SHUBHLAXMI MILLS LIMITEDversusADDITIONAL COMMISSIONER OF INCOME-TAX, GUJARAT

A
                 .SHUBHLAXMI MILLS LIMITED
                             v.
          ADDITIONAL COMMISSIONER OF INCOME-TAX,
                                                                                  *
                         GUJARAT

                               MARCH 28, 1989
B                                                                                     t'
          [R.S. PATHAK, CJ AND RANGANATH MISRA, J.]                                   I

                                                                                  ~
          Income Tax Act, 1961-S. 33(1) read with S. 34(3)(a) and Exp/a-
    nation thereto-Creation of a reserve fund in the relevant previous year
    is a condition precedent for claiming deduction on account of 'develop-
    ment rebate'.
c
                                                                                 ),--
          Sub-s. (1) of S. 33 of the Income Tax Act, 1961 provides that
    subject to the provisions of s. 34 thereof development rebate may be
    claimed as a deduction in respect of a new machinery or plant. Clause
    (a) of sub-s. (3) of s. 34 stipulates that the said deduction shall not be
D   allowed unless an amount equal to 75 per cent of the development
    rebate is debited to the profit and Joss account of the relevant previous
    year and credited to a reserve account; and the Explanation thereto
    provides that the deduction shall not be denied by reason only that the
    amount so credited to the reserve account exceeded the amount of the
    profit of such previous year.                                                +
E
          The appellant-assessee which had a textile mill claimed a sum as
    development rebate for the assessment year 1962-63. The Income Tax
    Officer rejected the claim on the ground that the assessee had not
    created a reserve as contemplated by sub-s. (3) of s. 34 and his order, on
    appeal, was upheld by the Assistant Commissioner. In second appeal,
    the claim by the assessee found favour with the Appellate Tribunal; but
                                                                                /-
F
    on a reference made by it at the instance of the Revenue, the High Court ''co-
    held that the assessee had failed to comply with the conditions of sub-s.
    (3) of s. 34. The appellant contended that the view taken by the High
    Court was erroneous and that it was not necessary that a reserve should
    have been created in the previous year.
G                                                                                ,A
          Dismissing the appeal,

          HELD: In order to claim the deduction on account of develop-
    ment rebate under sub-s. (1) of s. 33 it is obligatory that the debit
    entries in the profit and loss account and the credit entry in a reserve
H   account should be made in the relevant previous year in which the
                                       86
                             SHUBHLAXMI MILLS v. C.I. T.                   87

         machinery or plant is installed or first put to use. The development
         rebate contemplated by snb-s. (I) of s. 33 cannot be allowed as a deduc- A
         tion unless a reserve account bas been created in the previous year in
         which the installation or first use occurs. Any doubt in so reading the
         provisions because of a want or insufficiency of profit in such previous
         year has been removed by the Explanation to clause (a) of sub-s. (3) of
         s. 34. [91D-E]                                                           B
~         What is contemplated is the creation of a Reserve Fund in the
    relevant previous year irrespective of the result of the profit and loss
    account disclosed by the books of the assessee. Mere book entries will
    suffice for creating such a Reserve Fund. The debit entries and the
    entries relating to the Reserve Fund have to be made before the profit
·~ ·and loss account is finally drawn up. That is a condition for securing the   c
· benefit of development rebate. [89E-F]

              West Laikdihi Coal Co. Ltd., Calcutta v. Commissioner of
         Income-tax, West Bengal II,. [1973] 87 ITR 501; Commissioner of
         Income-tax, Delhi Central v. Modi Spinning & Weaving Mills Co. Ltd.,    D
         [1973] 89 ITR 304 and Indian Overs.eas Bank Ltd. v. Commissioner of
         Income-tax, Madras, [1970] 77 ITR 512, distinguished.

_.\.-·        Additional Commissioner of Income-tax v. Vishnu Industrial
         Enterprises, [1980] 122 ITR 919 and Commissioner of Income-tax v.
         U.P. Hotel and Restaurants Ltd., [1984] 145 ITR 598, overruled.         E
        Dodballapur Spinning Mills Ltd. v. Commissioner of Income·
  tax, Karnataka-2 and Anr., [1980] 121ITR94 and Indian Oil Corpora-
• tion Ltd. v. S. Rajagopalan, Income Tax Officer, Companies Circle
~ 11(1) Bombay and Others, [1973] 92 ITR 241, referred to.
                                                                                 F
              CIVIL APPELLATE JURISDICTION: Civil Appeal No. 47
         (NT) of 1975.

              From the Judgment and Order dated 3.10.1974 of the Gujarat
         High Court in I.T. Reference No. 30 of 1973.
    ~<                                                                           G
               Bishambar Lal for the Appellant.

               V.S. Desai, B. Rao and Ms. A. Subhashini for the Respondent.

               M.B. Lal forthe Intervener. (N.P.) •
                                                                                 H
    88                     SUPREME COURT REPORTS            [1989] 2 S.C.R.

