Development rebate reserve applies only to rebate actually allowed, not where no taxable income exists in the year

Proviso (b) to section 10(2)(vib) of the Indian Income-tax Act, 1922 links the prescribed development rebate reserve to the rebate actually allowed in a particular assessment year. The provision was construed as not requiring an assessee to create the reserve in the year of installation where there was no taxable income and, therefore, no rebate could be allowed in that year. The scheme permits the rebate to operate across assessment years depending on assessable income, and the reserve obligation does not extend to unabsorbed rebate carried forward. The question was answered in the negative, in favour of the assessee.

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Issues: Whether, under proviso (b) to section 10(2)(vib) of the Indian Income-tax Act, 1922, an assessee was required to create the prescribed reserve in the year of installation even where there was no taxable income in that year, for the purpose of claiming development rebate.

Analysis: The development rebate provisions were intended to encourage business expansion and were not meant to impose a burden that would require an assessee to borrow funds merely to create a reserve in a year of loss or nil assessable income. The scheme of section 10(2)(vib), read with the Explanations, shows that the rebate may be allowed in instalments over different assessment years depending on assessable income. The expression "actually allowed" in proviso (b) was construed as referring to the amount of rebate in fact allowed in a particular assessment year, not the entire rebate claimable in the year of installation. The reserve required by the proviso is therefore linked to the rebate actually allowed in the relevant year and not to unabsorbed rebate carried forward.

Conclusion: The assessee was not bound to create the reserve in the relevant years where there was no taxable income, and the requirement of proviso (b) did not arise for those years. The question was answered in the negative, in favour of the assessee.

Ratio Decidendi: The reserve contemplated by proviso (b) to section 10(2)(vib) is to be created only against the development rebate actually allowed in a given assessment year, and not where the rebate cannot be allowed because the assessee has no taxable income in that year.

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