1967 (4) TMI 34 - HC - Income Tax

Court rules reserve fund credit timing for tax rebate

The court determined that the reserve fund did not need to be credited before the close of the accounting year but rather before the assessment was ... Development rebate - section 10(2)(vib) Issues Involved:1. Entitlement to development rebate under section 10(2)(vib) of the Indian Income-tax Act, 1922.2. Compliance with the statutory requirement for creating a reserve fund before the close of the accounting year.Issue-Wise Detailed Analysis:1. Entitlement to Development Rebate:The primary issue was whether the assessee, a registered firm engaged in manufacturing and selling sugarcane crushers and tobacco furnaces, was entitled to a development rebate under section 10(2)(vib) of the Indian Income-tax Act, 1922. The assessee had installed new machinery costing approximately Rs. 1,00,233 for a new business of exhibiting cinema films during the relevant accounting year.The assessee claimed a development rebate on this machinery but had not initially credited the required amount to a reserve fund as mandated by the Act. The omission was due to a misapprehension that such entries were only necessary for companies. During assessment proceedings, the Income-tax Officer pointed out this omission and allowed the assessee time to make the relevant entries, which were subsequently made on August 9, 1961. However, the Income-tax Officer disallowed the claim, stating that the entries were made too late, nearly one year and four months after the accounting year's close. The Appellate Assistant Commissioner and the Appellate Tribunal upheld this disallowance, leading to the reference under section 66(1) of the Act.2. Compliance with Statutory Requirement:The court examined the statutory requirement under section 10(2)(vib), which mandates that an amount equal to seventy-five percent of the development rebate must be debited to the profit and loss account of the relevant previous year and credited to a reserve account. The proviso does not specify the exact time by which these entries must be made.The department argued that the entries should be made before the close of the accounting year. However, the assessee's counsel contended that it is only necessary to make these entries before the assessment is finalized, as the creation of a reserve fund presupposes the existence of a profit, which can only be determined after drawing up the profit and loss account.The court referred to the case of P. Appavu Pillai v. Commissioner of Income-tax, which clarified that a profit and loss account is not a book of account maintained from day to day but an abstract of the business results drawn from primary accounts. Therefore, it can be prepared at any time and not necessarily before the accounting year's close.The court also considered the ruling in Commissioner of Income-tax v. Veeraswami Nainar, where it was implied that if the necessary entries are made before the accounts are presented to the Income-tax Officer, the assessee is entitled to the development rebate. The court noted that the necessity for creating a reserve fund arises only when the trade results in profit, ascertainable only after preparing the profit and loss account.Judgment:The court concluded that the reserve fund need not be credited before the close of the accounting year. It is sufficient if the necessary entries are made before the assessment is finalized by the Income-tax Officer. Since the assessee made the required entries before the finalization of the assessment, they were entitled to the development rebate.The court answered the question in the affirmative, favoring the assessee, and awarded costs of the reference, with an advocate's fee of Rs. 250.R.C. No. 15 of 1964:In a similar reference (R.C. No. 15 of 1964), the court followed the same reasoning and concluded that the assessee was entitled to the development rebate as the necessary entries were made before the completion of the assessment. The question was answered in the affirmative, in favor of the assessee, with costs awarded and an advocate's fee of Rs. 150.