Shubhlaxmi
Mills Limited Vs. Additional Commissioner of Income-Tax, Gujarat [1989] INSC 100 (28 March 1989)
Pathak,
R.S. (Cj) Pathak, R.S. (Cj) Misra Rangnath
CITATION:
1989 AIR 1406 1989 SCR (2) 86 1989 SCC (2) 465 JT 1989 (2) 1 1989 SCALE (1)724
ACT:
Income
Tax Act, 1961--S. 33(1) read with S. 34(3)(a) and Explanation thereto--Creation
of a reserve fund in the relevant previous year is a condition precedent for
claiming deduction on account of 'development rebate'.
HEAD NOTE:
Sub-s.
(1) of S. 33 of the Income Tax Act, 1961 provides that subject to the provisions
of s. 34 thereof development rebate may be claimed as a deduction in respect of
a new machinery or plant. Clause (a) of sub-s. (3) of s. 34 stipulates that the
said deduction shall not be allowed unless an amount equal to 75 per cent of
the development rebate is debited to the profit and loss account of the relevant
previous year and credited to a reserve account; and the Explanation thereto
provides that the deduction shall not be denied by reason only that the amount
so credited to the reserve account exceeded the amount of the profit of such
previous year.
The
appellant-assessee which had a textile mill claimed a sum as development rebate
for the assessment year 1962-6 3.
The
Income Tax Officer rejected the claim on the ground that the assessee had not
created a reserve as contemplated by sub-s. (3) of s. 34 and his order, on
appeal, was upheld by the Assistant Commissioner. In second appeal, the claim
by the assessee found favour with the Appellate Tribunal; but on a reference
made by it at the instance of the Revenue, the High Court held that the assessee
had failed to comply with the conditions of sub-s. (3) of s. 34. The appellant
contended that the view taken by the High Court was erroneous and that it was
not necessary that a reserve should have been created in the previous year.
Dismissing
the appeal,
HELD:
In order to claim the deduction on account of development rebate under sub-s.
(1) of s. 33 it is obligatory that the debit entries in the profit and loss
account and the credit entry in a reserve account should be made in the relevant
previous year in which the 87 machinery or plant is installed or first put to
use. The development rebate contemplated by sub-s. (1) of s. 33 cannot be
allowed as a deduction unless a reserve account has been created in the previous
year in which the installation or first use occurs. Any doubt in so reading the
provisions because of a want or insufficiency of profit in such previous year
has been removed by the Explanation to clause (a) of sub-s. (3) of s. 34.
[91D-E] What is contemplated is the creation of a Reserve Fund in the relevant
previous year irrespective of the result of the profit and loss account
disclosed by the books of the assessee. Mere book entries will suffice for
creating such a Reserve Fund. The debit entries and the entries relating to the
Reserve Fund have to be made before the profit and loss account is finally
drawn up. That is a condition for securing the benefit of development rebate.
[89E-F] West Laikdihi Coal Co. Ltd., Calcutta v. Commissioner of Income-tax,
West Bengal 11, [1973] 87 ITR 501; Commissioner of Income-tax, Delhi Central v.
Modi Spinning & Weaving Mills Co. Ltd., [1973] 89 ITR 304 and Indian
Overseas Bank Ltd. v. Commissioner of Income-tax, Madras, [1970] 77 I TR 512,
distinguished.
Additional
Commissioner of income-tax v. Vishnu Indu s- trial Enterprises, [1980] 122 ITR
919 and Commissioner of Income-tax v. U.P. Hotel and Restaurants Ltd., [1984] 1
45 ITR 598, overruled.
Dodballapur
Spinning Mills Ltd. v. Commissioner of Incometax, Karnataka-2 and Anr., [1980]
121 ITR 94 and Indian Oil Corporation Ltd. v. S. Rajagopalan, Income T ax
Officer, Companies Circle H(I) Bombay and Others, [1973] 92 ITR 241, referred
to.
CIVIL
APPELLATE JURISDICTION: Civil Appeal No. 47 (N T) of 1975.
From
the Judgment and Order dated 3.10.1974 of the Gujarat High Court in I.T.
Reference No. 30 of 1973.
Bishambar
Lal for the Appellant.
V.S.
Desai, B. Rao and Ms. A. Subhashini for the Respondent.
