9911796707
TMI Blog1974 (10) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... us is a limited company and at the relevant time was running a textile mill at Combay in the State of Gujarat. The accounting period of the assessee for the assessment year 1962-63 was the calendar year 1961 ending on December 31, 1961. For this particular year the assessee claimed that a sum of Rs. 1,26,223 should be considered as the development rebate allowable to it under the provisions of section 33 of the Income-tax Act, 1961. The assessee had not created a reserve as contemplated by section 34(3) of the Act of 1961. The Income-tax Officer declined to entertain the claim on the ground that the assessee had not complied with the conditions of admissibility under section 34(3) of the Act of 1961. Before the Appellate Assistant Commissioner the same contention was urged as regards the claim for development rebate. This appellate officer agreed with the views of the Income-tax Officer and held that, as the assessee had not satisfied the preconditions mentioned in section 34(3), the assessee could not claim the development rebate. The matter was carried in further appeal before the Appellate Tribunal by the assessee and so far as development rebate was concerned, the contention o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equired that no allowance for development rebate could be made unless the particulars prescribed for the purpose of clause (vi), that is, for depreciation allowance, had been furnished by the assessee in respect of such machinery or plant. It may be noted that this was the only provision which came into effect from April 1, 1955. There was no provision in section 10(2)(vib) as originally enacted in 1955 for carry forward or for any setting up of reserve. This provision continued till 1958 when the Finance Act, 1958, substituted with effect from April 1, 1958, an entirely new clause for the clause as it existed from April 1, 1955, onwards. The new clause 10(2)(vib) provided for development rebate not only in respect of new machinery or plant but also in respect of new ship acquired after the 31st day of March, 1954. The percentage of development rebate was forty per cent. in the case of a new ship if purchased after the 31st day of December, 1957, and in the case of a ship acquired before the 1st day of January, 1958, and in the case of any machinery or plant, twenty-five per cent. of the actual cost of the ship or machinery or plant to the assessee. Under the new clause (vib) of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution by way of dividends or profits, or (ii) for remittance outside India as profits or for the creation of any asset outside India, and, moreover, if any such ship, machinery or plant was sold or otherwise transferred by the assessee to any person other than the Government 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 clause (vib) was to be deemed to have been wrongly allowed for the purpose of the Act. In 1961 certain further changes were made in section 10(2)(vib) with effect from 1st April, 1960, by the Taxation Laws (Amendment) Act, 1960. It was provided by this amendment that no allowance under clause (vib) was to be made in respect of any machinery or plant which consisted of office appliances or road transport vehicles. When the Income-tax Act, 1961, was enacted the provisions of section 10(2)(vib) were divided between two sections, namely, section 33 and section 34. Section 33 of the new Act provided by sub-section (1) what was originally provided for by clause (vib). Sub-section (2) of section 33 is equivalent to Explanation 1 to clause (vib). Explanation to sub-section (2) of section 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pply accordingly. In 1966, by the Finance Act, 1966, and Explanation was added ; section 9 of the Finance Act, 1966, provided that the following Explanation shall be, and shall be deemed always to have been, inserted, in section 34, namely : " Explanation.--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. " Since the Explanation has been added with retrospective effect, it will have to be read as if it had been originally enacted in the Income-tax Act, 1961, right from the beginning and as if the entire section with the Explanation had been in force with effect from April 1, 1962. The provisions of section 10(2)(vib) of the 1922 Act as they were in force between 1956 and 1958 came up for consideration before a Division Bench of this court in Commissioner of Income-tax v. Saurashtra Wire-Healds Mfg. Co. Pte. Ltd. and, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al or technical nature, which, in the interests of justice, should be dispensed with. We are, therefore, of opinion that the assessee, not having set apart in his accounts 75 per cent. of the amount claimable as development rebate, could not claim the benefit of section 10(2)(vib) of the Act. " The Madras High Court also expressed the opinion that it would not be open to the Tribunal to give a direction to the assessee, who had not made the necessary book entries by the time he produced his accounts before the Income-tax Officer, that he should be allowed to rewrite them by making the requisite entries. The Madras High Court also observed