Acropolymers (P.) Limited vs Commissioner of Income Tax

Madan Mohan Punchhi, J.—The Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh, has referred to this court for opinion the following question of law :

" Whether, on the facts of the case, the assessee has been rightly denied the benefit of development rebate to the tune of Rs. 33,904 in respect of the machinery worth Rs. 1,65,521 in the assessment year 1972-73 ? "

The assessee, at whose instance the aforesaid question was referred, is a private limited company. It derived income from manufacture and sale of polyester and resins which are used in the manufacture of paints. The accounting year relevant to the assessment year 1972-73 ended on June 30, 1971. The assessee-company had, during the "previous year" relevant to the assessment year 1971-72, installed and put to use new machinery worth Rs. 1,65,521 entitling it, in terms of Section 33(1)(a) of the I.T. Act, 1961, to a development rebate of Rs. 33,904 at the rate of 20 per cent. During the same " previous year", the assessee-company had installed and put to use additional new machinery worth Rs. 20,042 in respect of which it was entitled to a development rebate of Rs. 3,006 at the rate of 15 per cent. In the assessment year under reference, the assessee claimed a total development rebate of Rs. 36,910 representing the two amounts of development rebate as aforesaid. The reason advanced by the assessee was that, as the profit and loss account for the assessment year 1971-72 showed a loss, it had not created any statutory reserve in respect of the development rebate. The ITO took the view that, since the assessee had not created any reserve for the assessment year 1971-72, and even had not laid a claim for development rebate in the said year, there was no case for the assessee to claim such rebate in respect of the machinery of Rs. 1,65,521, installed. The assessee''s appeal against the order of the ITO met with success before the AAC, who, relying on a decision of the Bombay High Court in Indian Oil Corporation Ltd. Vs. S. Rajagopalan, Income Tax Officer, Companies Circle II(1), Bombay and Others, , directed the ITO to go into the claim regarding the development rebate of machinery of Rs. 1,65,521 installed in the accounting period relevant to the assessment year 1971-72, and further directed the ITO to allow the claim for the assessment year 1972-73, if necessary reserve had been created. The Revenue''s appeal against the said order was allowed by the Tribunal primarily on the premises that the new machinery had not been installed in the year relevant to the assessment year 1972-73, and, since the assessee had not obtained an order regarding carrying forward u/s 33(2) of the I.T. Act, its claim for development rebate deserved rejection. It is, therefore, that the question of law, as posed at the outset, is said to have arisen.

Allowance of development rebate under the I.T. Act under Sections 33(1)(a) and 33(2) read with Section 34(3)(a) and the Explanation appended thereto, has been a precedent-embroiled question. We would have gone on to steer the way but it has been brought to our notice that the Central Board of Direct Taxes has, in Circular No. 189 dated January 30, 1976, published in [1976] 102 ITR 90 (Statutes Section), clarified the matter and put to rest the controversy. Pithily put, the matter has been summarized to mean that in case, where the total income had been computed before allowing the development rebate, there is a loss, there was no legal obligation to create any statutory reserve in that year, as no development rebate could actually be allowed in that year. That was the view of the Board even earlier as reflected in its Circular No. F-1049/65-ITA(I), dated October 14, 1965. However, the aforesaid circular of 1965 pertaining to a different aspect in a different context, rubbed against the decision of the Supreme Court in The Indian Overseas Bank Ltd. Vs. The Commissioner of Income Tax, Madras, . Taking note of the decision in Indian Overseas Bank Ltd.''s case, the Board, in 1972, withdrew the circular order of October 14, 1965, to the extent it was superseded by the aforesaid The Indian Overseas Bank Ltd. Vs. The Commissioner of Income Tax, Madras, and the judgment of the Gujarat High Court in Surat Textile Mills Ltd. Vs. Commissioner of Income Tax, Gujarat II, . Somehow, the field officers interpreted the partial withdrawal in the order of 1972 of the Board as if the entire circular dated October 14, 1965, stood withdrawn. This necessitated clarification at the hands of the Board in reiterating that the position with regard to the claiming of development rebate and creation of any statutory reserve in a year in which there was loss, remained the same as before. In so many words, the Board bowed down to the dictum in Indian Oil Corporation Ltd. Vs. S. Rajagopalan, Income Tax Officer, Companies Circle II(1), Bombay and Others, . Thus, the position was and is that in case, where the total income had been computed before allowing the development rebate, there is a loss, there was no legal obligation to create any statutory reserve in that year, as no development rebate is actually to be allowed in that year.

Even way back in 1969 in Radhika Mills Ltd. Vs. Commissioner of Income Tax, , the Madras High Court, while interpreting the analogous provisions under the Indian I.T, Act, 1922, observed as follows (p. 667):

" We cannot overlook the word ''utilised'' in Clause (b) of the proviso and the expectation that the reserve contemplated by this provision could be utilised for the purpose of the business but not for the prohibited purposes. That shows clearly that debiting in the profit and loss account and crediting in the reserve account is not theoretical but on the basis of actual reserve created. One other question that may arise is whether the requirement to credit a reserve account as a condition for carrying forward arises when there are book profits but the total income as per completed assessment is nil or the assessment-result is a loss in any given year. In our view, the basis should be the total profits as per completed assessment and not book profits. This is because Explanation 1 shows that the development rebate to be allowed for any assessment year should only be such amount as would be sufficient to reduce the total income of that year to nil. That cannot refer to book profits. It follows, therefore, in our opinion, that although the books may show profits, if the assessment results in nil income or loss, there will then be no obligation on the part of the assessee to create a reserve as a condition for carrying over the development debate."

The above view, for all practical purposes, has been followed in West Laikdihi Coal Co. Ltd. Vs. Commissioner of Income Tax, ; TATA IRON and STEEL CO. LTD. Vs. N. C. UPADHYAYA AND ANOTHER. TATA IRON and STEEL CO. LTD. v. KUM. D. V. BAPAT and ANOTHER., ; Dodballapur Spinning Mills Ltd. Vs. Commissioner of Income Tax, Karnataka-2 and Another, ; Addl. Commissioner of Income Tax Vs. Vishnu Industrial Enterprises, ; Commissioner of Income Tax Vs. Agro Insecticides and Allied Industries, ; Addl. Commissioner of Income Tax Delhi-III Vs. Markanda Engineers, and Commissioner of Income Tax Vs. U.P. Hotel and Restaurants Ltd., . The view taken in Surat Textile Mills Ltd. Vs. Commissioner of Income Tax, Gujarat II, and Addl. CIT v. Shri Subhlaxmi Mills Ltd. [1975] 100 ITR 188 , which flowed from the misapplication of the Supreme Court''s case of The Indian Overseas Bank Ltd. Vs. The Commissioner of Income Tax, Madras, , as also Barar Lion Buttons (P.) Ltd. Vs. Commissioner of Income Tax, and Leader Engineering Works Vs. Commissioner of Income Tax, (the latter two decisions are of this court), on the same premises holding that for getting such a benefit, a separate rebate reserve has to be created by the assesses, cannot stand on the anvil of the clarificatory circular order of January 30, 1976. Undoubtedly, such circulars are binding on the Revenue as held by the Supreme Court in Navnitlal C. Javeri Vs. K.K. Sen, Appellate Assistant Commissioner of Income Tax, ''D'' Range, Bombay, . It cannot get out of it and the decision in this case must necessarily go against it.

For the aforesaid view, the question posed at the outset is answered in the negative, i.e., in favour of the assessee and against the Revenue, with costs.

Rajendra Nath Mittal, J.

I agree.