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TMI Blog1981 (9) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... er s. 34(3) of the I.T. Act, 1961, namely, 75% of the development rebate actually allowed to the assessee, being shown in the accounts as debited to the profit and loss account and credited to a reserve account, to enable the ITO to allow the said development rebate to the assessee. However, during the hearing of the said assessment proceedings before the ITO the assessee filed a revised return of income based on a fresh statement of accounts made by the assessee, complying with the said statutory conditions laid down under s. 34(3) of the I.T. Act, 1961. The ITO, relying on the decision of the Madras High Court in CIT v. Veeraswami Nainar [1965] 55 ITR 35, rejected the assessee's claim for the development rebate made under the revised return on the ground that the reserve created was not a proper reserve as envisaged under s. 34(3) of the I.T. Act, 1961. The AAC, in appeal from the said order distinguishing the decision of the Madras High Court in Veeraswami's case, relied upon by the ITO, as being not applicable to this case, and relying on the decisions of the Andhra Pradesh High Court in the case of Veerabhadra Iron Foundry v. CIT [1968] 69 ITR 425, and that of the Madras H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id development rebate it was necessary that it should have complied with the two statutory conditions under s. 34(3) of the I.T. Act, 1961, in respect of its accounts produced by it for the first time before the ITO, which, according to the learned counsel, were the final accounts and that the subsequent amendment or rectification of its accounts by the assessee-firm to comply with the provisions of s. 34(3) was not sufficient to permit the ITO to allow the said rebate. In support of: his said contention he relied on certain decisions of the Gujarat High Court. As against this, the learned counsel for the assessee contended that, in any event, in the case of an assessee, which is a firm, as in this case, there was no time-limit for making up the accounts by debiting the requisite amount to the profit and loss account and crediting it to development reserve account, nor was there any bar in law on the firms against amending or rectifying its accounts to comply with s. 34(3)(a) of the I.T. Act, 1961, and all that the ITO was concerned with under s. 34(3), before allowing the rebate to the assessee on the returns filed, was to see that the accounts on which the assessee had based hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w the rebate if otherwise factually the assessee was entitled to it under s. 33. The object of, the provision appears to be that, While allowing the rebate, to which the assessee was entitled under s. 33 for newly installed machinery, the ITO was to ensure that the assessee had built up a reserve for the future development of its business. The section does not provide for any time-limit within which a firm was required to complete its accounts, debiting the amount to the profit and loss account and crediting the same to a reserve account, nor is there, either in the section or otherwise in law, any bar against a firm either from amending or rectifying the accounts once they were made. In the case of an, assessee, who is a firm, as in this case, the law does not prescribe any time limit or formalities for making up its accounts or for its rectification or amendment thereafter, with the consent of the partners. Under the circumstances, while considering the allowance of a deduction on account, of development, rebate under, s. 34(3), the ITO was not concerned with the question of finality of the accounts, in a sense that there was to be no rectification thereof, even if permissible in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the close of the accounting year. In the appeals to the AAC and the Tribunal, the ITO's order was confirmed. However, the High Court, on a reference, held that (headnote): "There was no provision in the Act under which the reserve fund account should be credited with the amount of development rebate before the close of the accounting year and that as, the assessee made the necessary entries before the assessment was finalised by the Income-tax Officer, the assessee was entitled to the benefit of the rebate." The court, however, left open the question as to the ultimate time beyond which the entries could not be made. The next decision was of the Rajasthan High Court in the case of Mal-door Kisan Sakhari Samiti [1970] 75 ITR 253. There the assessee was a co-operative society, and the provisions applicable were s. 10(2)(vib) of the Indian I.T. Act, 1922 (same as s. 34(3) of the I.T. Act, 1961). The court there held that under prov. (b) under Expln. 2 to s. 10(2)(vib) an assessee shall be permitted the allowance in respect of development rebate only if he makes the debit entries as mentioned therein but as no time-limit is Placed for making such entries in the account bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ian I.T. Act, 1922. It also pointed out that from the observations in the said decision of the Supreme Court, the court was unable to infer that the profit and loss account originally prepared and passed by the company cannot be subsequently amended by it and that the ITO had no power to allow development rebate if the entries were made after the filing of the original return of income. The court disagreed with the contrary view taken by the Gujarat High Court in Surat Textile Mills' case [1971] 80 ITR 1, relying on certain observations of the Supreme Court in the said