Development rebate reserve cannot be diverted to dividend distribution and still qualify for the rebate.

Development rebate reserve could be used during the prescribed eight-year period only for the business of the undertaking, not for distribution by way of dividends or profits. Writing back the reserve and appropriating it towards dividends, including provision for proposed dividend in the accounts, was treated as utilisation for dividend distribution. The reserve was therefore diverted from the permitted business purpose, and the assessee was disentitled to development rebate for the assessment year 1977-78.

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Issues: Whether the assessee violated section 34(3)(a) of the Income-tax Act, 1961 by transferring the development rebate reserve to the profit and loss account and appropriating it for dividends, thereby disentitling it to development rebate for the assessment year 1977-78.

Analysis: Section 34(3)(a) permits the development rebate reserve to be utilised during the prescribed eight-year period only for the business of the undertaking and not for distribution by way of dividends or profits. The reserve in question was written back and the amounts were appropriated towards dividend on preference shares already paid and proposed dividend on equity shares. A mere recommendation or provision for dividend in the accounts was treated as a form of utilisation for distribution by way of dividend. The provisions in the company accounts, read with the requirement to show proposed dividend as a liability, supported the conclusion that the reserve had been diverted for dividend distribution and not retained for the permitted business purpose.

Conclusion: The assessee violated section 34(3)(a) of the Income-tax Act, 1961 and was not entitled to development rebate for the assessment year 1977-78.

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