COMMISSIONER OF INCOME TAX Vs. SAKTHI SUGARS LIMITED

JUDGEMENT

(1.) THE assessee in the case is a company. THE assessee claimed development rebate of Rs. 1,14,359 during the course of its assessment proceedings for the assessment year 1971-72 in respect of a new machinery purchased by it during that year. THE Income-tax Officer, originally disallowed the claim as the requisite reserve was not created. THE Appellate Assistant Commissioner, however, on appeal, held that since the company has incurred a loss and there is no assessable income during that year, the requirement of creating a reserve has to be waived in view of the Board's circular dated October 14, 1965. THE Revenue accepted the order of the Appellate Assistant Commissioner. THE Income-tax Officer computed the development rebate of Rs. 1,14,359 and carried forward the same to the subsequent assessment year 1972-73, with which we are concerned in the present tax case reference. In the assessment year 1972-73, the assessee claimed the development rebate of a sum of Rs. 9,62,422 and created a reserve for a sum of Rs. 7,22,000. THE Income-tax Officer allowed the claim of the assessee. It is significant to notice that the Income-tax Officer in the process allowed the development rebate claimed for and carried forward from the assessment year 1971-72. THE Income-tax Officer, subsequently, realised that the allowance of the development rebate of Rs. 1,14,114 relating to the assessment year 1971-72 in the assessment made for the assessment year 1972-73 was a mistake since no reserve was created and the reserve created by the assessee of a sum of Rs. 7,22,000 was just adequate to allow the deduction for the development rebate claimed for the assessment year 1972-73, viz., Rs. 9,62,422. THE Income-tax Officer, therefore, proposed to revise the assessment under section 154 of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), to withdraw the excess development rebate allowed amounting to Rs. 1,14,114. After hearing the objections raised by the assessee, the Income-tax Officer found that the profit and loss account for the year 1972-73 disclosed a net profit of Rs. 27,79,202 and the assessee had transferred to the general reserve account a sum of Rs. 17,18,786. THE Income-tax Officer held that in the absence of the creation of the development rebate reserve, it is not permissible to allow the development rebate of Rs. 1,14,114 relating to the assessment year 1971-72. He also held that the reserve created in the subsequent year cannot be taken into account for considering the deduction of development rebate in the earlier year. THE sum and substance of the order of the Income-tax Officer is that the assessee has not created the development rebate reserve in the year of installation of the machinery, i.e., 1971-72, nor in the year in which deduction was allowed, viz., 1972-73. THErefore, he disallowed the development rebate granted earlier.

(2.) THE assessee filed an appeal before the Appellate Assistant Commissioner. THE Appellate Assistant Commissioner found that the assessee has filed the return returning a loss of Rs. 13,84,485 for the assessment year 1972-73, but, however, the assessment under section 143(3) of the Act was made on the income of Rs. 22,24,751. He also found that the profit and loss account showed a net profit of Rs. 27,79,201 and the assessee has created the development rebate reserve for only Rs. 7,22,000. He, therefore, held that the assessee had sufficient funds to create further development rebate reserve and in the absence of the development rebate reserve, there is no scope for granting the development rebate of Rs. 1,14,114 and the grant of allowance in the original assessment was a patent mistake, which was justifiably rectified by the Income-tax Officer in his proceedings under section 154 of the Act. THE assessee, aggrieved by the order of the Appellate Assistant Commissioner, approached the Income-tax Appellate Tribunal, by filing an appeal. THE Tribunal, however, took the view that the total claim of the assessee for both the years was Rs. 10,76,781 and the assessee had created a reserve of Rs. 7,22,000. THE Tribunal, therefore, held that this is a case where the assessee had created a reserve in the year in which there was a good profit even though the total income assessed was nil and it is not a case of a failure on the part of the assessee to create a reserve, but a case of creation of the reserve which fell short of the amount required to be created. THE Appellate Tribunal placing reliance on circular of the Board in No. 259 (see [1981] 131 ITR (St.) 70), dated July 11, 1979, held that on the basis of the Board's circular, the shortfall could be made up by the assessee in the subsequent assessment year. THE Tribunal found that the assessee created an excess reserve of Rs. 3,97,068 during the subsequent assessment year which was more than adequate to cover the shortfall in respect of the assessee's claim of Rs. 1,14,114. THE Tribunal, therefore, held that there was no allowance of excessive rebate by mistake which was required to be rectified. In this view of the matter, the Appellate Tribunal accepted the claim of the assessee and allowed the appeal preferred by the assessee.

(3.) MR. Janarthana Raja, learned counsel for the assessee, on the other hand, submitted that it is a case where the assessee originally filed a loss return for the assessment year 1972-73 and out of the total claim of Rs. 10,76,781 the assessee has created the reserve of Rs. 7,22,000. He, therefore, submitted that this is not a case where it can be held that the assessee has not created the reserve, but, it is a case of creation of reserve which fell short of the requisite reserve needed to be created during the relevant previous year. He has submitted that the shortfall was made good by the assessee by creating the reserve in the subsequent assessment year 1973-74. He placed strong reliance on the circulars of the Board in Nos. 10/49/65-ITA-I, 189 (see [1976] 102 ITR (St.) 90) and 259 (see [1981] 131 ITR (St.) 70), dated October 14, 1965 January 30, 1976 and July 11, 1979, respectively. According to him, the Board after taking into account various aspects of the matter decided that the requirements of the provision of section 34(3)(a) would be satisfied, if the accumulated reserve in respect of the machinery or plant up to the year or years of actual allowance is equal to 75 per cent. of the amount of development rebate to be actually allowed. The Board also clarified that the condition for creation of requisite reserve would be satisfied if the sum total of the reserve created either in the year of installation or use or in the subsequent year or years is equal to the requisite amount of 75 per cent. of the actual allowance of development rebate in any year or years. He, therefore, submitted that when the Board itself has clarified that the reserve created in the year of installation or subsequent year or years can be taken into account, the Income-tax Officer was not justified in holding that the assessee has not complied with the requirements of sections 33 and 34(3)(a) of the Act.