M.B. Lal
for the Intervener. (N.P.) 88 The Judgment of the Court was delivered by
PATHAK, C.J. This appeal by certificate granted by the High Court of Gujarat is
directed against the judgment of the High Court on the following questions
referred to it by the Appellate Tribunal:
"1.
Whether, on the facts and in the circumstances of the case, the Tribunal was
fight in holding that the asse s- see cannot be denied the benefit of carry
forward of development rebate?
2.
Whether, on the facts and in the circumstances of the case, the Tribunal was
justified in directing that the Income-tax Officer should determine the
development rebate and such development rebate should be allowed to be carried
forward and set off when profits are available and if, in that year, the assessee
fulfils the necessary requirements for such allowance like creation of adequate
reserve?" The assessee is a limited Company. It has a textile mi ll at Cambay
in the State of Gujarat. For the assessment year 1962-63,
the previous year being the calendar year 1961, the assessee claimed that a sum
of Rs. 1,26,233 should be a l- lowed as development rebate under s. 33 of the
Income-t ax Act, 1961. The Income-tax Officer rejected the claim on the ground
that the assessee had not created a reserve as co n- templated by sub-s. (3) of
s. 34 of the Income-tax Ac t, 1961. The Appellate Assistant Commissioner of
Income T ax dismissed the appeal filed by the assessee. In second appeal the
claim by the assessee found favour with the Income T ax Appellate Tribunal. At
the instance of the Revenue the questions set forth earlier were referred to
the High Court for its opinion. The High Court has answered the questions in favour
of the Revenue and against the assessee. It h as held that the assessee had failed
to comply with the conditions of sub-s. (3) of s. 34 of the Act.
In
this appeal by the assessee it is urged that the view taken by the High Court
is erroneous and that it is not necessary that a reserve should be created in
the previous year during which the machinery or plant was installed.
Sub-s.
(1) of s. 33 provides that development rebate m ay be claimed as a deduction in
respect of a new machinery or plant installed 89 after 31 March, 1954 which is
owned by the assessee and is wholly used for the purposes of the business
carried on by him, and that the allowance of the deduction is subject to the
provisions of s. 34. CI. (a) of sub-s. (3) of s. 34 provides that the deduction
referred to in s. 33 shall not be allowed unless an amount equal to 75 per cent
of the development rebate to be actually allowed is debited to the profit and
loss account of the relevant previous year and credited to a reserve account to
be utilised by the assessee during a period of eight years next following for
the purposes of the business of the undertaking, other than f or distribution
by way of dividends or profits or for remittance outside India as profits or
for the creation of any asset outside India. The Finance Act, 1966 added an
Explanation to this clause. The Explanation declared that the deduction
referred to in s. 33 could 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 aforesaid reserve account exceeded the amount of the profit of such previous
year (as arrived at without making the depos it aforesaid) in accordance with
the profit and loss account.
The
Explanation was inserted with retrospective effect from the commencement of the
Act. Before the Explanation w as enacted a difference of opinion had existed
between the High Courts on the question whether the statute required the creation
of a reserve in the previous year in which the new machinery or plant was
installed, when the amount of the profit of that previous year was either nil
or insufficient for the purposes of enabling the creation of such reserve.
It is
not necessary to refer to these cases, for it see ms clear to us that the
Explanation, which applied to the assessment year under consideration before
us, removes the doubt altogether. What is contemplated is the creation of a
Reserve Fund in the relevant previous year irrespective of the result of the
profit and loss account disclosed by the books of the assessee. Mere book
entries will suffice f or creating such a Reserve Fund. The debit entries and the
entries relating to the Reserve Fund have to be made befo re the profit and
loss account is finally drawn up. That is a condition for securing the benefit
of development rebate and if that condition is not satisfied we fail to see how
the deduction on account of development rebate can be claimed at all.
Learned
counsel for the assessee relies on West Laikdihi Coal Co. Ltd., Calcutta v.
Commissioner of Income-tax, West Bengal 11, [1973] 87 ITR 501 and Commissioner
of Income-tax, Delhi Central v. Modi Spinning & Weaving Mills Co. Ltd .,
[1973] 89 ITR 304. Those were cases decided under the provisions of the Indian
Income-tax Act, 1922 and there was no Explanation such as we have before us.
