KESHAVLAL VITHALDAS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) IN this case at the instance of the assessee the following question has been referred to us for our opinion :

(2.) WE are concerned in the present case with the assessment year 1968 -69. The assessee is a registered partnership firm and carries on the business of manufacturing Sat -Isabgul. The assessee maintains its accounts on the basis of Samvat year and the previous year for the purposes of the assessment year under reference is Samvat year 2023, that is, the period November 13, 1966, to November 2, 1967. For the assessment year 1968 -69, the assessee filed its return on August 18, 1969. In Samvat year 2023, machinery worth Rs. 2,73,771 was installed. When the profit and loss account of the partnership firm was first prepared, no provision for development rebate reserve was made nor was a reserve created at that time. But, some time prior to the filing of the return, the exact date not being known, development rebate reserve was created by drawing up what was referred to by the assessee as the general profit and loss account of Samvat year 2023. When the profit and loss account was first prepared, the net profit amounting to Rs. 1,13,960.70 was distributed amongst the five partners by making the necessary havala entries in the books of account. At the time when what is referred to as the general profit and loss account for Samvat year 2023 was drawn up some time before the return was filed, entries were made and the amount of the development rebate reserve was proportionately debited to the accounts of the partners and was credited to the development rebate reserve account. An amount of Rs. 61,692 being the amount of the reserve was credited in this manner. It may be mentioned that the amount was debited to the capital accounts of the different partners. At the time of assessment the Income -tax Officer held that the reserve was not created before the books of account were closed and hence he disallowed the claim. When the assessee went in appeal against the decision of the Income -tax Officer, the Appellate Assistant Commissioner reversed the decision of the Income -tax Officer and allowed the assessee's appeal on this aspect of creation of development reserve. The Appellate Assistant Commissioner relied upon the decision of the Rajasthan High Court in Commissioner of Income -tax v. Mazdoor Kisan Sahkari Samiti, and drew support for his conclusion from that decision for the proposition that necessary entries may be permitted by the Income -tax Officer to be made even after the return had been filed. Against the decision of the Appellate Assistant Commissioner, the matter was taken in appeal to the Tribunal. The Tribunal relied on the decision of this High Court in Surat Textile Mills Ltd. v. Commissioner of Income -tax . The Tribunal also referred to the decision of the Madras High Court in Commissioner of Income -tax v. Veeraswamy Nainar . The Tribunal held that the assessee had first of all finalised the profit and loss account and the resultant profits were credited to the partners' accounts. Later, another account called general profit and loss account was created where the entire profit was credited. There was another credit for the development reserve which was debited to partners' accounts; on the debit side there was an entry for transfer of Rs. 61,692 to the development reserve account and of the entire profit transferred to partners' accounts without such deduction of development rebate. The Tribunal noted that at the time of making up the general profit and loss account the assessee had made two separate entries, one a credit entry for the share in profits and the other a debit entry for the proportionate debit in the account of each of the partners. According to the Tribunal, the requirements of the law were that the reserve contemplated must be debited before the profit and loss account was made up and the transfer had to be made at the time of making up the profit and loss account. According to the Tribunal, this was not done in the present case and the conditions required for allowance of development rebate were not fulfilled in this case. The Tribunal allowed the appeal of the revenue and thereafter at the instance of the assessee, the question set out hereinabove has been referred to us for our opinion.

(3.) SECTION 10 of the Act of 1922 provides by sub -section (1), that tax shall be payable by an assessee under the head 'Profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession of vocation carried on by him. Sub -section (2) of section 10 provided that such profits or gains shall be computed after making the allowance mentioned therein. Under clause (vib) of section 10, sub -section (2), provision was made for allowance by way of development rebate and under the proviso to section 10(2)(vib) it was laid down that no allowance under this clause shall be made unless, inter alia, an amount equal to 75 per cent. of the development rebate to be actually allowed was debited to the profit and loss account of the relevant previous year and credited to a reserve account to be utilised by him during a period of ten years next following for the purposes of the business. We are not concerned in the present case with the rest of the provisions of section 10(2)(vib).