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TMI Blog1971 (8) TMI 77X X X X Extracts X X X X X X X X Extracts X X X X ..... its or gains shall be computed after making the following allowances, namely :- ...... (vib) in respect of..... new machinery or plant installed after the 31st day of March, 1954, which is wholly used for the purposes of the business carried on by the assessee, a sum by way of development rebate in respect of the year ..... of the installation of the machinery or plant, equivalent to,-..... (ii) in the case of machinery or plant installed before the 1st day of April, 1961, twenty-five per cent. and in the case of machinery or plant installed after the 31st day of March, 1961, twenty per cent. of the actual cost of the machinery or plant to the assessee ; Explanation 1.--In the case of..... machinery, or plant installed after the 31st day of December, 1957, where the total income of the assessee for the year of .... installation (the total income for this purpose being computed without making any allowance under this clause) is nil or is less than the full amount of the development rebate calculated at the rate applicable thereto under this clause,-- (i) the sum to be allowed by way of development rebate for that year under this clause shall be only such amount as is suffici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits or for the creation of any asset outside India, and if any such .... machinery or plant is sold or otherwise transferred by the assessee to any person other than the Government or for any consideration not connected with any amalgamation or succession referred to in clause (vic) at any time before the expiry of ten years from the end of the year in which it was acquired or installed, any allowance made under this clause shall be deemed to have been wrongly allowed for the purposes of this Act : Provided further that no allowance under this clause shall be made in respect of any machinery or plant which consists of office appliances or road transport vehicles. " The assessee in the instant reference derives income from coal mining. During the calendar years 1959 and 1960 (assessment years 1960-61 and 1961-62), the assessee had installed additional machinery and plant on which it claimed development rebate of Rs. 9,468 and Rs. 2,440, respectively. Profits shown in the profit and loss accounts for the respective years came to Rs. 41,663 and Rs. 76,476.75, respectively. In order to be eligible for the rebate, the assessee should have, under the above provisions of the Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not come into play and as such the claims appear to have been rightly rejected by the department. We, therefore, confirm the consolidated order of the Appellate Assistant Commissioner, dated 16th March, 1944, and dismiss both the appeals." The following question of law has been referred to this court : " Whether, on the facts and in the circumstances of the case, and on a proper interpretation of proviso (b) to section 10(2)(vib), the assessee had to create a reserve in order to be eligible for allowance of development rebate though there was no taxable income in the relevant years as per the assessment ? " Mr. D. K. Sen, learned counsel appearing for the department, slightly deviated from the stand taken by the departmental representative who had argued this case before the Income-tax Appellate Tribunal. The departmental representative's contention, as we have pointed out, was that the assessee should have created the reserve in the year of installation as its audited accounts showed a net profit before the unabsorbed depreciation was taken into account. But, Mr. Sen's contention is that, irrespective of any question of profit, the assessee, as a condition precedent, must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The development rebate is not to be spread over and cannot be spread over a number of years as in the case of additional depreciation under section 10(2)(via). " Mr. Sen's other argument is that, under the scheme of the Indian Income-tax Act, " development rebate " is an item of business expenditure. Under section 10 of the Act expenditures actually incurred in the business are allowed by way of deduction. These expenditures relate to the expenses incurred in the financial year. And only expenses incurred in the financial year can be claimed by way of deduction particularly in view of expression " relevant previous year " in clause (b) of the first proviso. If it be held, argues Mr. Sen, that " relevant previous year " in this proviso refers to the year or years when profits are made so that the assessee's accounts can be adjusted by allowing the appropriate deduction, the entire scheme of these provisions would fall. In fact, according to Mr. Sen, there is no scope under the Income-tax Act, for purposes of deduction, to look to any other year except the year when an expense is actually incurred. Learned counsel contends that unless the provisions of section 10(2)(vib) are appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court in Indian Overseas Bank Ltd. v. Commissioner of Income-tax. We would have occasion to advert to this decision of the Supreme Court later in this judgment as well. Mr. Sen for the department submits that, in the light of the above judgment of the Madras High Court, and the Supreme Court, it is apparent that in the year of installation of the machinery an assessee knows what is the quantum of development rebate allowable to him. And on the basis of the sum allowable he has to create a reserve account which has to be appropriately shown in his profit and loss account for the year of installation. Learned counsel says that unless these conditions precedent are fulfilled an assessee is not entitled to claim development rebate at all. Our attention has been drawn to the relevant sections of the Companies Act to show that a profit and loss account is a statutory requirement in a balance sheet and there is no scope for making alterations or modifications thereto at a later or subsequent stage. There is no dispute as to the propositions laid down by the Madras High Court. As we shall point out later even if the expression " actually allowed " be understood to mean " actua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar assessee the development rebate is to be allowed. The second part of section 10(2)(vib) consists of two Explanations. These Explanations deal with the methods that are to be adopted in granting development rebate to assessees. For instance, if the total income of the assessee in the year of installation is less than the full amount of the development rebate that he is entitled to, the sum to be allowed by way of development rebate for that year shall be only such amount as is sufficient to reduce the said total income to nil. And the amount of development rebate, to the extent to which it has not been allowed in the year of installation, shall be carried forward to the following year. The word "allowed " has been used both in clauses (i) and (ii) of Explanation 1. In the third part of the section, we have two provisos. The first proviso is the one we are concerned with in this reference. It has two clauses, namely, clause (a) and clause (b). The first proviso opens with the words " no allowance under this clause shall be made ". Here the expression " no allowance " refers to the entire amount of development rebate claimable by an assessee under clause (vib). Clause (a) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whole or a part of the development rebate is " actually allowed ". If we construe " relevant previous year " as the year of installation, the main object of section 10(2)(vib), in our opinion, would fail. The purpose of clause (b) of the first proviso seems to be that the assessee would create a reserve fund out of the development rebate to be actually allowed to him in any particular year and not by incurring loans or otherwise and utilise the reserve account for a period of ten years for the purpose of the business of the assessee's undertakings only, except the purposes indicated in the said clause. We may usefully quote the comments in Kanga's Law and Practice of Income-tax, 6th edition, volume 1, at page 367, on the relevant proviso in the Income-tax Act, 1961, corresponding to clause (b) of the first proviso, we are now considering. The comments are as follows : " .......The clause requires the assessee to create a reserve of an amount equal to seventy-five per cent. of the development rebate actually allowed, that is, not of that part of the rebate which, being unabsorbed, is carried forward to a subsequent year........... " We are inclined to agree with these comment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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