1990 (11) TMI 127 - HC - Income Tax

Transfer of Reserve Fund to Capital Account Upheld as Business Purpose

The court held that the transfer of the reserve fund to the capital account within eight years did not violate section 34(3)(a) of the Income-tax Act, ... Developement Rebate Issues:1. Interpretation of section 34(3)(a) of the Income-tax Act, 1961 regarding transfer of development rebate reserve to the capital account.2. Whether the transfer of reserve fund to the capital account constitutes distribution of profits within the meaning of the Act.Detailed Analysis:1. The judgment pertains to the interpretation of section 34(3)(a) of the Income-tax Act, 1961. The case involved an assessee, a Hindu undivided family, who claimed a development rebate and created a reserve fund as required by the Act. The Income-tax Officer found that the reserve fund was transferred to the capital account within eight years, leading to a rectification of the assessment for a previous year. The Tribunal held that this transfer did not violate the conditions of section 34(3)(a), leading to a reference application by the Revenue.2. Section 34(3)(a) mandates that a certain percentage of the development rebate should be debited to the profit and loss account and credited to a reserve account for business purposes, excluding distribution as dividends or profits. The court analyzed whether the transfer of the reserve fund to the capital account within eight years constituted a violation. The court noted that the transfer was for business purposes and did not fall under the prohibited categories of distribution specified in the section. The court emphasized that the transfer to the capital account did not amount to distribution or disbursement by way of profit, especially in the context of a Hindu undivided family where capital and revenue accounts are considered distinct.3. The court distinguished the case from precedent where a clear violation of section 34(3)(a) occurred due to distribution of reserve amount as profits to partners. Additionally, the court referenced Supreme Court decisions emphasizing strict compliance with the statutory requirements of section 33 and section 34(3)(a) for availing benefits. Ultimately, the court answered the reference question in favor of the assessee, concluding that the transfer of the reserve fund to the capital account did not constitute a violation of the provisions of section 34(3)(a), thereby ruling against the Revenue.