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TMI Blog1967 (4) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... of 1922. The assessee had not credited to a reserve fund as required by the provisions of the Act and did not make the relevant entries in respect of the reserve fund before the close of the accounting year. It is stated by the assessee that this omission was due to a misapprehension on the part of the assessee that such entries should be made only by companies. During the assessment proceedings this omission was pointed out by the Income-tax Officer and, on the request of the assessee, the proceedings were adjourned for a few days, so as to enable the assessee to make the relevant entries. Accordingly, the assessee made the relevant entries on August 9, 1961, debiting the profit and loss account relating to the accounting year with a sum of Rs. 18,784 and crediting the development rebate reserve account likewise and the assessee made the consequential entries in the accounts of the two partners. On the basis of these entries, the assessee made the claim towards development rebate. It may be recalled that though the entries were not made initially, the assessee in fact did make a claim towards development rebate. But though the Income-tax Officer himself pointed out the mistake and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee's claim for development rebate was disallowed on the ground that the mandatory provisions of proviso (b) had not been complied with. The first part of the proviso (b) refers to certain exceptions and the present case does not fall within those exceptions because the machinery was installed after January 1, 1958. Hence, omitting exceptions to the proviso, it reads as follows : " No allowance under this clause shall be made unless ... an amount equal to seventy five per cent. of the development rebate to be actually allowed is debited to the profit and loss account of the relevant previous year and credited to a reserve account to be utilised by him. . . " This provision of law is significantly silent as to what point of time when the debit and credit entries should be made. According to the department, the entries have to be made before the close of the accounting year. But it is pointed out by Sri Venkatappayya Sastry, the learned counsel for the assessee, that it is not obligatory to make the relevant entries before the close of the accounting year and that the question of creating a reserve fund and making a credit entry does not arise until a profit and loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period which is not co-extensive with the period of accounts, either falling short of, or stretching beyond such period, and as it is essential that the period for which accounts are prepared should bear the true expenditure-no more, no less-an adjustment is usually called for to give effect to this principle. " At page 74, referring to depreciation, it is stated as follows : " In normal circumstances, the question of providing for depreciation is deferred until the trial balance is extracted and, hence, will not have been dealt with prior to the preparation of the final accounts ... Depreciation is the inherent decline in the value of an asset from any cause whatever. The wearing out of a machine is a simple and obvious example, but it must be emphasized that this is but one of many causes. As with all other entries, there must be complete double-entry for the depreciation adjustment. The required entry is, debit trading and profit and loss account and credit the asset, in respect of which depreciation is being recorded. This entry conforms with the principles already enunciated in that the debit to trading and profit and loss account is necessary because the amount written ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim in the present case, the learned counsel for the assessee contended that the basis of the actual decision of the Madras High Court requires reconsideration and is open to various objections. In the said decision of the Madras High Court, it was observed as follows : " It will be apparent from the terms of the proviso that the object of the legislature is allowing a development of the assessee's business from out of the reserve fund. The entries in the account books required by the proviso are not an idle formality. The assessee being obliged to credit the reserve fund for a specific purpose, he cannot draw upon the same for purposes other than those of the business, and if the assessee were a company, for example, that amount could not be distributed by way of dividend. It is also clear from the terms of the proviso that the reserve should be made at the time of making up the profit and loss account. The Tribunal was clearly in error when it held that it would be open to the assessee to readjust the account by making the reserve at a later period of time. Any account maintained by a business should reflect its financial transactions correctly. If at the time of the closing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tire business prepared out of the regular accounts of the assessee. The finalisation of the assessment itself in the hands of the Income-tax Officer involves various incidental adjustments of the account submitted by the assessee. Under these circumstances, there is nothing wrong if the assessee credits a reserve fund and makes the necessary entries before the matter is finalised by the Income-tax Officer. As this has been done in the present case, we answer the question in the affirmative and in favour of the assessee. The assessee will be entitled to costs of this reference. Advocate's fee Rs 250. R. C. No. 15 of 1964 This is also a reference made to us by the Income-tax Appellate Tribunal on the application of the assessee. The question for decision is identical as that arising in the above R.C. No. 8 of 1964. In this case, also, the assessee made the necessary entries before the completion of the assessment by the Income-tax Officer but subsequent to the last day of the accounting year. The claim for rebate was disallowed by the authorities on the ground that the relevant entries were not made during the accounting year. But as the entries have been made before the completi ..... 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