(3) of the Income-tax Act, 1961. The Tribunal observed that debiting the cost of the moulds to the profit and loss account did not create a reserve account as required by law for future utilization towards business purposes. The Tribunal held that without the creation of a reserve account, the development rebate could not be allowed.

2. The issue of compliance with the provisions of section 34(3) of the Income-tax Act, 1961 was crucial in determining the entitlement to development rebate. The provision required that an amount equal to 75% of the development rebate to be allowed should be debited to the profit and loss account and credited to a reserve account for future utilization for the purposes of the business of the undertaking. The failure to create such a reserve account led the departmental authorities to deny the development rebate to the assessee.

3. The interpretation of the conditions for obtaining the allowance of development rebate was a key aspect of the judgment. The Supreme Court decision in Indian Overseas Bank Ltd. v. Commissioner of Income-tax highlighted that the creation of the reserve account was a condition precedent for obtaining the allowance of development rebate. The purpose of creating the reserve fund was to ensure that the amount was utilized for the development of the business and not for other purposes such as distribution by way of dividends.

4. The question of whether the amount spent on the moulds should be classified as revenue or capital expenditure was raised by the counsel for the assessee. However, this issue was not referred for opinion and did not arise from the Tribunal's order. Therefore, the court did not provide a judgment on the validity of treating the expenditure as either revenue or capital in the present proceedings.

In conclusion, the court answered the question referred to them in the negative, against the assessee and in favor of the department, due to the failure to comply with the statutory requirement of creating a reserve account for the development rebate. The judgment emphasized the importance of adhering to the prescribed conditions for claiming development rebates under the Income-tax Act, 1961.