Allowance of development rebate-Clarification regarding - Income Tax - 189/1976

Allowance of development rebate-Clarification regarding. Circular No. 189 Dated 30/1/1976 Subject: Allowance of development rebate-Clarification regarding. Reference is invited to Board's Circular F. No. 10/49/65-ITA.I dated 14th October, 1965, which, inter alia, explained the position regarding the creation of statutory reserve for allowance of development rebate as follows:-- (a) In the case of certain industrial undertakings, particularly those in which there is Government participation either by way of capital, loan or guarantee, and where there are certain obligations by law or agreement about the maintenance of reserve for development purposes, the development rebate reserve may be treated as included in the said reserve though not specifically created as a development rebate reserve. (b) In a case where the total income computed before allowing the development rebate is a loss, there was no legal obligation to create any statutory reserve in that year, as no development rebate would actually be allowed in that year. (c) Where there was no deliberate contravention of the provisions, the Income-tax Officer may condone genuine deficiencies subject to the same being made good by the assessee through creation of adequate additional reserve in the current year's books in which the assessment is framed. 2. The Supreme Court, in the case of Indian Overseas Bank Ltd v. Commissioner of Income-tax3 had occasion to consider the validity of the position as explained at (a) above. In that case, the bank had not created any development rebate as such, although the books of accounts disclosed a substantial reserve under section 17 of the Banking Companies Act of 1949. On the claim of the bank that reserve had been created for purposes of claiming development rebate, the Supreme Court held that the reserve contemplated under the Income-tax Act was altogether an independent reserve and since the taxpayer had not complied with the requirements for the creation of special development rebate reserve, it was not entitled to claim the allowance in question. The Supreme Court also observed that the entries in the account books were not idle formalities. Thus, the instructions of the Board set out above in so far as part (a) is concerned became inoperable. However, the position explained in parts (b) and (c) above were not specifically considered by the Supreme Court in that decision. Taking note of the decision of the Supreme Court in Indian Overseas Bank1 as well as a subsequent pronouncement of the Gujarat High Court in the case of Surat Textile Mills Ltd.2 the Board had withdrawn in 1972 the aforesaid Circular dated 14th October, 1965, to the extent it was superseded by the aforesaid Supreme Court decision and the judgment of the Gujarat High Court in Surat Textile Mills Ltd. 3. It was also directed that past assessments be reviewed and suitable action taken to retrieve loss of revenue including securing of necessary disallowances by way of enhancement, etc., in appeals relying on the aforesaid judicial pronouncements. It would appear that this has been interpreted by the field officers as having withdrawn not only part (a), but parts (b) and (c) of para. 1 above also, and rectificatory/revisionary action has been initiated in a number of cases. 4. It has been represented to the Board that their earlier instruction dated 14th October, 1965, represented the correct position in law and that its withdrawal to the extent it was presumed to be overruled by the Supreme Court in the Indian Overseas Bank's case1 created unnecessary hardship to assessees. Some of the rectificatory action taken had also reached the High Court for decision and in two separate decisions the Bombay High Court struck down the rectificatory order under section 154 in the case of Tata Iron and Steel Co. Ltd. v. N. C. Upadhyaya and in a more detailed discussion on merits in the writ petition of the Indian Oil Corporation Ltd. v. S. Rajagopalan4. 5. The Board have re-examined the issues involved and are of the view that except the clarification given in part (a) of para. 1 above, which stands superseded by the aforesaid decision of the Supreme Court, the clarifications given in paras. (b) and (c) or para. 1 above hold good. (Sd.) K. R. Raghavan, Director, Central Board of Direct Taxes.