1973 (4) TMI 12 - HC - Income Tax

Petitioner-company is a Government of India undertaking registered under the Companies Act 1956 - The questions that arise for determination in this petition pertain to development rebate provided for in section 33 of the income-tax Act 1961 the conditions for allowance of such development rebate prescribed by section 34 and computation of capital employed in an industrial undertaking under section 80J of the said Act and rule 19A of the Income-tax Rules 1962.

Issues Involved:
1. Development rebate under section 33 of the Income-tax Act, 1961.
2. Conditions for allowance of development rebate under section 34 of the Income-tax Act, 1961.
3. Computation of capital employed in an industrial undertaking under section 80J of the Income-tax Act, 1961, and rule 19A of the Income-tax Rules, 1962.
4. Validity of rectification notices issued under section 154 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Development rebate under section 33 of the Income-tax Act, 1961:
The petitioner-company, a Government of India undertaking, sought the allowance of development rebate for various assessment years. The development rebate was introduced as an incentive for industrial development and is in addition to depreciation allowance. The relevant provisions are sections 33 and 34 of the Income-tax Act, 1961. Section 33(1)(a) provides that development rebate "shall be allowed" in the year the new machinery or plant is installed or put to use. Section 33(2) allows the rebate to be carried forward if not fully utilized in the year of installation, provided it is not carried forward for more than eight assessment years.

2. Conditions for allowance of development rebate under section 34 of the Income-tax Act, 1961:
Section 34(3)(a) stipulates that the development rebate shall not be allowed unless an amount equal to 75% of the rebate is debited to the profit and loss account and credited to a reserve account. The court found that the creation of the reserve is contingent upon the existence of profits. If there are no profits, the reserve cannot be created, and thus, the rebate cannot be allowed. The court rejected the Income-tax Officer's stance that the reserve must be created irrespective of profits, as it would lead to an illusory fund and possibly necessitate borrowing.

3. Computation of capital employed in an industrial undertaking under section 80J of the Income-tax Act, 1961, and rule 19A of the Income-tax Rules, 1962:
Section 80J(1) allows a deduction of 6% per annum on the capital employed in an industrial undertaking. Rule 19A(3) requires the deduction of borrowed moneys and debts from the aggregate value of assets to compute the capital employed. The court held that only the liabilities pertaining to the specific industrial undertaking should be deducted, not the total liabilities of all undertakings owned by the assessee. This interpretation avoids the absurdity of deducting total liabilities from the assets of each individual undertaking.

4. Validity of rectification notices issued under section 154 of the Income-tax Act, 1961:
The petitioner challenged the rectification notices issued for various assessment years, arguing that there was no mistake apparent from the record. The court referenced the Supreme Court's decision in T. S. Balaram, Income-tax Officer v. Volkart Brothers, which held that a mistake apparent on the record must be obvious and not subject to debate. The court found it unnecessary to decide on this contention, as the matter was resolved on merits.

Conclusion:
The court quashed the rectification notices for assessment years 1962-63, 1965-66, 1966-67, 1967-68, 1968-69, and 1969-70, and directed the Income-tax Officer to allow development rebate for assessment years 1969-70 and 1970-71 in accordance with the judgment. The computation of capital employed in each industrial undertaking was also to be done as per the court's interpretation of rule 19A. The respondents were ordered to pay the costs of the petition.

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