Development rebate reserve must be created before accounts close; later adjustment entries do not satisfy the statutory condition.

Development rebate under section 34(3) required the reserve to be debited to the profit and loss account before that account was finally made up and transferred to a separate reserve account at that stage. A reserve created only after the profits had been ascertained and distributed, through later adjustment entries to partners' capital accounts, did not satisfy the statutory condition precedent. The assessee therefore failed to qualify for development rebate, and the referred question was answered against the assessee and in favour of the Revenue.

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Issues: Whether the assessee was entitled to development rebate where the reserve was created only after the profit and loss account had been finally made up and the profits had been distributed to the partners.

Analysis: The statutory scheme under section 34(3) of the Income-tax Act, 1961, corresponding to proviso (b) to section 10(2)(vib) of the Indian Income-tax Act, 1922, requires that the amount intended for development rebate reserve must be debited to the profit and loss account before that account is finally made up and credited to a separate reserve account at that stage. The reserve requirement is not an idle formality and cannot be satisfied by later adjustment entries after the profits have already been ascertained and distributed. Once the profit and loss account is closed, subsequent debits to partners' capital accounts for creating the reserve do not amount to compliance with the statutory condition.

Conclusion: The assessee did not satisfy the statutory conditions for allowance of development rebate, and the answer to the referred question was against the assessee and in favour of the Revenue.

Ratio Decidendi: For development rebate, the reserve must be created by a contemporaneous debit to the profit and loss account before it is finally made up; later rectification or adjustment entries after closure of the accounts do not satisfy the condition precedent.

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