Re- 90 ference was made to the decision of this Court in Indian Overseas Bank
Ltd. v. Commissioner of Income-tax Madras, [1970] 77 ITR 512. In that case,
however, the question w as whether the creation of a reserve in compliance with
s. 17 of the Banking Companies Act constituted sufficient compliance with the
requirements of proviso (b) to s. 10(2) (vi b) of the Indian Income-tax Act,
1922. Reference has also be en made to Additional Commissioner of Income-tax v.
Vishnu Industrial Enterprise, [1980] 122 ITR 919. We do not find it possible to
agree with the view taken by the Allahabad High Court in that case that the
development reserve need not be created in the relevant previous year during
which the new machinery or plant is installed, and that a profit must have been
earned during the previous year to permit the creation of a reserve fund. We
think that the Explanation is clear, and that there can be no doubt that it
envisages the creation of a Reserve Fund notwithstanding that there is no
profit or insufficient profit from which such reserve may be provided. To
contemplate otherwise would be to negate the entire scheme incorporated in s.
33 read with s. 34 of the Act. For the same reason we are unable to affirm the
view taken by the Allahabad High Court in Commissioner of Income-tax v. U.P.
Hotel and Restaurants Ltd., [1984] 1 45 ITR 598. Our attention has been drawn
by the learned counsel for the assessee to Dodballapur Spinning Mills Ltd. v.
Commissioner of Income-tax, Karnataka-2 and Anr., [1980] 1 21 ITR 94 where
reference has been made to a circular issued by the Central Board of Direct
Taxes dated 14th October, 19 65 and to a subsequent circular dated 30 January,
1976. We have carefully considered the matter and we do not think that the circulars
affect the true position in law.
On
behalf of the assessee reliance was placed on Indian Oil Corporation Ltd. v. S.
Rajagopalan, Income-tax Office r, Companies Circle II (1) Bombay and others,
[1973] 92 ITR 2 41 where the Bombay High Court has held that there was no
obligation on the assessee to create a reserve in the year of installation if
there was no taxable income in the relevant year. Some of the submissions
addressed in that ca se may be set forth in detail. A powerful argument was a
d- dressed by learned counsel for the assessee and it w as pointed out that the
expression "shall be allowed" in clause (a) of sub-s. (1) of s. 33
indicated that the development rebate is to be assessed and thereupon it
becomes allowable, and that sub-s. (2) of s. 33 which provides for the allowance
of development rebate mentions that the sum "to be allowed" by way of
development rebate for the assessment year shall be only such amount as shall
be sufficient to reduce the total assessable income to nil and the amount of
development rebate to the extent to which 91 it has not been allowed shall be
carried forward to the following assessment years for eight subsequent year s.
Reference
was also made to the distinction between the expressions "to be
allowed" and "actually allowed" used in the relevant provisions.
It was also argued that the utilisation by the assessee of the development
rebate reserve f or the purposes of the business of the undertaking contemplated
the existence of an actual fund which could be utilised for the purposes of the
business, and that an illusory debit entry in the profit and loss account and
an illusory credit entry in the development rebate reserve account were not
contemplated. The High Court accepted the submission and concluded that it was
not mandatory that the necessary debit and credit entries must be made in the
assessment year following the year of installation in which the developme nt
rebate is determined under s. 33. Having considered the matter at some length
in the present case, it seems to us clear that in order to claim the deduction
on account of development rebate under sub-s. (1) of s. 33 it is obligatory
that the debit entries in the profit and loss account and the credit entry in a
reserve account should be made in the relevant previous year in which the machinery
or plant is installed or first put to use. The development rebate co n- templated
by sub-s. (1) of s. 33 cannot be allowed as a deduction unless a reserve
account has been created in the previous year in which the installation or
first use occurs.
Any
doubt in so reading the provisions because of a want or insufficiency of profit
in such previous year has be en removed by the Explanation to clause (a) of
sub-s. (3) of s. 34. The significance of the words "actually allowed"
in clause (a) of sub-s. (3) of s. 34 has been considered by the High Court in
the judgment under appeal, and we are in entire agreement with the view taken
by the High Court in that' regard.
A
number of other cases have also been placed before us by learned counsel for the
assessee, but as they deal with the point on the basis of considerations
substantially the same as have been referred to in the cases mentioned earlier,
we think it unnecessary to deal with them specifically .
Upon
the aforesaid considerations we hold that the High Court is right in answering
the questions in favour of the Revenue and against the assessee.
In the
result, the appeal is dismissed but there is no order as to costs.
H.L.C.
Appeal dismissed.
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