          The Judgment of the Court was delivered by
A
          PATHAK, C.J. This appeal by certificate granted by the High
    Court of Gujarat is directed against the judgment of the High Court on
    the following questions referred to it by the Appellate Tribunal:

B               "1. Whether, on the facts and in the circumstances of the
                    case, the Tribunal was right in holding that the asses-
                    see cannot be denied the benefit of carry forward of
                    development rebate?

                 2. Whether, on the facts and in the circumstances of the
                    case, the Tribunal was justified in directing that the
c                   Income-tax Officer should determine the development
                    rebate and such development rebate should be allowed )r
                    to be carried forward and set off when profits are avail-
                    able and if, in that year, the assessee fulfils the neces-
                    sary requirements for such allowance like creation of
D                   adequate reserve?"

           The assessee is a limited Company. It has a textile mill at
    Cambay in the State of Gujarat. For the assessment year 1962-63, the
    previous year being the calendar year 1961, the assessee claimed that a   -+
    sum df Rs.1,26,233 should be allowed as development rebate under s.
E   33 of the Income-tax Act, 1961. The Income-tax Officer rejected the
    claim on the ground that the assessee had not created a reserve as
    contemplated by sub-s. (3) of s. 34 of the Income-tax Act, 1961. The
    Appellate Assistant Commissioner of Income Tax dismissed the
    appeal filed by the assessee. In second appeal the claim by the assessee
    found favour with the Income Tax Appellate Tribunal. At the instance j
F   of the Revenue the questions set forth ea~lier were referred to the ~­
    High Court for its opinion. The High Court has answered the ques-
    tions in favour of the Revenue and against the assessee. It has held
    that the assessee had failed to comply with the conditions of sub-s. (3)
    of s. 34 of the Act.

G         In this appeal by the assessee it is urged that the view taken by ,,.-{
    the High Court is erroneous and that it is not necessary that a reserve
    should be created in the previous year during which the machinery or
    plant was installed.

         Sub-s. ( 1) of s. 33 provides that development rebate may be
H   claimed as a deduction in respect of a new machinery or plant installed
                      SHUBHLAXMI MILLS v. C.I.T. [PATHAK. CJ.]                89

)-      after 31 March, 1954 which is owned by the assessee and is wholly used
        for the purposes of the business carried on by him, and that the al- A
        lowance of the deduction is subject to the provisions of s. 34. Cl. (a) of
        sub-s. (3) of s. 34 provides that the deduction referred to ins. 33 shall
        not be allowed unless an amount equal to 75 per cent of the develop-
        ment 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 B
~       be utilised by the assessee during a period of eight years next following for

• I     the purposes of the business of the undertaking, other than for distribu-
        tion by way of dividends or profits or for remittance outside India as
        profits or for the creation of any asset outside India. The Finance Act,
         1966 added an Explanation to this clause. The Explanation declared that
         the deduction referred to in s. 33 could not be denied by reason only
         that the amount debited to the profit and loss account of the relevant c
 -;.... previous year and credited to the aforesaid reserve account exceeded
         the amount of the profit of such previous year (as arrived at without
         making the deposit aforesaid) in accordance with the profit and loss
         account. The Explanation was inserted with retrospective effect from
         the commencement of the Act. Before the Explanation was enacted a D
         difference of opinion had existed between the High Courts on the
         question whether the statute required the creation of a reserve in the
         previous year in which the new machinery or plant was installed, when
         the amount of the profit of that previous year was either nil or
  -f insufficient for the purposes of enabling the creation of such reserve. It
         is not necessary to refer to these cases, for it seems clear to us that the E
         Explanation, which applied to the assessment year under considera-
         tion before us, removes the doubt altogether. What is contemplated is
         the creation of a Reserve Fund in the relevant previous year irrespec-
         tive of the result of the profit and loss account disclosed by the books
_.. of the assessee. Mere book entries will suffice for creating such a
         Reserve Fund. The debit entries and the entries relating to the
-~ Reserve Fund have to be made before the profit and loss account is F
         finally drawn up. That is a condition for securing the benefit of
         development rebate and if that condition is not satisfied we fail to see
         how the deduction on account of development rebate can be claimed
          at all.
                                                                      '             G
     ~~         Learned counsel for the assessee relies on West Laikdihi Coal
          Co. Ltd., Calcutta v. Commissioner of Income-tax, West Bengal II,
          [1973) 87 !TR 501 and Commissioner of Income-tax, Delhi Central v.
          Modi Spinning & Weaving Mills Co. Ltd., [1973) 89 !TR 304. Those
          were.cases decided under the provisions of the Indian Income-tax Act,
          1922 and there was no Explanation such as we have before us. Re-          H
     90                     SUPREME COURT REPORTS            [1989) 2 S.C.R.

