RADHIKA MILLS LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee is a public limited company engaged at the relevant years in the manufacture and sale of yarn. It installed machinery, the cost of which amounted to Rs. 10,59,634 for the year ended March 31, 1958, to Rs. 5,82,142 for the next year and to Rs. 3,12,470 for the third year. But production commenced from January 1, 1958. For the year ended March 31, 1958, there was no assessment. In the previous year ended March 3,1', 1959, the assessee made a profit of Rs. 89,034 according to its books out of which it distributed as dividend Rs. 60,726 and set apart Rs. 7,719 as development rebate reserve. After adjusting the balance of Rs. 20,589 against the loss of the earlier year, the assessee filed a return showing a loss of Rs. 64,247. THE assessment was completed by fixing the loss at Rs. 60,693. In the next year, the assessee made a profit of Rs. 1,83,372. Out of this sum was distributed as dividend a sum of Rs. 78,582 ; a sum of Rs. 67,621 was set apart as development rebate reserve though, having regard to the installation cost, a sum of Rs. 58,227 would have sufficed. Out of the balance, a sum of Rs. 35,000 was transferred to the general reserve and the remaining sum of Rs. 2,169 was carried over to the next year. THE Income-tax Officer disallowed development rebate in respect of the first two years, Rs. 2,64,908 and Rs. 1,26,061, respectively, but allowed it in full for the assessment year 1960-61 in the sum of Rs. 77,703. THE ground for disallowance was that there was no assessment for the first year and there was no claim made for the assessment year 1959-60. THE Appellate Assistant Commissioner of Income-tax declined to interfere. He pointed out that the assessee had also failed to furnish the particulars necessary to compute the rebate for the assessment year 1959-60. THE Tribunal sustained the disallowance for the year ended March 31, 1958, on a new plea raised by the revenue which it allowed, to wit, the provision for carrying forward of development rebate was itself introduced only with effect from April 1, 1958, by the Finance Act of 1958. As to the second year, the Tribunal, disagreeing with the revenue, found that the assessee had, as a matter of fact, furnished on December 30, 1960, the necessary particulars and that as it happened to be before the assessment was completed, it was sufficient compliance. THE Tribunal further held that, since the assessee had created a reserve of Rs. 7,719 in the previous year, it would be entitled to development rebate of Rs. 10,292 to be brought forward and adjusted against the profits of the assessment year 1960-61. But, as no corresponding reserve had been created for the balance of the claim for rebate for the assessment year 1959-60, the Tribunal sustained the order of the Appellate Assistant Commissioner to the extent of Rs. 1,18,342 disallowed for carrying over. In the circumstances, this reference under Section 256(1) of the Income-tax Act, 1961, comes before us on the question :

(2.) REGARDING the first year ended March .31, 1958, the decision of the Tribunal is correct. This is because the provision enabling carry forward of development rebate introduced by the Finance Act of 1958 itself came into force but with effect from April 1, 1958, and the machinery had been admittedly installed prior to January 1, 1958. No question of carrying forward of any development rebate in respect thereof could, therefore, arise.

(3.) IN our opinion, the scheme of Clause (vib) as thus envisaged by us would admit of its practical working. It is contended for the revenue that all that is contemplated by Clause (b) of the proviso is to debit the profit and loss account of the relevant previous year and credit to a reserve account an amount equal to 75 per cent of the development rebate to be actually allowed and for this purpose it is not required that an amount equal to that percentage should be actually set apart as reserve. Having regard to our understanding of the entire provision of Clause (b) of the proviso, we are unable to accept this contention. We cannot overlook the word "utilised" in Clause (b) of the proviso and the expectation that the reserve contemplated by this provision could be utilised for the purpose of the business but not for the prohibited purposes. That shows clearly that debiting in the profit and loss account and crediting in the reserve account is not theoretical but on the basis of actual reserve created. One other question that may arse is whether the requirement to credit a reserve account as a condition for carrying forward arises when there are book profits but the total income as per completed assessment is nil or the assessment-result is a loss in any given year. IN our view, the basis should be the total profits as per completed assessment and not book profits. This is because Explanation I shows that the develcpment rebate to be allowed for any assessment year should only be such amount as would be sufficient to reduce the total income of that year to nil. That cannot refer to book profits. It follows, therefore, in our opinion, that although the books may show profits, if the assessment results in nil income or loss, there will then be no obligation on the part of the assessee to create a reserve as a condition for carrying over the devjlop-ment rebate.