1989 (3) TMI 2 - SC - Income Tax

No carry forward of development rebate without statutory reserve under s.33(1) read with s.34(3)(a) requirements clarified

SC upheld the HC's view that the assessee was not entitled to carry forward development rebate where the statutory reserve was not created in the previous ... Development Rebate - Whether Tribunal was right in holding that the assessee cannot be denied the benefit of carry forward of development rebate - HELD THAT:- Reliance was placed on Indian Oil Corporation Ltd. v. S. Rajagopalan, ITO [1973 (4) TMI 12 - BOMBAY HIGH COURT], where the Bombay High Court has held that there was no obligation on the assessee to create a reserve in the year of installation if there was no taxable income in the relevant year. It seems to us clear that in order to claim the deduction on account of development rebate under sub-section (1) of section 33, it is obligatory that the debit entries in the profit and loss account and the credit entry in reserve account should be made in the relevant previous year in which the machinery or plant is installed or first put to use. The development rebate contemplated by sub-section (1) of section 33 cannot be allowed as deduction unless a reserve account has been created in the previous year in which the installation or first use occurs. Any doubt in so reading the provisions because of want, or insufficiency, of profit in such previous year has been removed by the Explanation to clause (a) of sub-section (3) of section 34. The significance of the words 'actually allowed' in clause (a) of sub-section (3) of section 34 has been considered by the High Court in the judgment under appeal and we are in entire agreement with the view taken by the High Court in that regard. In the result, the appeal is dismissed but there is no order as to costs. Issues:- Whether the assessee can be denied the benefit of carry forward of development rebateRs.- Whether the Income-tax Officer should determine the development rebate and allow it to be carried forward and set off when profits are availableRs.Analysis:The case involves an appeal by a limited company against the High Court's judgment regarding the denial of development rebate benefit. The assessee claimed a development rebate for the assessment year 1962-63, which was rejected by the Income-tax Officer due to the failure to create a reserve as required by section 34 of the Income-tax Act, 1961. The Appellate Tribunal favored the assessee, leading to the questions being referred to the High Court. The High Court ruled against the assessee, stating non-compliance with the conditions of section 34(3) of the Act.The main contention in the appeal is whether a reserve must be created in the previous year of machinery installation for claiming the development rebate. Section 33 allows for a development rebate subject to the provisions of section 34. The court highlighted that the creation of a reserve fund in the relevant previous year is essential, as clarified by an Explanation added by the Finance Act, 1966. The Explanation mandates the creation of a reserve fund irrespective of the profit earned in that year, emphasizing the importance of book entries for creating such a reserve.The assessee relied on previous cases and argued that the reserve need not be created in the year of installation if there was no taxable income. However, the court emphasized that the creation of a reserve in the year of machinery installation is mandatory to claim the development rebate. The court rejected the argument that illusory entries suffice, emphasizing the need for actual fund existence for business purposes. The court aligned with the High Court's view on the significance of 'actually allowed' in section 34(3)(a) and affirmed the ruling in favor of the Revenue.In conclusion, the Supreme Court upheld the High Court's decision against the assessee, emphasizing the necessity of creating a reserve in the previous year of machinery installation to claim the development rebate. The court dismissed the appeal, with no order as to costs, based on the provided considerations and legal interpretations.