Development rebate reserve condition: later accounting entry could not cure non-compliance, so rectification was treated as justified.

Development rebate on a cheese dyeing plant was conditional on creation of the statutory reserve by debiting 75% of the rebate to the profit and loss account and crediting it to a reserve account when the relevant accounts were made up. A later entry in a subsequent year did not satisfy that requirement. On that basis, the original allowance was contrary to law and the error was treated as apparent from the assessment record, making rectification under section 154 available and supporting withdrawal of the rebate.

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Issues: Whether the development rebate allowed on the cheese dyeing plant could be withdrawn on rectification on the ground that the requisite reserve had not been created in accordance with the statutory condition.

Analysis: The allowance of development rebate under clause (b) of the proviso to section 10(2)(vib) of the Income-tax Act, 1922 depended on an amount equal to 75% of the rebate being debited to the profit and loss account of the relevant previous year and credited to a reserve account at the time the profit and loss account was made up. The assessee had not made the required debit and credit entries when the relevant accounts were made up, and the later entry in a subsequent year did not satisfy the statutory condition. In the light of the Supreme Court's interpretation of the provision, the original allowance was contrary to law and the error was evident from the assessment record, attracting rectification under section 154 of the Income-tax Act, 1961.

Conclusion: The withdrawal of the development rebate was valid, and the question was rightly answered against the assessee and in favour of the Revenue.

Ratio Decidendi: For development rebate to be allowable, the statutory reserve must be created by the requisite accounting entries at the time of making up the relevant profit and loss account; non-compliance is a mistake apparent from the record that can be rectified.

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