that the entries in the account books required by the proviso to section 10(2)(vib) were not an idle formality. The assessee being obliged to credit the reserve fund for a specific purpose, he cannot draw upon the same for purposes other than those of the business, and if the assessee were a company for example, that amount could not be distributed by way of dividend. It is also clear from the terms of the proviso to section 10(2)(vib) that the reserve should be made at the time of making up the profit and loss account. In Indian Overseas Bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent from the terms of the proviso. The entries in the account books required by the proviso are not an idle formality. The assessee being obliged to credit the reserve fund for a specific purpose, he cannot draw upon the same for purposes other than those of the business and that amount cannot be distributed by way of dividend. It is also clear from the terms of the proviso that the transfer to the reserve fund should be made at the time of making up the profit and loss account. " During the pendency of the case of Indian Overseas Bank Ltd. v. Commissioner of Income-tax before the Supreme Court, the Madras High Court considered the matter in Radhika Mills Ltd. v. Commissioner of Income-tax. The Madras High Court in this case observed at page 666 of the report : " In our opinion, the scheme of clause (vib), therefore, comes to this. For each year of installation of machinery, the assessee will in or along with his return make a claim for development rebate with the necessary and relevant particulars furnished at least before completion of the assessment. The actual allowance of the claim will depend upon compliance with the requisites of clauses (a) and (b) of the proviso as alr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of the Division Bench of the Calcutta High Court, has observed at page 508 : " The provisions relating to development rebate in clause (vib) of section 10(2), it appears, were introduced for giving incentives to businessmen to develop their business. It is not, strictly speaking, an expenditure which is allowed as a deduction for purposes of assessment of income-tax. The development rebate cannot be treated by the assessee as part of its income or profit for all purposes. Restrictions have been imposed on an assessee's right to deal with or dispose of the development rebate. For a period of ten years the assessee cannot utilise the reserve account that has to be created either for distribution by way of dividends or profits or for remittances outside India as profits or for the creation of any asset outside India. Against this background we have to examine the provisions of clause (vib) to see whether the reserve account must be created in the year of installation of the plant or machinery irrespective of whether the assessee has an assessable income in that year. If an assessee has to create a reserve account in the year of installation, though in that year the assessee does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or if in the year of installation the assessee had incurred a loss. At page 250 of the report, Nain J., delivering the judgment of the High Court, observed : " We are of the view that if in the assessment year relevant to the year of installation or use the total assessed income of the assessee is nil, the assessee cannot naturally be expected to have credited an actual and non-illusory reserve equivalent to 75% of the development rebate to be allowed and that such reserve can only be made out of assessed profits. There can be no obligation on the part of the assessee to create a reserve as a condition merely for carrying over the development rebate without it being actually allowed to him by setting off the rebate against the assessed profits. We are unable to accept the contention of the respondents that the assessee must create the reserve in the year of installation or use of the plant or machinery, irrespective of any profits, as a condition precedent to the actual allowance of development rebate in the subsequent years in which there are assessed profits. If this contention is accepted, the assessee may have to resort to borrowing for creation of the reserve in order to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of a reserve by debiting the profit and loss account of the assessee and crediting to the reserve account the appropriate amount. If this is not done, the development rebate cannot be allowed. It must be pointed out at this stage that under section 33(1) the development rebate is to be allowed subject to the provisions of section 34 and it should be allowed as a deduction in the computation of profits of business while assessing the income of the previous year in which the ship was acquired or the machinery or plant was installed. Under section 28 profits and gains of any business or profession have to be computed in accordance with the provisions contained in sections 30 to 63 and hence section 33 which provides for deduction by way of development rebate is a deduction while computing the assessable income of the particular previous year in the course of which the ship was acquired or the machinery or plant was installed. The actual relevant portion of section 33(1) may at this stage be reproduced : " 33. Development rebate.