Commissioner of Income Tax vs South India Viscose Ltd.

Thanikkachalam, J.—As per the direction of this Court in TCP No. 237 of 1981 the Tribunal referred the following question for the opinion

of this Court under s. 256(2) of the IT Act, 1961 :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the provisions of s. 154 of the IT Act could not

be invoked to withdraw the unabsorbed development rebate already allowed in the asst. yr. 1967-68 ?

The assessee is a public limited company. For the asst. yr. 1967-68 the income determined as per the order dt. 1st February, 1973 is as under :

Rs. Rs.

Total income after giving effect

to the AAC''s order 86,60,247

Development rebate set off for the

asst. yr. 1962-63 71,53,652

For the asst. yr. 1963-64 15,06,595 86,60,247

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Nil

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The ITO subsequently sought to rectify the above order under s. 154 of the Act. The grounds for rectification were stated as :

(i) The assessee has not created the necessary reserve to the extent of 75 per cent. of the development rebate before the P&L a/c of the relevant

previous year was made up and hence in terms of the Supreme Court judgment in the case of The Indian Overseas Bank Ltd. Vs. The

Commissioner of Income Tax, Madras, , and the Gujarat High Court decision in the case of Surat Textile Mills Ltd. Vs. Commissioner of Income

Tax, Gujarat II, , the assessee was not entitled to set off the development rebate already set off in the aforesaid order and the entire development

rebate of Rs. 86,60,247 relating to the asst. yrs. 1962-63 and 1963-64 should be disallowed;

(ii) The assessments for 1962-63 to 1966-67 have been revised by order dt. 21st January, 1975 and as per the latest order for 1966-67 there

was no development rebate for earlier years to be carried forward and set off against the income for 1967-68. Hence the development rebate of

Rs. 86,60,247 originally deducted from total income required to be disallowed;

(iii) It was found that during the year ended 31st December, 1967 relevant for the asst. yr. 1968-69 the assessee had withdrawn from the

development rebate reserve account a sum of Rs. 16 lakhs for payment of dividends, which the directors had recommended specifically in

presenting the accounts after stating that there had been excess provision in the development rebate reserve account in the reserves created in prior

years, which was hence transferred to P&L a/c.

According to the assessee there was no mistake apparent on record warranting application of the provisions contained in s. 154 of the Act. The

assessee also contended that there was no shortfall of the development rebate reserve. According to the assessee the reserve to be created from

1961-62 to 1968-69 would be Rs. 1,18,47,851 and the reserve actually created was Rs. 1,39,07,312. Therefore the excess development rebate

available was Rs. 20,59,561. Thus as against withdrawal of Rs. 16,00,000 there was excess reserve of Rs. 20,59,561 according to the assessee.

But according to the ITO, under s. 34(3) the assessee should have created 75 per cent. of the development rebate as reserve which worked out

to Rs. 1,00,56,033 up to the asst. yr. 1967-68 taking into account the reserve of Rs. 64,95,185 to be created for the asst. yr. 1967-68. The

assessee had created development rebate reserve of Rs. 1,07,07,312 but the directors in presenting the accounts for the subsequent accounting

year 1967 (calendar year) relevant to the asst. yr. 1968-69 had recommended that Rs. 16,00,000 should be withdrawn from the development

rebate reserve which would result in a deficiency of Rs. 9,48,721. If this was considered against the reserve originally created by the assessee, the

actual reserve created up to the asst. yr. 1967-68 to meet the requirements of law is only Rs. 91,07,312 as against the sum of Rs. 1,00,83,314

that should have been created by the assessee. Hence according to the ITO, the development rebate already allowed for the asst. yr. 1967-68

requires to be withdrawn to the extent of Rs. 12,64,961 as this was not covered by the reserve even considering the overall question of reserve

created as claimed by the assessee. According to the ITO, the balance in the reserve account to be considered for the purpose of s. 34(3) was as

on 31st December, 1966 and not as on 31st December, 1967. For the abovesaid reasons the ITO held that the assessee was not entitled to set

off of the development rebate of the earlier years and taxed the entire income of Rs. 86,45,387.

