Commissioner of Income Tax vs Karamchand Premchand Pvt. Ltd.

G.T. Nanavati, J.—The following three questions have been referred to this Court by the Tribunal under s. 256(1) of the IT Act, 1961 :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in setting aside the order of the ITO withdrawing the development rebate of Rs. 6,67,351 ?

Whether, on the facts and in the circumstances of the case, the Tribunal rightly came to the conclusion that it could not be said that there had been, utilisation of the development rebate reserve by the assessee at all and that it could not also be said that the assessee by merely effecting the transfer of the development rebate reserve account to the general reserve account utilised the statutory reserve for any of the prohibited purposes specified under s. 34(3)(a) of the IT Act, 1961 ?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that on acquisition of assets of the value of more than the development rebate reserve, without making any entry in development reserve account, it could not be held that the same was utilisation of development rebate reserve for the said purpose ?"

During the course of assessment proceedings for the asst. yr. 1971-72, the ITO noticed that the statutory development rebate reserve of Rs. 5,33,690 created in the asst. yr. 1969-70 was transferred to general reserve immediately in the next accounting year 1969-70. The ITO, therefore, exercising the power under s. 147(b) of the IT Act, 1961, reopened the assessment and withdrew the development rebate of Rs. 6,67,351.

The assessee, therefore, preferred an appeal before the AAC. The appeal was allowed as the AAC was of the view that the ITO was not justified in withdrawing the development rebate of Rs. 6,67,351 by reopening the assessment.

The Revenue, therefore, preferred an appeal to the Tribunal but it was dismissed. The Revenue then moved the Tribunal for referring questions Nos. 1 and 2 to this Court. Question No. 3 was suggested by the assessee.

In the case of this very assessee for asst. yr. 1971 72 CIT vs. Karamchand Premchand (P) Ltd. a similar point had arisen and in a reference made to this Court, it is held that once the balance in development rebate reserve gets exhausted on acquisition of new capital assets of higher value, its subsequent transfer to general reserve does not infringe conditions laid down in s. 34(3) so as to justify withdrawal of development rebate. Once it is established that development rebate reserve was utilised for permissible business purposes, mere absence of entries in development rebate reserve will be of no consequence. It is also not necessary that the reserve should be kept intact for eight years. The said decision is also followed by this Court in IT Ref. No. 25 of 1979 decided on 12th October, 1992 [since reported as CIT vs. Sarabhai M. Chemicals Pvt. Ltd. Following the decision in Karamchand Premchand''s case (supra) and IT Ref. No. 25 of 1979, we hold that the ITO was not justified in withdrawing the development rebate of Rs. 6,67,351 as it cannot be said that the assessee by merely effecting the transfer of the development rebate reserve account to the general reserve account, utilised the statutory reserve for any of the prohibited purposes specified under s. 34(3)(a) of the Act.

For the reasons stated above, we answer questions Nos. 1 and 2 in the affirmative, that is against the Revenue and in favour of the assessee. Question No. 3 is answered in the negative, that is in favour of the assessee and against the Revenue. No order as to costs.