--(1) in respect of a...... new machinery or plant...... installed after the 31st day of March, 1954, which is owned by the assessee and is wholly used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business the particular amount contemplated by section 34(3)(a). The words used in section 34(3)(a) are " amount equal to seventy-five per cent. of the development rebate to be actually allowed and a great deal of emphasis is placed on the words " actually allowed " by the learned Advocate-General. He contends that if the income of the assessee on a computation of profit and loss account is nil or the profit and loss account without taking into consideration the development rebate shows a loss, there is no question of any deduction by way of development rebate being allowed in the previous year in which machinery or plant was installed and so long as the reserve is created out of profits during the period of eight years immediately succeeding the previous year in which the machinery was installed, the requirements of section 33 and section 34 would be fully satisfied. The legislature does not contemplate, as shown by the Explanation to section 34(3)(a), that the reserve should be created out of any surplus profits or should be backed up by any actual amount. The Explanation does contemplate that the reserve can be created even when the profit and loss account does not justify the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be allowed as a deduction in respect of the previous year in which the ship was acquired or new machinery or plant installed and that too subject to the provisions of section 34. The provisions of section 34 are not a mere idle formality and they must be complied with if the benefit of the development rebate is to be availed of by an assessee. Section 33(1) read with section 34 provides that before the amount of twenty-five per cent. or forty per cent. or appropriate percentage can be allowed as a deduction in computing the assessable income of the relevant previous year, it is essential that the reserve of an amount equal to seventy-five per cent. of the development rebate to be actually allowed should be created by debiting the profit and loss account of the relevant previous year and crediting the same to a reserve account. As pointed out by the Madras High Court in Commissioner of Income-tax v. Veeraswami Nainar the debiting of the profit and loss account must be done before the profit and loss account is closed, that is, entries should be made regarding the reserve at the time of making up the profit and loss account. The words used in section 33(1) are " allowed as a deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eference to the amount which has to be set apart to the reserve account. The legislature by using the identical words, namely, " be allowed " in section 33(1), by using the words " it has not been allowed as aforesaid " in section 33(2) and the words " to be actually allowed " in section 34(3)(a) has in this context clearly indicated that the assessee must ordinarily be allowed the benefit of development rebate as a deduction in respect of the previous year in which the ship was acquired or the machinery or plant was installed and this can be done only if the profit and loss account before it is finally made up shows the necessary debit entry for the purpose of creation of the reserve and the corresponding credit entry for the reserve account. If this is not done, the condition for getting the benefit of development rebate will not be satisfied and the development rebate cannot be allowed in view of section 34(3)(a). If the necessary reserve fund has been created by debiting the profit and loss account and crediting it to the reserve account, the question will have to be considered whether the whole of it is availed of in assessing the income of the previous year in which the ship ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause (b) of the proviso to section 10(2)(vib) of the 1922 Act, the amount to be transferred to the reserve contemplated by that clause must be debited before the profit and loss account is made up and, secondly, the transfer to the reserve fund should be made at the time of making up of the profit and loss account. We agree with that conclusion because that conclusion follows from the decision of the Supreme Court in Indian Overseas Bank Ltd. v. Commissioner of Income-tax and the earlier decision in Commissioner of Income-tax v. Veeraswami Nainar. In this connection it may be pointed out that the legislature has followed a consistent scheme of making a provision of eight years for three purposes in the context of development rebate. In the first instance, under section 33(2) the development rebate can be carried forward for a period of eight years from the end of the previous year in which the machinery or plant was installed or the ship was acquired. Under section 34(3)(a) the reserve has to be utilised during a period of eight years following the end of the previous year in which the machinery or the plant was installed or the ship was acquired and under section 34(3)(b) if t ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