Aggrieved, the assessee filed an appeal before the AAC questioning the validity of the order passed under s. 154 of the Act as well as on

merits.

After hearing the learned counsel for the assessee as well as the ITO, the AAC ultimately held as under :

From the foregoing discussion it should be clear that the question whether the transfer for payment of dividends took effect out of the

appropriations to the development rebate reserve in 1967-68 or any prior year to years is at the very least controversial enough to place the matter

outside the ambit of valid rectificatory action under s. 154. Besides and in any event, the impugned revision was made exclusively on the ground

that the deduction in respect of unabsorbed development rebate originally allowed in the assessment for 1967-68 was not admissible by reason of

the appellant''s failure to create reserve under s. 34(3) in the years to which the unabsorbed allowances carried forward and deducted were

referable and not for the reason that the allowance which the ITO sought to withdraw by his order under s. 154 fell within the terms of s. 34(3)(a)

(i) either wholly or in part, for if such had been his case the ITO could well have proceeded under s. 154 with s. 155(5). I have to conclude that

the order under s. 154 objected to in the present appeal was bad in law.

As against the order passed by the AAC, the Department preferred a second appeal before the Tribunal. The Tribunal pointed out that before

the AAC the only reason pressed by the ITO for the rectification was that since the assessee has withdrawn a sum of Rs. 16,00,000 for the

purpose of distribution of dividends there was no proper compliance with the requirements of s. 34(3) and hence the deduction for development

rebate allowable for the asst. yrs. 1962-63 to 1963-64 should be determined at Rs. 73,95,286.

According to the Tribunal it was manifest there is no patent mistake apparent on record warranting exercise of jurisdiction under s. 154 of the

Act. The Tribunal further pointed out that regarding the ITO''s reference to the declaration of dividend of Rs. 16,00,000 the AAC has extracted

the relevant portion from the printed account which would go to show that as on 31st December, 1967 the assessee found that there was excess

provision to the extent of Rs. 16,00,000 and it was only after the adjustment of the excess provision the declaration of dividend was made.

Therefore the Tribunal considered that it is not necessary for it to go into the merits of the case in the appeal presented before it. Accordingly the

Tribunal confirmed the order passed by the AAC.

Before us the learned standing counsel appearing for the Department reiterated the arguments as was advanced before the Tribunal in the

matter of exercising jurisdiction under s. 154 of the Act. According to the learned standing counsel, inasmuch as a sum of Rs. 16,00,000 was

withdrawn as per the directors'' report, dt. 31st December, 1967 from the reserve created for the earlier years, the conditions prescribed under s.

34(3)(a) of the Act were infringed. According to the learned standing counsel, because of the withdrawal of Rs. 16,00,000 as per the directors''

report, dt. 31st December, 1967, there was a shortfall in the credit reserve in the earlier years to the extent of 75 per cent. as stated under s. 34(3)

(a). According to the learned standing counsel the fact that in the later years this sum of Rs. 16,00,000 taken out from the reserve for the purpose

of payment of dividend cannot be made good in a subsequent year by adjusting the profit of Rs. 32,00,000 and on that score the assessee is not

entitled to say that there is an excess profit of Rs. 20,59,561. Therefore according to the learned standing counsel, since there is a mistake

apparent on the face of the record in allowing development rebate in the earlier years it would warrant rectification under s. 154 of the Act for the

purpose of withdrawing the development rebate already granted.

On the other hand the learned counsel appearing for the assessee while supporting the order passed by the Tribunal, submitted that according

to the directors'' report, dt. 31st December, 1967 it is stated that Rs. 16,00,000 would be adjusted for payment of dividend, at the same time the

balance sheet also shows that there is excess profit of Rs. 32,00,000 as on 31st December, 1967. It remains to be seen according to the learned

counsel that even though a direction was given in the directors'' report to utilise Rs. 16,00,000 from the earlier years'' development rebate that was

adjusted from and out of Rs. 32,00,000 which was the profit as on that date. It means according to the learned counsel for the assessee, that sum

of Rs. 16,00,000 said to have been taken from the earlier years'' reserve was immediately adjusted out of the excess profit of Rs. 32,00,000 and

in that process a sum of Rs. 20,59,561 still remains in the hands of the assessee as excess profit. Therefore, according to the learned counsel

appearing for the assessee actually this sum of Rs. 16,00,000 was not taken out from the earlier years'' reserve, in which case there is no ground

for exercising jurisdiction under s. 154 of the Act since there was no mistake apparent on record.

