COMMISSIONER OF INCOME TAX, DELHI CENTRALversusMODI SPINNING AND WEAVING MILLS CO. LTD.

    COMMISSIONER OF INCOME TAX, DELHI CENTRAL
                                     v.                                       A
      MODI SPINNING AND WEAVING MILLS CO. LTD.

                           OCTOBER 26, 1990

   [MADAN MOHAN PUNCHHI AND S.C. AGRAWAL, JJ.]                                B

       Income Tax Act, 1922-Section 10(2)(vib), Proviso (b) and
 CBDT Circular dated October 14, 1965 Explanations (a), (b) and (c)
 Allowance of development rebate on plant and machinery--Entitlement
 to by assessee.

        In Commissioner of Income Tax, Madras v. Veeraswami Nainar &          c
 0 rs., SS ITR .3S, the Madras High Court took the view that the aevelop-
 ment rebate reserved shonld be made at the time of making up the
 Profits and Loss A~count, and this was affirmed by this Court in Indian
 Overseas Bank's Ltd. v. Commissioner of Income Tax, 77 ITR S12. A
 distinction "'as drawn between development rebate reserve and other          D
 reserves createable under the Companies Act and the Income Tax Ad
 and it was required to be separately created.

        Consequent to this decision it was noticed that an important circu-
                   ' Board of Direct Taxes dated October, 4, 1965 was
 lar of the Central.
 unwittingly mowed down. This circular gave the Board's Explanation
 in three paragraphs (a), (b) and (c) regarding the position for creation
 of statutory reserve for allowance of development rebate.

      A spate of litigation ensued and·some of the taxing authorities,
relying on the Indian Overseas Bank's case in some cases, took revi-
sional and rectificatory actions, and these reached various High Court$.

      The Gujarat High Court in Surat Textiles Mills Ltd. v. Comm~
sioner of Income-tax Gujarat, 80 I.T .R. 1 opted for the narrow view in
assuming that all the 3 Explanations contained iii the 1965 Circular
stood wiped out by Indian Oversas Bank's case.
                                                                              G
       The Central Board of Direct Taxes, therefore, took the step of
  withdrawing in the year 1972 the Circular dated Odober 14, 196S to the
  extent it stooa superseded by decision in Indian Overseas Bank's case.
  Other High Courts, however, took a broader view to the effect that
· Explanation contained in para (a) only was done away with by this
  Court's decision in Indian Overseas Bank's case and that contained in       H
  paras (b) and (c) were still alive.
                                      461
    462         SUPREME COURT REPORTS                  [ 1990] Supp. 2 S.C.R.

          On account of the aforesaid difference of opinion, it was represen-
A
    ted to the Board that the earlier instructions dated October 14, 1965
    represented the correct position of law and that the withdrawal to the
    extent it was presumed to be overruled by the decision in Indian Over-
    seas Bank's case had created unnecessary hardships to the assessees.

B         In the instant appelll the question, whether the respondent-
    assessee was entitled to al1owance rebate on the plant and machinery
    after 1.1.1958, after due compliance with the provisions of proviso (b)
    to section 10(2)(vib) of the Income Tax Act, 1922 was answered by the
    Division Bench of the Allahabad High Court in favour of the assessee
    and against the Revenue.

c         The Revenue appealed to this Court.

          Dismissing the appeal, this Court,

          HELD: 1. The Board itself had clarified the matter by Circular
D   No. 189 dated 30th January, 1986. It states to have re-examined the
    issue involved coming to the view that except the clarification contained
    in Explanation para (a) which stood superseded by the decision of this
    Court in Indian Overseas Bank's case, the clarification given in para-
    graphs (b) and (c) bold good. [4650]

E         2. The Board itself has opted for the broader view expressed in
    the matter in the-Tata Iron and Steel Companies' case and other cases.
    There is, therefore, no reason 'to do the exercise of taking any side of the
    two views. [465E]                                                              '
         .3 •. It is undisputed that the Board's view is not only valid under
F   the new Income Tax Act of 1961, but to the Indian Income-Tax Act,
    1922 as well. [465F]

          Commissioner of Income Tax, Madras v. Veeraswami Nainarand
    Ors., 551. T .R. 35, affirmed.

G          Indian Overseas Bank Ltd. v. Commissioner of Income Tax, 77
    I. T .R. 512, followed.

          Surat Textile Mills Ltd. v. Commissioner of Income-Tax Gujarat,
    80 I.T .R. 1, overruled.

H         Veerabhadra Iron Fo1mdary & Anr. v. Commissioner of Income
                    C.l.T. v. MODI SPG. & WVG. MILLS               463

Tax, 69 I.T.R. 425; Tata Iron and Steel Co. Ltd. v. N.C Upadhyaya. 96     A
I.T.R. I and The Commissioner of Income Tax v. SardarSingh, 86 ITR
387, approved.

      CIVIL APPELLATE JURISDICTION: Civil Appeal No. 330
of 1976.
                                                                          B
     From the Judgment and Order dated 13.3. 1972 of the Allahabad
High Court in !TR No. 457 of 1968.

      V. Gauri Shankar, S. Rajappa and Ms. A. Subhashini for the
petitioner.

     Harish N. Salve, A.T. Patra, Ms. Bina Gupta, Ms. Monika              c
Mohil, Raj iv Shakhdhar and Praveen Kumar for the Respondent.

      The following Order of the Court was delivered:

     This appeal is directed against the Judgment dated 13.3.1972         D
made by a Division Bench of the Allahabad High Court in Income Tax
Reference No. 457 of 1968 deciding the following question of law in
favour of the assessee and against the Revenue.

