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TMI Blog1969 (1) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... pleted by fixing the loss at Rs. 60,693. In the next year, the assessee made a profit of Rs. 1,83,372. Out of this sum was distributed as dividend a sum of Rs. 78,582 ; a sum of Rs. 67,621 was set apart is development rebate reserve trough, having regard to the installation cost, a sum of Rs. 58,227 would have sufficed. Out of the balance, sum of Rs. 35,000 was transferred to the general reserve and the remaining sum of Rs. 2,169 was carried over to the next year. The Income-tax Officer disallowed development rebate in respect of the first two years, Rs. 2,64,908 and Rs. 1,26,061, respectively, but allowed it in full for the assessment year 1960-61 in the sum of Rs. 77,703. The ground for disallowance was that there was no assessment for the first year and there was no claim made for the assessment year 1959-60. The Appellate Assistant Commissioner of Income-tax declined to interfere. He pointed out that the assessee had also failed to furnish the particulars necessary to compute the rebate for the assessment year 1959-60. The Tribunal sustained the disallowance for the year ended March 31, 1958, on a new plea raised by the revenue which it allowed, to wit, the provision for carryi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess carried on by the assessee, twenty-five per cent. of its actual cost is allowable as development rebate in respect of the year of installation. The clause has two Explanations and also two provisos. The first Explanation provides that so much only of such development rebate be allowed as will go to reduce the total income of such year to nil and the balance of the development rebate not allowed shall be carried forward to the following year but subject to the condition that no portion of the development rebate shall be carried forward for more than eight years. The allowance of rebate is thus always in respect of the year of installation and, apart from the creation of requisite reserve, depends on and goes to reduce the available total income of that year or the following previous year. If there is no such total income or it is a loss, there can of course be no allowance of rebate but it is to be carried forward to the following years. We think that total income in this regard means the income aggregated from all heads and before deduction of development rebate and as assessed. Explanation provides that the development rebate carried forward shall first be set off every time a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The entries as required by the condition are of course a sine qua non and are not an idle formality, for it is only then that it will be possible to keep track of the development rebate reserve for the purpose of enforcing the particular inhitioiis against its user. The permitted user and the inhibitions point to the entry in the profit and loss account and the reserve account being of the actual reserve created. The clause itself contemplates that such a reserve is capable of being utilised and may be expected to be utilised for the purpose of the business and further, as contemplated by the exception, it is prohibited from being distributed as dividends or profits or remitted outside India as profits or for the creation of any asset outside India. There is also an additional reason that if within ten years of the installation of the machinery it is sold, clause (b) directs that any allowance made under it shall be deemed to have been wrongly allowed with the consequence that the assessee will have to make good the deficiency to the revenue. Because of these considerations, we think the requisite under clause (b) of the proviso is the creation of an actual reserve to the extent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total assessed income of such year. It should be noted that such allowance in each year, as indicated by us, can only be made with reference to and to the extent warranted by the actual reserve created and the balance of the rebate to the extent not covered by reserve because the assessed total income is nil or inadequate, should be carried forward to the next year. The carrying forward of development rebate is however not permitted only by mere book entries debiting it to the profit and loss account and crediting it to a reserve account of the relevant previous year. Such an entry can be expected to be made and should be made only when there is income available to the assessee as per the assessment results out of which the reserve could to any extent be made. If in a particular assessment year, there is income available according to the assessment but the whole or a portion of it has been distributed as dividends or as profits and for that reason the assessee has failed to create a reserve as required by clause (b) of the proviso, we are inclined to think that the consequence would be that to the extent of such failure, the assessee will be disentitled to carry forward the devel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits but the total income as per completed assessment is nil or the assessment-result is a loss in any given year. In our view, the basis should be the total profits as per completed assessment and not book profits. This is because Explanation shows that the development rebate to be allowed for any assessment year should only be such amount as would be sufficient to reduce the total income of that year to nil. That cannot refer to book profit. It follows, therefore, in our opinion, that although the books may show profits, if the assessment results in nil income or loss, there will then be no obligation on the part of the assessee to create a reserve as a condition for carrying over the development rebate. On applying the principles we have set out above to the instant reference, the result will be as follows : The assessment for the assessment year 1959-60 showed a loss. No questicn of debiting to the profit and loss account and crediting to the reserve account therefore arises. The assessee would, therefore, be entitled to carry forward the entire development rebate for that year to the following year, namely, the sum of Rs. 1,26,061. But since, notwithstanding the loss as per ..... X X X X Extracts X X X X X X X X Extracts X X X X
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