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TMI Blog1972 (3) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... . RAMASWAMY., RAMANUJAM. JUDGMENT The judgment of the court was delivered by RAMASWAMI J.- The following question has been referred under section 256(1) of the Income-tax Act: "Whether, on the facts and in the circumstances of the case, the amount of development rebate in excess of the statutory percentage required to be made under the Income-tax Act is part of the accumulated profits of the company within the meaning of section 2(22)(e) of the Income-tax Act?" The assessee is the governing director of a private limited company called Sri Karthikeya Spinning and Weaving Mills Private Ltd., Coimbatore. During the year ending December 31, 1961, which is the accounting year of the company, the assessee had drawn a sum of Rs. 71,792. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22)(e). On appeal, preferred by the department against that order, the Tribunal held as follows: "In our opinion a reserve made towards the development rebate to the extent it is not required to be made under the Income-tax Act, is a free reserve and would form part of the accumulated profits. There is no statutory provision to charge the amount of development rebate to profit and loss account. It is not a charge on the profit. It is only an appropriation of profit. In this respect it differs from depreciation. There can be no restriction in the use of such a reserve. Under the Indian Income-tax Act, a reserve of 75% of the rebate actually to be allowed has to be made and this could not be used by the assessee. It can be said that only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit and loss account of the relevant previous year and credited to a reserve account. If within a period of eight years the reserve is utilised for distribution by way of dividends or profits in breach of the provisions contained in section 34(3), the rebate would be withdrawn by amending under section 155(5), the assessment for the year for which the rebate was granted. There are other conditions and limitations relating to this reserve which need not be particularly noted for the purpose of deciding this case. It will thus be seen that there is no ban on distribution of this reserve by way of dividends or profits, but if the reserve is distributed then the assessment for the year for which the rebate was granted is liable to be amende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion allowance with development rebate, came to the conclusion that the development rebate is not intended to replace any capital loss by wear and tear or in any such other way and that, therefore, it forms part of the real profits and even after it is allowed as a deduction under section 10(2)(vib) of the Income-tax Act, 1922, it continued to retain its original character of profits. Even depreciation reserve has been held to be part of accumulated profits available for distribution in a case arising under section 2(6A) of the Income-tax Act in Commissioner of Income-tax v. Bibhuli Busan Dutt. Whether it is accumulated profit or not depends normally on the question whether it was a transfer of the profits. Unless the profit is capitalised ..... X X X X Extracts X X X X X X X X Extracts X X X X
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