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TMI Blog1978 (7) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... 70] 77 ITR 512 applied and no development rebate was allowable. On appeal, it was held that since there was no profit, development reserve could not be created, but the development rebate should have been calculated and allowed in a succeeding year in which the assessee earned profits and created the requisite reserve. The ITO was directed to determine the development rebate admissible to the assessee. The ITO appealed. The Tribunal affirmed the view of the AAC. At the instance of the Commissioner, the Tribunal has referred for our opinion the following question of law : " Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in upholding the direction given by the Appellate Assistant Comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .--For the removal of doubts, it is hereby declared that the deduction referred to in section 33 shall not be denied by reason only that the amount debited to the profit and loss account of the relevant previous year and credited to the reserve account aforesaid exceeds the amount of the profit of such previous year (as arrived at without making the debit aforesaid) in accordance with the profit and loss account. " In Indian Overseas Bank Ltd. v. CIT [1970] 77 ITR 512, the Supreme Court had to consider a case where the assessee had earned sufficient profits but yet had not debited the profit and loss account with the amount allowable as development rebate. It had also not created the development reserve. The Supreme Court held that creati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e allowance. It is actual money and not notional relief from taxation to be utilised for the development of the business in the next eight years. There is no express provision that the reserve must be created in the year for which the rebate is to be determined. The reserve can be created only if profits are earned ; else it will be forcing the assessee to create a reserve out of its capital or by borrowings, either of which events will defeat the object of enabling the company to accumulate funds to be used for its development. Sub-section (2) of s. 33 clarifies the position. Under it if the total income of the assessee for the year in which machinery or plant, etc., was acquired or installed is nil or is less than the full amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in section 33 shall not be allowed unless ......" 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 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-s. (2) of s. 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 a single year ; depending on the ava ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions, the Income-tax Officer may condone genuine deficiencies subject to the same being made good by the assessee through creation of adequate additional reserve in the current year's books in which the assessment is framed." The Board issued Circular No. 189, dated 30th January, 1976, saying in para. 5 thereof thus : " The Board have re-examined the issues involved and are of the view that except the clarification given in part (a) of para. 1 above, which stands superseded by the aforesaid decision of the Supreme Court, the clarifications given in parts (b) and (c) of para. 1 above hold good. " The reference was to the decision of the Supreme Court in Indian Overseas Bank's case [1970] 77 ITR 512. In Navnit Lal C. Javeri v. K. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its for development purposes. This could be done only after profits have been earned. If profits accrue for the first time in the eighth year, there is nothing unconscionable in the utilisation taking place in the next seven years. But s. 33(2) makes it clear that the development rebate cannot be carried forward for more than eight years after the installation of the machinery or plant. By the Finance Act of 1966, the Explanation was added to s. 34(3)(a) with retrospective effect. It was clarificatory. It stated that the development rebate shall not be denied only because the amount debited to the profit and loss account and credited to the reserve account exceeds the amount of profit available. Learned counsel for the department, relyi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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