COMMISSIONER OF INCOME-TAX VS SOUTH INDIA VISCOSE LTD., 2000 PTD-MADRAS-HIGH-COURT-INDIA 184 (1996)

Income-tax---

----Development rebate---Rectification of mistakes---Withdrawal of development rebate---Amount taken from earlier development rebate reserve for distribution as dividends- --Amount adjusted against excess profits---No shortfall in reserve of earlier year---Development rebate could not be withdrawn in rectification proceedings---Indian Income Tax Act, 1961, Ss.34 & 154.

The Income-tax Officer passed an order under section 154 of the Income Tax Act, 1961, withdrawing development rebate allowed to the assessee on the ground that the assessee originally created the reserve of Rs 70,00,000 in the accounts of the previous year relevant to the assessment year 1967-68 and the total reserve created up to and including the assessment year 1967-68 was Rs.1,07,07,312.It was found that the directors while presenting the accounts for the subsequent year, viz., 1968-69, to the general body had recommended that Rs.16,00,000 should be withdrawn from the development rebate account of earlier years.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 was a deficiency of Rs.9,48,721 in the reserve created by the assessee for the assessment year 1967-68. It was pointed out that if the was considered against the reserve originally created by the assessee the actual reserve that lead been created for the years up to and including the assessment year 1967-68 to meet the requirements of law, was only Rs.91,07,312 as against a sum of Rs.1,00,83,314 that should have been created by the assessee. Therefore, according to the Department, the development rebate already allowed for the assessment year 1967-68 required to be withdrawn to the extent of Rs.12,64,961 as this was not covered by the reserve even taking an overall position of the reserve created as claimed by the assessee. The Appellate Assistant Commissioner held that the issue was controversial and set aside the order of rectification. The Tribunal held that on December 31,1967, 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 that the declaration of dividend was made. Accordingly, the Tribunal confirmed the order passed by the Appellate Assistant Commissioner. On a reference:

Held, that Rs.16,00,000 which was direct ed 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 Rs.32,00,000 which was the excess profit as on December 31,1967. If that was so, there was an excess provision of Rs.16,00,000 transferred to the profit and loss account. 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 remained with the assessee as on December 31,1967.Hence, it could not be said that there was any shortfall in the earlier years as contended by the Department. These facts on record would go to show that there was no mistake apparent on record warranting exercise of jurisdiction under section 154 of the Act.

C.V. Rajan for the Commissioner.

P.P.S. Janarthana Raja for the Assessee.

JUDGMENT

K. A. THANIKKACHALAM, J,---As direction of this Court in T.C.P. No.237 of 1981, the Tribunal referred the following question for the opinion of this Court under section 256(2) of the Income Tax A,1961:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the provisions of section 154 of the Income-tax Act could not be invoked to withdraw the unabsorbed development rebate already allowed in the assessment year 1967-68?"

The assessee is a public limited company. For the assessment year 1967-68, the income determined as per the order, dated February 1,1973, is as under:

??????????? .

??? ??????????????????????????????????????????????????????????????????????????????????????????

The Income-tax Officer subsequently sought to rectify the above order under section 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 percent. of the development rebate before the profit and loss account of the relevant previous year was made up and hence in terms of the Supreme Court judgment in the case of Indian Overseas bank and the Gujarat High Court decision in the case of Surat Textile Mill Limited, 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 assessment years 1962-63 and 1963-64 should be disallowed;

(ii) The assessments for 1962-63 to 1966-67 have been revised by order dated January 21,1975, 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 the total income required to be disallowed;

(iii) It was found that during the year ended December 31,1967, relevant for the assessment year 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 standing that there had been excess provision in the development rebate reserve account in the reserves created in prior years, which was hence transferred to the profit and loss account.

