1971 (8) TMI 77 - HC - Income Tax

Whether the assessee had to create a reserve fund out of its profits to be eligible for development rebate, under section 10(2)(vib) of the Indian Income-tax Act, 1922, in the year in which the new machinery is installed held that, it is not necessary that the assessee should create the reserve if he has no taxable income in that year

Issues Involved:
1. Whether the assessee had to create a reserve fund out of its profits to be eligible for development rebate under section 10(2)(vib) of the Indian Income-tax Act, 1922.

Comprehensive, Issue-Wise Detailed Analysis:

Issue 1: Requirement of Creating a Reserve Fund for Development Rebate
The primary issue was whether the assessee was required to create a reserve fund out of its profits to be eligible for development rebate under section 10(2)(vib) of the Indian Income-tax Act, 1922.

Relevant Provisions:
The relevant provisions of the Act, particularly section 10(2)(vib), stipulate that an assessee must create a reserve fund equivalent to seventy-five percent of the development rebate claimed. This reserve must be debited to the profit and loss account of the relevant previous year and credited to a reserve account to be utilized for business purposes over the next ten years.

Facts of the Case:
The assessee derived income from coal mining and claimed development rebate for additional machinery and plant installed during the calendar years 1959 and 1960. However, no reserve was created as required by the Act, and the assessments for the relevant years ended in a loss.

Income-tax Officer's Decision:
The Income-tax Officer disallowed the development rebate on the grounds that the assessee did not create the required reserve.

Appellate Assistant Commissioner's Decision:
The Appellate Assistant Commissioner upheld the Income-tax Officer's decision.

Tribunal's Decision:
The Tribunal agreed with the department's stance that the creation of a reserve was a condition precedent for claiming the development rebate. It confirmed the Appellate Assistant Commissioner's consolidated order and dismissed the appeals.

Arguments by the Department:
The department argued that the reserve must be created irrespective of whether there was taxable income in the relevant years. They contended that the reserve should be created based on the net profits as per audited accounts, not the assessed income.

Assessee's Contention:
The assessee argued that since there was no taxable income, it was not feasible to create a reserve. They pointed out that the Act allowed for carrying forward unabsorbed development rebate, implying that creating a reserve was not mandatory when the total income was nil or negative.

Court's Analysis:
The court examined the provisions of section 10(2)(vib) and the relevant case law. It noted that the development rebate was intended as an incentive for business development and not as an expenditure deduction. The court emphasized that the reserve account should be created from actual profits and not through borrowings, which would defeat the legislative intent.

Key Judgment Points:
- The court held that the reserve account must be created in the year of installation only if there are sufficient profits.
- The term "actually allowed" in clause (b) of the first proviso to section 10(2)(vib) refers to the quantum of development rebate allowed in a particular year, not carried forward.
- The reserve account is to be created from the development rebate actually allowed in the relevant year of assessment.
- If there is no taxable income in the year of installation, the assessee is not obliged to create a reserve account to carry forward the development rebate.

Conclusion:
The court concluded that the assessee was not required to create a reserve account if there was no taxable income in the relevant years. The answer to the referred question was in the negative and in favor of the assessee. Each party was ordered to bear its own costs.

Separate Judgment:
A. N. Sen J. concurred with the judgment.

This comprehensive analysis covers the relevant issues, legal provisions, arguments, and the court's reasoning, maintaining the original legal terminology and significant phrases.

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