Interpretation of Tax Law on Development Rebate Reserve: Timing & Compliance

Commissioner of Income-Tax, Punjab Versus Sardar Singh Sachdeva.

Commissioner of Income-Tax, Punjab Versus Sardar Singh Sachdeva. - [1972] 86 ITR 387 Issues:
Interpretation of proviso (b), clause (vib) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922 regarding the creation of development rebate reserve.

Analysis:
The case involved a dispute regarding the creation of a development rebate reserve by the assessee for the assessment year 1961-62. The Income-tax Officer disallowed the claim for development rebate as the reserve was created after the close of the relevant accounting year. The Appellate Assistant Commissioner also rejected the claim, leading the assessee to appeal to the Income-tax Appellate Tribunal. The Tribunal accepted the assessee's contention and allowed the claim, disagreeing with the department's argument based on a decision of the Madras High Court. The department then applied for reference to the High Court.

The High Court considered the requirement of making relevant entries in the account books and profit and loss account before the close of the accounting year. The court referred to decisions of the Andhra Pradesh High Court and the Rajasthan High Court, which clarified the interpretation of the relevant provisions. The court emphasized that statutory provisions should not be extended beyond their clear language. The court highlighted that the profit and loss account cannot be finalized immediately after the close of the year and noted the assessee's right to modify the return before assessment, indicating the possibility of correcting mistakes in the accounts.

The department relied on a Supreme Court decision regarding a different context, but the High Court distinguished the case and emphasized that the key issue was compliance with the requirements of the proviso before the assessment is completed, rather than before the close of the accounting year. The court concluded that the entries could be made before the assessment was finalized, and any errors could be corrected until that point. Therefore, the court answered the question referred in favor of the assessee, rejecting the department's contention.