           "Whether on the facts and in the circumstances of the case
           the assessee can be.said·to have complied with the provi-      E
           sions of proviso (b) to section l0(2)(vib) of the Income Tax
           Act, 1922 and was, therefore, entitled to allowance of
           development rebate on the plant and machinery installed
           after I. I. 1958." •

       It would be unnecessary to detail out fads which led to the        F
framing of the question and the answer given. The dispute centered
around the timing of the creation of the reserve known as the develop-
ment rebaie reserve. In Commissioner of Income Tax, Madras v.
Veeraswami Nainar & Ors., 55 !TR p. 35, the Madras High Court took
the view that development rebate reserve should be made at the time
of making up the Profits and Loss Account. This view was affirmed by      G
this Court in Indian Overseas Bank's Ltd. v. Commissioner of Income
Tax, 77 ITR 512 .. Both cases arose under the Indian Income Tax Act,
 I922. Distinction was drawn between development rebate reserve and·
other reserves createable under the Companies Act and the Income
Tax Act and it was required to be separately created. On appearance
of the Indian Overseas Bank's case on the scene it appears that an        H
    464          SUPREME COURT REPORTS                (1990] Supp. 2 S.C.R.

     important circular of the Central Board of Direct Taxes was unwit·
A
     tingly mowed down. That circular was of October 4, 1965 and stands
     reproduced in circular No. 189 dated 30th January, 1976 at page 90 in
      102 Income Tax Reports (Statutes). The Board's Explanation with
    ·regard to the position for creation of statutory reserve for allowance of
     development rebate was in these terms:
B
                 (a) In the case of certain industrial undertakings, particu·
          larly those in which there is Government participation either by
          way of capital, loan or guarantee, and where there are certain
          obligations by law or agreement about the maintenance of
          reserve for development purposes, the development rebate
          reserve may be treated as included in the said reserve though not
c         specifically created as a development rebate reserve.

                (b) In a case where the total income computed before
          allowing the development rebate is a loss there was no legal
          obligation to create any statutory resel'Ve in that year as no
D         development rebate would actually be anowed in that year.

                (c) Where there was no deliberate contravention of the
          provisions, the Income-tax Officer may condone genuine
          deficiencies subject to the same being made good by-the assessee
          though operation of adequate additional reserve in the current
E         year books in which the assessment is framed.

          This led to a spate of litigation, pressing the Indian Overseas
  'Bank's case some taxing authorities in some cases took revisional and
   rectificatory actions. These reached various High Courts. The Gujarat
   High Court in Surat Textile Mills Ltd. v. Commissioner of Income-tax
F Gujarat, 80 I.T.R. P. 1 opted for what may be called a narrow view in
   assuming that besides Explanation (a) reproduced above explanations
   (b) and (c) as well too stood wiped out by Indian Overseas Bank's case ..
   In these circumstances the Central Board of Direct Taxes took the step
   of withdrawing in the year 1972 the Circular dated October 14, 1965 to
   the extent it stood superseded by decision in Indian Overseas Bank's
G  case  and the judgment of the Gujarat High Court in Surat Textile Mills
   Ltd. v. Commissioner of Income Tax.

         Other High Courts took what may be cailed a broader view. ·The
    trend of reasoning in those cases was that explanation (a) only was
    done away with by this Court in Indian Overseas Bank's case but
H   explanations (b) and (c) were still alive. In this connection Veerabha·
•                     C.l.T. v. MODI SPG. & WV.!} .. MILLS                465

    dra Iron Foundary & Anr. v. Commissioner of Income Tax, 691.T.R.             A
    425; Tata Iron and Steel Co. Ltd. v. N.C. Upadhyaya, 96 I.T.R. p. 1
    and The Commissioner of Income Tax v. Sardar Singh, 86 ITR 387
    (Punjab) may be seen.

          In the face of such difference of opinion, it was represented to the
                                                                                 B
    Board that earlier instructions dated October 14, 1965 represented the
    correct position of law and that the withdrawal to the extent it was
    p.resumed to be overruled by this Court in Indian Overseas Bank's case
    had createcj unnecessary hardship to the assessees.

          It appears that the instant case, out. of which this appeal has
    arisen, was decided by the Allahabad High Court taking the broader           c
    view, Spei:ial leave was sought by the Revenue from this Court on the
    question of resolving the conflict between the two views. Leave was
    granted at a time when the Board itself had clarified the matter vide
    Circular No. 189 dated 30th January, W86·ofwhich hint has been left
    earlier. The Board states to have re-examined the issue involved com-
                                                                                 D
    ing to the view that except the clarification given in paragraph (a)
    above, which stood superseded by the decision of this Court in Indian
    Overseas Bank's case,_ the clarifications given in paragraphs (b) and (c)
    quoted above hold good. It can thus legitimately be stated that the
    Board h'ls itself opted for the view expressed in Tata Iron and Steel
    Companies' case and other cases of the kind taking the broader view in
    the matter. When the Board has itself opted for that view and that           E
    view is being followed by Income Tax authorities concerned, we see no
    reason to do the exercise of taking any side of the two views and 1eave
    the matter at that. It is undisputed that the Board's view is not only
    valid under the new Income Tax Act of 1961 but to the Indian Income
    Tax Act, 1922 as well.
                                                                                 p
          For the foregoing discussions this appealfails and the judgment
    of the High Court is left untouched. In the circumstances of the case
    there will be no order as to costs. ·

    V.P.R.                                                   Appeal dismissed.