Development rebate can be carried forward despite no reserve in a loss year, if profit later allows the required reserve.

Where an assessee has a loss in the relevant year, development rebate need not be supported by a statutory reserve in that year because no rebate is actually allowable when total income remains negative. The rebate may still be determined and carried forward for set-off in a later year when profits arise and the required reserve is created. On that basis, denial of the carried-forward benefit solely for want of reserve creation in the loss year is unsustainable.

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Issues: Whether development rebate, where the assessee suffered a loss in the relevant assessment year and no statutory reserve was created, could still be determined and carried forward for set-off in the year in which profit is made and the requisite reserve is created.

Analysis: The issue was answered in the light of the principle that if total income has been computed before allowing development rebate and the year results in a loss, there is no legal obligation to create the statutory reserve in that year because no rebate is actually allowable then. On that footing, denial of the benefit in later years merely because the reserve was not created in the loss year was held to be unsustainable.

Conclusion: The development rebate was rightly directed to be determined and carried forward for set-off in the subsequent assessment year when profit is earned and the requisite reserve is created.

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