ADDITIONAL COMMISSIONER OF INCOME TAX Vs. SANTOSH INDUSTRIES

JUDGEMENT

(1.) THIS reference raises a very interesting question of law relating to the interpretation of section 271(1)(a) of the Income -tax Act, 1961 (hereinafter referred to as 'the new Act'). The facts giving rise to the reference are few and may be briefly stated as follows. The assessee is a registered firm and for the assessment year 1961 -62, the assessee was required to furnish its return of income on or before June 30, 1961, by virtue of the public notice issued by the Income -tax Officer under Section 22, sub -section (1) of the Indian Income -tax Act, 1922 (hereinafter referred to as 'the old Act'). The date for delivery of the return, namely, June 30, 1961, was not extended by the Income -tax Officer under the proviso to section 22, sub -section (1), and the assessee should have, therefore, filed its return of the income on or before that date. But the assessee failed to do so and filed its return of income as late as January 31, 1966. By that time the old Act was repealed and the new Act had taken its place and section 297(2)(b) of the new Act required that since the return of income was filed by the assessee after the commencement of the new Act, the assessment of the assessee for the assessment year 1961 -62 should be made in accordance with the procedure specified in the new Act. The return of income being filed before the expiration of four years from the end of the assessment year 1961 -62, it was regarded as a voluntary return under section 139, sub -section (4), and the Income -tax Officer processed it and assessed the assessee to tax under section 143. The Income -tax officer in the course of the assessment proceedings was prima facie satisfied that the assessee had without reasonable cause failed to furnish its return of income within the time allowed by the notice under section 22, sub -section (1) of the old Act and he, therefore, issued a notice under section 274 calling upon the assessee to show cause why penalty should not be levied upon it under section 271(1)(a). The assessee submitted its explanation giving various reasons for late filing of the return, but the Income -tax Officer was not satisfied with the explanation offered by the assessee and he levied a penalty of Rs. 16,415 on the assessee under section 271(1)(a). The assessee appealed against the order of penalty to the Appellate Assistant Commissioner but the appeal was unsuccessful. The matter was thereupon carried in further appeal to the Tribunal, namely, that the return having been filed before the assessment was made and within four years from the end of the assessment year 1961 -62 as provided under suggestion in the case of the assessee who was a company and was a licensee under the Electricity (Supply) Act. Apparently that was because, simultaneously, provision was made by amendment of the Schedule to the Electricity (Supply) Act, 1948, for the creation of a development reserve. Paragraph V - A of the Sixth Schedule was introduced in the Electricity (Supply) Act, 1948 in 1956 and it is that Paragraph which created the obligation in a licensee under the Act to a keep a development reserve. That reserve was directly related to the development rebate being equal to the income -tax Act, 1922, to plough back a portion of the development rebate allowed to him during the course of the succeeding years. Of course, in the case of the latter, the assessee stood the risk of losing the benefit of the development rebate in case he did not so plough back while that was not the case with the obligation to create a development reserve. The distinction is immaterial for our present purpose. When an assessee under the Indian Income -tax Act, 1922, brought back into the business a portion of the development rebate in the succeeding years, admittedly, he was not entitled to claim this as expense. If the creation of a development reserve was similar, then, of course, by merely being asked to reserve a certain amount by way of development reserve, a person who had obtained the benefit of the development rebate cannot claim to seek deduction by way of expenditure on account of the creation of such reserve.

(2.) THE assessee contends before us in regard to the contingencies reserve and the development reserve that they were created not on the assessee's own volition but because of statutory compulsion, that these are really diversions from the revenue and not from the income, that, therefore, these deductions are deductions not from the income, but before the income was received, and for that reason the assessee is entitled to claim exemption.

(3.) WE can dispose of the case of the assessee with regard to the last of these items, namely, the deduction of the amount under the 'special reserve'. It has not been shown that the amount so reserved was not available to the assessee for diversion for any purpose of his own. It has not been attempted to be proved that the terms of the instruction to the assessee in any way affects the right of the assessee to deal with such a reserve as in the case of any ordinary reserve which the assessee is not bound to apply to any particular purpose only. Therefore, merely because some instruction is said to have been given by the electricity board and a reserve is created which reserve, in the normal course, would be available for appropriation by the assessee without any restriction, it cannot be said that it should be deductible from the income. In fact, the assessee did not attempt to make out a case on this. The real controversy concerns the other two items.