Indian Overseas Bank's case [1970] 77 ITR 512. The next decision was of the Punjab and Haryana High Court in the case of CIT v. Sardar Singh Sachdeva [1972] 86 ITR 387. There the assessee was an individual. The court held that (headnote) : " It is not necessary that entries about development rebate should be made in the accounts on or before the last day of the accounting year or even before the preparation of the profit and loss account. It is open to the assessee to make the entries at any time before the assessment is completed. The entries become final only when the assessment is made. Till then, they are in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court has not decided the point, and, with respect, we do not agree with the construction placed by the Gujarat High Court no the judgment of the Supreme Court". The next decision was of the Orissa High Court in the case of CIT v. Narula Cold Storage Ice, Factory[1976] 104 ITR 148. The facts there were close to our case. In that case the assessee was a registered firm. It had filed its return for the assessment year 1964-65, in February, 1968. When the books of account were originally closed and the return was filed, a provision for development rebate reserve had not been made. The assessee subsequently created the reserve and in March 1969, submitted revised returns. The revised returns were accepted, but the ITO rejected the claim for development rebate on the ground that the reserve for it, had, not been created at the time of the making profit and loss account. The AAC confirmed the order of the ITO. The Tribunal held that the development rebate was allowable. On a reference the High Court held (headnote): " There is no upper limit of time fixed under the Income-tax Act, 1961, for claiming development rebate The creation of a development rebate reserve is a condi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, the transfer to the reserve fund should be made at the time of making up of the profit and loss account." The court further held (headnote): "In view of the aforesaid decision of the Supreme Court, the benefit of the development rebate cannot be granted to the assessee in the instant case because, of non-compliance with the requisite conditions laid down clause (b) to the proviso to section 10(2)(vib)." The second decision of the Gujarat High Court also was , in the case of Addl. CIT v. Shri Subhlaxmi Mills Ltd. [1975] 100 ITR 188 Here also, the assessee was a limited company. In this case the court, again relying on the observations of the Supreme Court in Indian Overseas Bank's case [1970] 77 ITR 512, and also following its said earlier decision, took the same view as in the earlier decision. The third decision was in the case of Keshavlal Vithaldas v. CIT [1976] 105 ITR 601 (Guj). In that case the assessee was a firm. In the previous year relevant to the assessment year 1969-70, the assessee had installed certain machinery. When the profit and loss account of the firm was first prepared, no provision for development reserve was made nor was a reserve created. But som ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court in its decision in the Indian Overseas Bank's case [1970] 77 ITR 512, to the effect (p. 514): " It is also clear from the terms of the proviso that transfer to the reserve fund should be made at the time of making up the profit and loss account.", It would be, therefore, proper to examine the said decision of the Supreme Court to see whether from any of the observations therein the strict view taken by the Gujarat High Court was justified. In Indian Overseas Bank's case [1970] 77 ITR 512 the assessee, a banking company, had claimed development rebate under prov. (b) under Expln. 2 to s. 10(2)(vib) of the Indian I.T. Act, 1922, and had contended that the transfer which it had made to the reserve under s. 17 of the Banking Companies Act, 1949, was sufficient compliance with the said prov. (b) under Expln. 2 to s. 10(2)(vib) (s. 34(3) of the I.T. Act, 1961). The court there held (headnote): " The reserve contemplated by section 17 of the Banking Companies Act, 1949, and the one contemplated by proviso (b) to section 10(2)(vib) of the Income-tax Act, 1922, are two independent reserves. The entries in the account books required by proviso (b) to section 10(2)(vib) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounts in the case of a firm nor does it lay down that the, profit and loss account originally prepared by the firm cannot be subsequently amended by it and/or that the ITO had no power to allow development rebate, if the entries were made after the filing of the original return of income. In our view, therefore, the Supreme Court in its, said decision had not considered and/or decided the question before us, and the observations of the Supreme Court in its said decision cannot be read to that effect, as done by the Gujarat High Court. In that view of the matter, we are in agreement with the view taken by this court as well as various other High Courts on this question, and we are unable to agree with the contrary view taken by the Gujarat High Court. In our view, that being the position in law as regards the, compliance by the firm with the statutory conditions of s. 34(3) of the I.T. Act, 1961, for deductions on: account of development rebate being allowed, we may now deal with the facts of this case. There is no dispute in this case that factually the assessee-firm was entitled to deduction on account of development rebate. The only question, therefore, was as to its complia ..... X X X X Extracts X X X X X X X X Extracts X X X X
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