1982 (10) TMI 23 - HC - Income Tax

Strict adherence to reserve account creation for development rebate upheld by court

The court ruled against the assessee and in favor of the Revenue, stating that the statutory requirement of creating a reserve account must be strictly ... Developement Rebate Issues Involved:1. Entitlement to claim development rebate in the absence of a reserve account creation for the relevant previous year.Summary:Issue: Entitlement to Claim Development RebateThe primary question referred to the court was whether the assessee, a limited company, is entitled to claim a deduction for the development rebate in the absence of a reserve account being created for the relevant previous year. The concerned accounting year is 1974, during which the assessee installed certain machineries. It is undisputed that if the conditions in s. 34 of the I.T. Act are satisfied, the assessee would be entitled to development rebate as provided u/s 33 of the Act.The assessee claimed a deduction of Rs. 22,341 by way of development rebate but did not create the required reserve during the accounting year. The ITO disallowed this claim, but the AAC allowed it on appeal, noting that reserves created in prior years (1965-1973) were sufficient to cover the development rebate for the current year. The AAC argued that the Act does not explicitly require the equivalent of the development rebate claimed to be debited to the profit and loss account of the relevant year.On the Revenue's appeal, the Tribunal upheld the AAC's order, referencing two Calcutta High Court decisions which suggested that there is no statutory obligation to maintain a separate fund known as the development rebate reserve, and that sufficient funds in another account could suffice for compliance.The court examined s. 34(3)(a) of the I.T. Act, which mandates that an amount equal to seventy-five per cent of the development rebate to be actually allowed must be debited to the profit and loss account of the relevant previous year and credited to a reserve account for business purposes over the next eight years. The court emphasized the need for strict adherence to this statutory requirement, citing several precedents, including Indian Overseas Bank Ltd. v. CIT [1970] 77 ITR 512, which underscored that the creation of a reserve is a condition precedent for obtaining the allowance of development rebate.The court disagreed with the Calcutta High Court's interpretation in CIT v. Calcutta Tramways Co. Ltd. [1978] 112 ITR 643, which suggested that there is no mandatory requirement for setting apart an amount under a separate head. The court reiterated that the statutory provision requires the amount to be credited to a reserve account, which must be kept separate and reserved for a specific purpose.The court also considered the binding nature of circulars issued by the CBDT u/s 119 of the Act but noted that no instruction or circular can contravene the provisions of the Act.In conclusion, the court answered the question in the negative, ruling against the assessee and in favor of the Revenue, stating that the statutory requirement of creating a reserve account must be strictly followed for claiming the development rebate. There was no direction regarding costs.