1982 (4) TMI 228 - HC - Companies Law

Issues Involved:

1. Entitlement to development rebate under section 34(3)(a) of the Income-tax Act, 1961.
2. Timing and creation of the development rebate reserve.
3. Compliance with the conditions for claiming development rebate.

Issue-wise Detailed Analysis:

1. Entitlement to Development Rebate:

The primary issue was whether the assessee, a private limited company dealing in alcohol, was entitled to a development rebate under section 34(3)(a) of the Income-tax Act, 1961, for the assessment year 1964-65. The assessee had installed fermentation tanks valued at Rs. 1,40,000 and claimed a development rebate of Rs. 28,100. However, the Income Tax Officer (ITO) disallowed the claim because no appropriation had been made in the original profit and loss account for the development rebate reserve.

2. Timing and Creation of the Development Rebate Reserve:

The Tribunal had to determine whether the development rebate reserve was created within the required timeframe. The assessee initially did not make the appropriation in the profit and loss account for the year ending 31st March 1964. However, after the accounts were audited and placed before the shareholders in December 1964, a resolution was passed to create the reserve. The auditor advised that it was not necessary to revise the balance-sheet for the year ending 31st March 1964, and the necessary adjustments were indicated in the balance-sheet for the year ending 31st March 1965.

3. Compliance with Conditions for Claiming Development Rebate:

The Tribunal's decision hinged on whether the assessee had substantially complied with the requirements of section 34(3)(a) by debiting 75% of the development rebate to the profit and loss account of the relevant previous year and making a corresponding credit to a reserve account. The Tribunal concluded that since the shareholders resolved to appropriate the sum to the development rebate reserve, the accounts stood amended accordingly. The Tribunal held that the development rebate reserve was created at the end of the year, and the non-revision of the balance-sheet did not detract from the validity of the shareholders' decision.

Legal Precedents and Interpretation:

The judgment referenced several legal precedents to interpret the timing and creation of the development rebate reserve. The Supreme Court in Indian Overseas Bank Ltd. v. CIT [1970] 77 ITR 512 emphasized that the creation of a separate development rebate reserve fund is essential and not an idle formality. Similarly, the Gujarat High Court in Addl. CIT v. Shri Subhlaxmi Mills Ltd. [1975] 100 ITR 188 held that necessary entries must be made before the profit and loss account is finally closed.

However, there were also cases that took a more liberal view, permitting the reserve to be created as long as there were pending proceedings before the ITO. In the present case, the assessee had taken steps to create the reserve before filing the return and long before the assessment proceedings were taken up by the ITO.

Final Decision:

The High Court concluded that the development rebate reserve was created before the finalization of the accounts. The resolution of the shareholders directed the creation of the reserve, and the auditors indicated that this had been done. The accounts were adjusted accordingly, and the next year's balance-sheet reflected the adjustments. The High Court held that the development rebate reserve had been created before the finalization of the accounts, thereby complying with the requirements of section 34(3)(a).

Conclusion:

The High Court answered the question in the affirmative, holding that the Tribunal was legally correct in allowing the assessee's claim for development rebate. The decision was in favor of the assessee, confirming their entitlement to the development rebate under the provisions of section 34(3)(a) of the Income-tax Act, 1961.

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