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TMI Blog1984 (4) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessments made by the income-tax authorities, there were losses for the assessment years 1962-63, 1963-64, 1964-65 and 1965-66. For the assessment year 1966-67, there was a profit of Rs. 11,195 but even for that year, no development rebate reserve was created. For the assessment year 1967-68, income was determined at Rs. 54,842 and a reserve of Rs. 47,701 was also created. Somehow or other, the claim of the assessee for development rebate was not allowed. For the assessment year 1968-69, that is the year under consideration, the assessee did create a reserve for Rs. 46,038 and that resulted in nil balance in the profit and loss account. The ITO determined the net income at Rs. 60,753 but in arriving at this figure he did not allow development rebate except to the extent of Rs. 51 only. This development rebate of Rs. 51 was as per chart filed. The ITO disallowed development rebate to the extent of Rs. 46,038. The AAC, in appeal, confirmed the disallowance on the ground that since the machinery on which the development rebate has been claimed was neither installed in the assessment year under appeal nor installed in the preceding assessment year and put to use in the assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 149 ITR 259) the judgment of which is announced today, we answer that question against the Revenue and in favour of the assessee. An assessee is not bound to create development rebate reserve during the year of installation of plant or machinery if there is no profit in that year and it is sufficient if the reserve is created when there are profits and the development rebate is actually allowed. The second question which is to be answered is whether the carry forward business losses would get precedence over the unabsorbed development rebate and the current year's development rebate. The Tribunal in the statement of case refers to a fact " that there is a further complication that, apart from the claim of development rebate, the unabsorbed losses of the earlier years have been brought forward and the net result even for the assessment years 1966-67 and 1967-68 was a loss ". The Tribunal has given a direction that the ITO should construct an account of the development rebate right up to and including the assessment year 1968-69 and allow the assessee the set-off of development rebate which is allowable by reference to the reserve created by the assessee for the year 1968-69. It wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hip acquired or machinery or plant installed after December 31, 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-s. (1) or sub-s. (1A) of s. 33 or sub-s. (1) of s. 33A or any deduction under Chapter VI-A or s. 280-0 is nil or is less than the full amount of the development rebate calculated at the rate applicable thereto under sub-s. (1) or sub-s. (1A), as the case may be. It further provides that the sum to be allowed by way of development rebate for that assessment year under sub-s. (1) or sub-s. (1A) shall be only such amount as is sufficient to reduce the total income to nil. A provision is further made that the amount of the development rebate, to the extent to which it has not been allowed as aforesaid, shall be carried forward to the following assessment years, and the development rebate to be allowed for the following assessment year shall be such amount as is sufficient to reduce the total income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions which are provided under s. 34 of the Act and the unabsorbed development rebate can be carried forward only for eight years as provided by the Act. The development rebate in the case of plant or machinery varies according to the year of installation and the use to which it was put. Sub-s. (2) of s. 33, in the case of a ship acquired or the machinery or plant installed after December 31, 1957, requires the computation of 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 " is required to be computed first without making any allowance under sub-s. (1) or sub-s. (1A) of s. 33 or sub-s. (1) of s. 33A or any deduction under Chapter VI-A or s. 280-0. If the legislative intent was to compute the total income first without making any allowance/deduction under s. 72, then it would have been so expressed. The total income as defined in s. 2(45) of the Act means the total amount of income referred to in s. 5, computed in the manner laid down in the Act. The manner of computation laid down ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtified in this view by a Division Bench of the Gujarat High Court in Monogram Mills Co. Ltd. v. CIT [1982] 135 ITR 122. The question was posed in a reference as to the order of priority among current year's depreciation, carried forward development rebate, current year's development rebate, carried forward losses from earlier years and unabsorbed depreciation. The Gujarat High Court dealt at great length with the statutory provisions and the meaning to be assigned to the material words "total income". After placing reliance on Cambay Electric Supply Co. Ltd. v. CIT [1978] 113 ITR 84 (St), it was expressed (p. 130 of 135 ITR) "Though there is no direct authority for the priority to be given as between carried forward business loss, unabsorbed depreciation and carried forward development rebate under the provisions of s. 72(1), s. 32(2) and s. 33(2) of the 1961 Act, there is a direct authority of the Supreme Court relating to the priority to be given at the time of setting off of carried forward business loss and unabsorbed depreciation, in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC). In that case, the Supreme Court was concerned with the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on because that is the first charge on the receipts in the profit and loss account; (2) carry forward business losses under section 72(2) read with section 72(1); (3) unabsorbed depreciation by virtue of the provisions of section 32(2) ; (4) unabsorbed development rebate because of the provisions of clauses (1) and (2) of section 32(2) and current year's development rebate. The Madras High Court in CIT v. Coromandel Steel Ltd. [1981] 130 ITR 856, came to a similar conclusion. Their Lordships held that first comes the deduction of depreciation of the current year; then as between unabsorbed business loss carried forward and unabsorbed depreciation, loss has priority over unabsorbed depreciation and has to be allowed. Unabsorbed development rebate comes up for consideration only after these two allowances. The same view is shared by the Karnataka High Court in Mysore Paper Mills Ltd. v. CIT [1979] 117 ITR 132. A subsidiary point may also be noticed before concluding the discussion. For the assessment year 1966-67, there was a profit of Rs. 11,195 but even for that year no reserve was created. Information is not available on the record as to the unabsorbed losses of the earl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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