We have heard both the learned standing counsel appearing for the Department as well as the learned counsel appearing for the assessee.

The fact remains that for the asst. yr. 1967-68 the development rebate of earlier years amounting to Rs. 86,60,247 has been carried forward

to be set off against the income determined. In terms of the provisions of s. 34(3) of the Act the assessee should have created 75 per cent. of the

development rebate to be allowed as reserve and as such the reserve that should have been created by the assessee even according to its

calculation works out to Rs. 1,00,56,033 upto and including the asst. yr. 1967-68 taking into account the reserve of Rs. 64,95,185 to be created

for 1967-68. The assessee originally created the reserve of Rs. 70,00,000 in the accounts of the previous year relevant for the asst. yr. 1967-68

and the total reserve created upto and including the asst. yr. 1967-68 was Rs. 1,07,07,312. It was found that the directors while representing the

accounts for the subsequent year viz., 1968-69 to the general body have recommended that Rs. 16,00,000 should be withdrawn from the

development rebate account of earlier years.

On account of the proposal made by the directors there is a deficiency of Rs. 9,48,721 in the reserve created by the assessee for the asst. yr.

1967-68. It was pointed out that if this is considered against the reserve originally created by the assessee the actual reserve that has been created

for the years up to and including the asst. yr. 1967-68 to meet the requirements of law, is only Rs. 91,07,312 as against a sum of Rs. 1,00,88,314

that should have been created by the assessee. Therefore according to the Department the development rebate already allowed for the asst. yr.

1967-68 requires to be withdrawn to the extent of Rs. 12,64,961 as this is not covered by the reserve even taking an overall position of the

reserve created as claimed by the assessee.

According to the Department, the balance in the reserve account to be considered for the purpose of statutory requirements under s. 34(3) is

as on 31st December, 1966 and not as on 31st December, 1967 in view of the directors'' report in presenting the accounts for the year ended

31st December, 1967. Therefore according to the Department, as per the directors'' report, a sum of Rs. 16,00,000 was withdrawn from the

earlier years reserve and on account of that there was shortfall of the reserve in the earlier years infringing the provisions of s. 34(3) of the Act. At

the same time the Department failed to take into account the other portion of the balance sheet as on 31st December, 1967 wherein a sum of Rs.

32,00,000 was shown as the excess profit which was appropriated towards the reserve for development rebate. Accordingly Rs. 16,00,000

which was directed to be taken out from the earlier years'' reserve was made good by adjusting the said sum of Rs. 16,00,000 from and out of the

said Rs. 32,00,000 which was the excess profit as on 31st December, 1967. If that is so, there is an excess provision of Rs. 16,00,000

transferred to the P&L a/c. By the same process a sum of Rs. 16,00,000 which was directed to be taken out for the purpose of payment of

dividend from the earlier years'' reserve was adjusted out of the profit of Rs. 32,00,000 which remains with the assessee as on 31st December,

1967. If that is so, it cannot be said that there is any shortfall in the earlier years as contended by the Department.

In view of this factual position, the Tribunal came to the conclusion that the assessee fulfilled the conditions as prescribed under s. 34(3) of the

Act and, therefore, they did not want to go into the merits of the case. These facts on record would go to show that there was no mistake apparent

on records warranting exercise of jurisdiction under s. 154 of the Act. Accordingly we are in agreement with the order passed by the Tribunal in

confirming the order passed by the AAC on this aspect. In that view of the matter we answer the question referred to us by the Department in the

affirmative and against the Department. No costs.