1975 (12) TMI 63

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....                             Table A --------------------------------------------------------------      Name of               Worth      Percentage     Amount of     the machine                       of rebate      of rebate --------------------------------------------------------------  1. Boring machine         99,407         35%         34,792  2. Turret Lathe           66,300         35%         23,205  3. Turret Lathe           58,613&n....

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....;                        ------                                        Total       73,369                                                    ------ ---------------------------------------------------------- Thus, by this alternative claim the assessee requested the department to grant development rebate on the first two items at the rate of 35% on the basis that these machines were covered by clause (a) of section 33(1)(iii)(c)(A) of the Income-tax Act, 1961, and further requested that for the remaining machines development rebate should be granted at the usual rate of 20%. In the revised return,....

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....e for an assessee to claim development rebate at a lesser rate than what is contemplated by section 33 especially when reserve, which is referable to an item of machinery, with regard to which the development rebate is claimed, does not comply with the provisions contained in section 34(3)(a) of the Act with regard to the creation of a reserve. In this case, it is an admitted fact that the development reserve which is created in its account books by the assessee is not 75% of the rebate at the enhanced rate of 35% on the actual cost of machinery mentioned in Table B. The facts of the case show that initially the assessee created the reserve only at the rate of 20% on the cost of Rs. 2,75,305. This reserve was sufficient for it to earn development rebate at the uniform rate of 20%, but not at the uniform enhanced rate of 35%. Realising this position, the assessee now claims that if the reserve is not sufficient for granting uniform rebate at the enhanced rate of 35% on all the machines, the said rebate rate should be bifurcated so as to give rebate at the rate of 35% on the first two machines mentioned in Table B and at the rate of 20% on the remaining three machines mentioned in th....

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....velopment rebate at the rate of 20% on the machines mentioned at Sr. Nos. 3, 4 and 5 of Table B. After considering the scheme of sections 33 and 34 of the Act, which refer to the grant of development rebate, we find ourselves unable to accept these contentions of Shri Shah. In substance what Shri Shah has contended amounts to saying that even though a particular machine falls within a specific category of cases for the purpose of earning development rebate the assessee can claim a lesser rebate by creating a reserve which falls short of the requirements of sub-section (3) of section 34. The question, therefore, is whether such a claim is permissible having regard to the requirements contemplated by sections 33 and 34(3)(a). The relevant portion of section 33, as it stood at the relevant time, was as under : " (1) In respect of a new ship acquired or new machinery or plant (other than office appliances or road transport vehicles) installed after the 31st day of March, 1954, which is owned by the assessee and is wholly used for the purposes of the business carried on by him, a sum by way of development rebate, equivalent to --....... (iii) in the case of machinery or plan....

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....be considered as covered only by the category which earns the higher rebate at the rate of 35%. Now, the grant of development rebate under section 33 is governed by the provisions contained in section 34. Sub-section (1) of section 34 says that deductions referred to in section 33 shall be allowed only if the particulars prescribed for the purpose of clauses (i) and (ii) of sub-section (1) of section 32 have been furnished by the assessee in respect of the relevant machinery or plant. This is one condition for earning development rebate. In this case, we are not concerned with this condition. Another condition is the one contemplated by sub-section (3)(a) of section 34, the relevant portion of which is in the following terms : " (3)(a). The deduction referred to in section 33 shall not be allowed unless an amount equal to seventy-five per cent of the development rebate to be actually allowed is debited to the profit and loss account of the relevant previous year and credited to a reserve account to be utilised by the during the period of eight years next following for the purposes of the business of the undertaking, other than-- (i) for distribution by way of dividends or ....

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....ion 3(a) of section 34 specifically provides for the creation of a reserve which has reference to the rebate which is " to be actually allowed ". Therefore, the pertinent question is what is the rebate " to be actually allowed " to the articles and things specified in the Fifth Schedule ? The answer is, the rebate at the rate of 35%. The next question is whether the assessee has created the reserve of 75% of this rebate. If the answer is in the negative, it follows that the assessee has not complied with the condition precedent contemplated by sub-section (3)(a) of section 34 and would, therefore, fail in getting any rebate with regard to the machine concerned. It is true that the reserve contemplated by section 34(3)(a) is not to be created machine-wise. It may be created in lump covering all machines. But the lump sum figure of reserve must be sufficient to cover all the categories of rebates which are " to be actually allowed " under section 33. In other words, it is not open to an assessee first to create a reserve of an amount he thinks proper, and then to ask the assessing authority to allow only such rebate which is found just sufficient to cover the reserve so created. This....

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....o embark upon what the general object of the exemption was, and whether the conditions imposed were of a theoretical or technical nature, which, in the interests of justice, should be, dispensed with. We are, therefore, of opinion that the assessee, not having set apart in his accounts 75 per cent. of the amount claimable as development rebate, could not claim the benefit of section 10(2)(vib) of the Act." The above referred decision of the Madras High Court is approved by the Supreme Court in Indian Overseas Bank Ltd. v. Commissioner of Income-tax, wherein Hegde J., delivering the judgment for the court, observed that the creation of reserve contemplated by clause (b) to the proviso to section 10(2)(vib) is a condition precedent for obtaining the allowance of development rebate. In view of this, the assessee's contention should fail, not because it is claiming the development rebate at a lesser rate than what it is entitled to, but because it has failed to comply with one of the conditions precedent contemplated by section 34 of the Act namely, creation of sufficient reserve to earn development rebate contemplated by section 33. On reference to the valuation of the machin....