Court allows carry-forward of development rebate; no reserve creation required upon installation; sets priority order for set-off.

The court ruled in favor of the assessee, holding that the development rebate could be carried forward and allowed in subsequent years until fully absorbed within eight years. It was determined that the creation of a reserve for development rebate was not required in the year of installation but could be done when there was sufficient income to absorb the rebate. Additionally, the court established the priority order for set-off as current year depreciation, carry forward business losses, unabsorbed depreciation, and unabsorbed development rebate along with the current year's development rebate.

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Issues Involved:
1. Legality of allowing development rebate for the assessment year 1968-69.
2. Priority of carry forward business losses over unabsorbed development rebate and current year's development rebate.

Detailed Analysis:

Issue 1: Legality of Allowing Development Rebate for Assessment Year 1968-69
The primary question was whether the Tribunal was legally correct in allowing the claim of development rebate for the assessment year 1968-69. The relevant facts are that the assessee, a private limited company dealing in building materials, installed new machinery and plant in the accounting periods relevant to the assessment years 1962-63 and 1963-64. However, no development rebate reserve was created due to losses in those years. For the assessment year 1968-69, the assessee created a reserve of Rs. 46,038, resulting in a nil balance in the profit and loss account. The Income Tax Officer (ITO) disallowed the development rebate except for Rs. 51. The Appellate Assistant Commissioner (AAC) confirmed the disallowance, stating that the machinery was neither installed in the assessment year under appeal nor in the preceding year. The Tribunal, however, held that the development rebate could be carried forward and allowed in subsequent years until fully absorbed within eight years. It stated that the reserve need not be created in the year of installation but could be created in the year when there was sufficient income to absorb the rebate. The Tribunal directed the reconstruction of accounts to allow the set-off of development rebate for the year 1968-69.

Issue 2: Priority of Carry Forward Business Losses Over Unabsorbed Development Rebate and Current Year's Development Rebate
The second question addressed whether carry forward business losses should take precedence over unabsorbed development rebate and the current year's development rebate. The Tribunal noted that apart from the development rebate, unabsorbed losses from earlier years were carried forward, resulting in a loss even for the assessment years 1966-67 and 1967-68. The Tribunal directed the ITO to reconstruct the account of the development rebate and allow the set-off by reference to the reserve created for the year 1968-69. The court examined the statutory provisions, particularly sections 4, 5, 14, 28, 29, 33, and 34 of the I.T. Act, 1961. It was argued that the provisions of sections 29 to 43A should be applied before considering the carry forward and set-off of business losses under section 72. The court noted that section 33(2) allows the carry forward of unabsorbed development rebate for up to eight years. The court concluded that the correct order of priority should be:
1. Current year depreciation.
2. Carry forward business losses under section 72(2) read with section 72(1).
3. Unabsorbed depreciation.
4. Unabsorbed development rebate and current year's development rebate.

The court cited the Gujarat High Court's decision in Monogram Mills Co. Ltd. v. CIT and the Madras High Court's decision in CIT v. Coromandel Steel Ltd., which supported this order of priority. The court also referenced the Supreme Court's decision in Cambay Electric Supply Co. Ltd. v. CIT, which emphasized the impact of section 72 on the computation of total income.

Conclusion:
The court answered the reference in the affirmative, against the Department and in favour of the assessee, with no order as to costs. The judgment emphasized that the assessee is not bound to create the development rebate reserve in the year of installation if there is no profit, and it is sufficient if the reserve is created when there are profits. The carry forward business losses under section 72(2) read with section 72(1) get precedence over unabsorbed development rebate and the current year's development rebate.

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