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TMI Blog1985 (11) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... e at Rs. 1,51,171 could not be allowed because no reserve as required by law had been created by the assessee. In regard to extra shift allowance, the Appellate Assistant Commissioner in appeal, held that extra shift allowance of Rs. 1,31,230 should not be allowed in the relevant assessment year. In regard to development rebate, he directed that the development rebate should be quantified and it should be carried forward as a claim to the next year. The Appellate Tribunal concurred with the view of the Appellate Assistant Commissioner in regard to the extra shift allowance. The assessee having withdrawn its claim of extra shift allowance, it could not be forced to claim it. The Department, therefore, could not compel the assessee to claim extra shift allowance. The Tribunal also upheld the view of the Appellate Assistant Commissioner and the claim of the assessee in regard to development rebate and extra shift allowance. It may be mentioned that the stand of the Revenue before the Tribunal as before this court was that the statutory reserve not having been created, development rebate could not be allowed nor could be carried forward. Hence, the questions referred to us for ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unabsorbed depreciation, income is determined at nil. Assessed under section 143(3) at nil." It is not in controversy that no reserve had been created during the relevant accounting year. It is also not in controversy that the assessee was assessed at nil income. The assessee also does not contend that it was entitled to be allowed development rebate in the said assessment year. Mr. Vyas for the assessee only contended that it had to be quantified and carried over for eight future years. The real controversy between the parties is whether there could be quantification of the development rebate and whether it could be carried forward. Learned senior standing counsel, Income-tax Department, contended that no quantification in respect of the development rebate could be done nor could any sum be carried forward. The question thus posed is this. Where no statutory reserve as contemplated by section 34(3) has been created, can there be quantification and carrying forward of the development rebate in the year of installation of the machineries ? Section 33 of the Act provides for allowance of development rebate where new machinery or plant has been installed. The provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tified, but the benefit of quantification is not extended to the assessee, it cannot be said to have been allowed. Section 34(3) bars only allowance. There should, therefore, be no difficulty in holding that when development rebate is quantified and carried forward for succeeding years, development rebate has not been allowed. Mere quantification is not allowance. The question then arises why should there be quantification and carrying forward. That has to be done in terms of section 33(2) of the Act which reads as follows : " (2) In the case of a ship acquired or machinery or plant installed after the 31st day of December, 1957, where the total income of the assessee assessable for the assessment year relevant to the previous year in which the ship was acquired or the machinery or plant installed or the immediately succeeding previous year, as the case may be, (the total income for this purpose being computed without making any allowance under sub-section (1) or sub-section (1A) of this section or sub-section (1) of section 33A or any deduction under Chapter VI-A or section 280-O) is nil or is less than the full amount of the development rebate calculated at the rate applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reserve cannot be created as the year of installation happens to be a year of loss. According to him, therefore, there cannot be any quantification nor carrying forward and, therefore, no development rebate can be allowed in any year. The submission urged on behalf of the Revenue does not appear to be sound as I shall presently show. Let us test the submissions urged on behalf of the Revenue. It is contended that statutory reserve equal to seventy-five per cent of the rebate claimed must be created by debit to the profit and loss account. From where is this transfer to be made. If the total income of the undertaking is a loss, there is nothing to be transferred to the profit and loss account. Surely, the undertaking is not expected to raise a loan for that purpose. If that were intended, it would take away the entire purpose of granting rebate. Mr. Rajgarhia for the Revenue did not contest the proposition that if there is a loss, there cannot be any transfer to the profit and loss account for creating the reserve. He, however, contended that in the computation of the total income, the assessee cannot adjust its losses before creating development reserve. Is that right ? Is not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pment rebate is confined to eight years. The Explanation to sub-section 3(a) of section 34 further places the matter beyond all doubt. The Explanation clarifies clearly that development rebate is not to be denied only for the reason that the amount debited to the profit and loss account of the relevant previous year and credited to the reserve account as stipulated in sub-section 3(a) exceeds the amount of profit of such previous year. In my view, therefore, the claim for development rebate has to be made by the assessee in the year of installation of the machinery. If in that year the total income