     ference was made to the decision of this Court in Indian Overseas
A
     Bank Ltd. v. Commissioner of Income-tax Madras, [1970) 77 ITR 512.
     In that case, however, the question was whether the creation of a
     reserve in compliance with s. 17 of the Banking Companies Act con-
     stituted sufficient compliance with the requirements of proviso (b) to
     s. 10(2) (vib) of the Indian Income-tax Act, 1922. Reference has also
B    been made to Additional Commissioner of Income-tax v. Vishnu
     Industrial Enterprises, I1980) 122 ITR 919. We do not find it possible
     to agree with the view taken by the Allahabad High Court in that case
    that the development reserve need not be created in the relevant pre-
    vious year during which the new machinery or plant is installed, and
    that a profit must have been earned during the previous year to permit
    the creation of a reserve fund. We think that the Explanation is clear,
c   and that there can be no doubt that it envisages the creation of a
    Reserve Fund notwithstanding that there is no profit or insufficient         ~
    profit from which such reserve may be provided. To contemplate
    otherwise would be to negate the entire scheme incorporated in s. 33
    read withs. 34 of the Act. For the same reason we are unable to affirm
D   the view taken by the Allahabad High Court in Commissioner of
    Income-tax v. U.P. Hotel and Restaurants Ltd., [1984] 145 ITR 598.
    Our attention has been drawn by the learned counsel for the assessee
    to Dodbal/apur Spinning Mills Ltd. v. Commissioner of Income-tax,
    Karnataka-2 and Anr., [1980] 121 ITR 94 where reference has been
    made to a circular issued by the Central Board of Direct Taxes dated
E   14th October, 1965 and to a subsequent circular dated 30 January,
    1976. We have carefully considered the matter and we do not think
    that the circulars affect the true position in law.

          On behalf of the assessee reliance was placed on Indian Oil
    Corporation Ltd. v. S. Rajagopalan, Income-tax Officer, Companies
    nrcle II ( 1) Bombay and others, [1973] 92 !TR 241 where the Bombay          /
                                                                                     ...
F
    High Court has held that there was no obligation on the assessee to          ~­
    create a reserve in the year of installation if there was no taxable
    income in the relevant year. Some of the submissions addressed in that
    case may be set forth in detail. A powerful argument was addressed by
    learned counsel for the assessee and it was pointed out that the ex-
G   pression "shall be allowed" in clause (a) of sub-s. (1) of s. 33 indicated
    that the development rebate is to be assessed and thereupon it
    becomes allowable, and that sub-s. (2) of s. 33 which provides for the
    allowance of ·development rebate mentions that the sum "to be
    allowed" by way of development rebate for the assessment year shall
    be only such amount 1s shall be sufficient to reduce the total assessable
H   income to nil and the amount of development rebate to the extent to which
                     SHUBHLAXMI MILLS v. C.l.T [PATHAK, CJ.]                91

     it has not been allowed shall be carried forward to the following assess- A
     ment years for eight subsequent years. Reference was also made to the
     distinction between the expressions "to be allowed" and "actually
     allowed" used in the relevant provisions. It was also argued that the
     utilisation by the assessee of the development rebate reserve for the
     purposes of the business of the undertaking contemplated the exis-
     tence of an actual fund which could be utilised for the purposes of the B
     business, and that an illusory debit entry in the profit and loss account
     and an illusory credit entry in the development rebate reserve account
     were not contemplated. The High Court accepted the submission and
     concluded that it was not mandatory that the necessary debit and
..   credit entries must be made in the assessment year following the year
     of installation in which the development rebate is determined under s. c
     33. Having considered the matter at some length in the present case, it
     seems to us clear that in order to claim the deduction on account of
     development rebate under sub-s. (1) of s. 33 it is obl:gatory that the
     debit entries in the profit and loss account and the credit entry in a
     reserve account should be made in the relevant previous year in which
     the machinery or plant is installed or first put to use. The development D
      rebate contemplated by sub-s. (1) of s. 33 cannot be allowed as a
     deduction unless a reserve account has been created in the previous
      year in which the installation or first use occurs. Any doubt in so
      reading the provisions because of a want or insufficiency of profit in
      such previous year has been removed by the Explanation to clause (a)
      of sub-s. (3) of s. 34. The significance of the words "actually allowed" E
     in clause (a) of sub-s. (3) of s. 34 has been considered by the High
      Court in the judgment under appeal, and we are in entire agreement
      with the view taken by the High Court in that regard.

           A number of other cases have also been placed before us by
     learned counsel for the assessee, but as they deal with the point on the      F
     basis of considerations substantially the same as have been referred to
     in the cases mentioned earlier, we think it unnecessary to deal with
     them specifically.

           Upon the aforesaid considerations we hold that the High Court is
     right in answering the questions in favour of the Revenue and against         G
     the assessee.

              In the result, the appeal is dismissed but there is no order as to
     costs.

     H.L.C.                                                  Appeal dismissed.     H