is a loss, the statutory reserve need not be created. Statutory reserve not having been created, development rebate will not be allowed, but the rebate to be actually allowed in future will be calculated and carried forward to the next assessment year. The stand of the Revenue, therefore, that the statutory reserve must be created in the year of installation of the machinery in order to claim development rebate appears to be manifestly unsound. In Radhika Mills Ltd. v. CIT [1969] 74 ITR 661, a Division Bench of the Madras High Court laid down that the allowance of development rebate is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . . This provision comes into play at the time of actual allowance of the rebate. The conditions precedent should be complied with at that time. Before an assessee claims the deduction, he should create a reserve by debiting the profit and loss account and crediting the reserve account with the requisite amount of the money. This can be done only in the year in which profits are earned. The scheme of carrying forward unabsorbed development rebate postulated by sub-section (2) of section 33 can be achieved only if it is permissible to create reserve by making the requisite entries to the extent the income is able to absorb the rebate. The full reserve may not be created in single year ; depending on the available income it may take more than one year to create the reserve to the full extent of the development rebate which is allowable, and which has already been determined. The proper procedure is that the amount of the development rebate ought to be determined in the first year. Its actual adjustment will be dependent on the availability of income. In the case of loss, the determination has to be done in the first year ; the adjustments are to be actually made in subsequent year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rseas Bank Ltd. v. CIT [1970] 77 ITR 512. Indian Overseas Bank's case does not militate against the proposition that development rebate cannot be computed and carried forward until the statutory reserve has been created. In the case before the Supreme Court, the position was that the assessee, a banking company had created a reserve in terms of section 17 of the Banking Companies Act, 1949. The assessee claimed that the reserve fulfilled the requirements of section 10(2)(vib) of the Indian Income-tax Act, 1922, which is equivalent to section 34(3)(a) of the 1961 Act. In that situation, their Lordships of the Supreme Court observed that the reserve contemplated by the Banking Companies Act was entirely different from the reserve contemplated under the Indian Incometax Act, 1922, and since there was no reserve in terms of the Income-tax Act, 1961, development rebate could not be allowed. That is not the situation before us or in the view propounded by the Gujarat High Court. Further, another noteworthy aspect is that the Supreme Court held that rebate could not be allowed. In the instant case, we are not concerned with the allowance of rebate. It admits of no doubt that until a reser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 154 or section 263 of the Income-tax Act, 1961, consequent upon the decision of the Supreme Court in the case of Indian Overseas Bank Ltd. [1970] 77 ITR 512 and of the Board's circular of October, 1972, may be dropped. The third direction was that in appeals from such reassessment orders, the Revenue may concede in terms of the position specified in parts (b) and (c) of the 1965 circular. The fourth direction was that all assessments pending finalisation involving issues covered by parts (b) and (c) are to be completed as if the circular of 1965 on this point had not been superseded. The Board issued yet another circular bearing reference No. 228/8/72, dated January 30,1976 by which the position as clarified in the 1975 circular was reiterated. For the Board, thus, the position is that development rebate will not be denied if a statutory reserve is not created in the year of installation of the machinery. It will be quantified and carried forward for the year in which the reserve is created. In the instant case, the machinery was installed in 1971. The assessee created reserve in 1976 and the Department allowed the rebate in the corresponding year. In view of the 1965 and 1975 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eight years of installation), the circulars of the Central Board of Direct Taxes also has a binding effect and cannot be ignored. The view that I have taken in regard to the efficacy of the circulars mentioned above finds support in CIT v. T S. Venkiteswaran 1979] 120 ITR 675 (Ker), Dodballapur Spinning Mills Ltd. v. CIT [1980] 121 ITR 94 (Kar), CIT v. U P. Hotel Restaurants Ltd. [1984] 145 ITR 598 (All), CIT v. Agro Insecticides Allied Industries [1981] 127 ITR 796 (AP), CIT v. Metal Forging P. Ltd. [1984] 149 ITR 259 (Delhi) and Aeropolymers (P.) Ltd. v. CIT [1985] 151 ITR 158 (P H). Learned senior standing counsel placed reliance upon B. Rajagopala Naidu v. State Transport Appellate Tribunal, AIR 1964 SC 1573, and submitted that in quasi-judicial matters, the direction of the Board would be of no consequence. I regret, the decision of the Supreme Court in the case of B. Rajagopala Naidu, AIR 1964 SC 1573, was in an entirely different set of circumstances. The Supreme Court observed in that case that the impugned order issued by the State Government was not a statutory rule and, therefore, did not have the force of law. The position is different in the instant case. Circul ..... X X X X Extracts X X X X X X X X Extracts X X X X
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