According to the assessee, there was no mistake apparent on record warranting application of the, provisions contained in section 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 reserve 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 Income-tax Officer, under section 34(3) the assessee should have created 75 percent. of the development rebate as reserve which worked out to Rs.1,00,56,033 up to the assessment year 1967-68 taking into account the reserve of Rs.64,95,185 to be created for the assessment year 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 assessment year 1968-69 had recommended that 89,16,00,000 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 tip to the assessment year 1967-68 to meet the requirements of law was 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 Income-tax Officer, the development rebate already allowed for the assessment year 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 Income-tax Officer, the balance in the reserve account to be considered for the purpose of section 34(3) was as on December 31,1966, and not as on December 31,1967. For the abovesaid reasons, the Income-tax Officer 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 Appellate Assistant Commissioner questioning the validity of the order passed under section 154 of the Act as well as on the merits.

After hearing learned counsel for the assessee as well as the Income?-tax Officer, the Appellate Assistant Commissioner 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 or years is at the very least controversial enough to place the matter outside the ambit of valid rectificatory action under section 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 section 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 Income-tax Officer sought to withdraw by his order under section 154 fell 'such within terms of section 34(3)(a)(i) either wholly or in part, for if such had been his case the Income-tax Officer could well have proceeded under section 154 with section 155(5). I have to conclude that the order under section 154 objected to in the present appeal was bad in law."

As against the order passed by the Appellate Assistant Commissioner, the Department preferred a second appeal before the Tribunal. The Tribunal pointed out that before the Appellate Assistant Commissioner the only reason pressed by the Income-tax Officer 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 section 34(3) and hence the deduction for development rebate allowable for the assessment years 1962-63 to 1963-64 should be determined at Rs.73,95,286.

According to the Tribunal, -it was manifest that there is no patent mistake apparent on the record warranting exercise of. jurisdiction under section 151 of the Act. The Tribunal further pointed out that regarding the Income-tax Officer's reference to the declaration of dividend of Rs.16,00,000 the Appellate Assistant Commissioner has extracted the relevant portion from the printed account which would go to show that as on December 31,1967, 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 go into merits of the case in the appeal presented before it. Accordingly, the Tribunal confirmed the order passed by the Appellate Assistant Commissioner.

Before us learned standing counsel appearing for the department reiterated .the argument as was advanced before the Tribunal in the matter of exercising under section 154.of the Act. According to learned standing counsel, inasmuch as a sum of Rs.16,00,000 was withdrawn as per the directors' report, dated December 31,1967, from the reserve created for the earlier years, the conditions prescribed under section 34(3)(a) of the Act were infringed. According to learned standing counsel, because of the withdrawal of Rs.16,00,000 as per the directors' report, dated December 31,1967, there was a shortfall in the credit reserve in the earlier years to the extent of 75 percent. as stated under section 34(3)(a). According to 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 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 section 154 of the Act for the purpose of withdrawing the development rebate already granted.

On the other hand learned counsel appearing for the assessee while supporting the order passed by the Tribunal submitted that, according to the directors report, dated December 31,1967, 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 December 31,1967 It remains to be seen, according to learned counsel, that even though a direction vas given in the directors report to utilise Rs.16,00,000 from the earlier years employment rebate reserve, that was adjusted from and out of Rs.32,00,000 which was the profit as on that date. It means, according to learned counsel for the assessee, that the 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 (reserve ?). Therefore according to learned counsel appearing for the assessee, actually this sum of Rs.46,00,000 was not taken out from the earlier years reserve, in which case there is no ground for exercising jurisdiction under section 154 of the Act since there was no mistake apparent on record.

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

The fact remains that for the assessment year 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 section 34(3) of the Act, the assessee should have created 75 percent. 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 up to and including the assessment year 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 to the accounts of the previous year relevant to the assessment year 1967-68 and the total reserve created up to and including the assessment year 1967-68 was Rs.1.07,07,312. It was found that the directors while presenting 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 assessment year 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 assessment year 1967-68 to meet the requirements of law, is only Rs.91,07,312 as against a sum of Rs.1,00,83,314 that should have been created by the assessee. Therefore, according to the Department, the development rebate already allowed for the assessment year 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 the statutory requirement under section 34(3) is as on December 31,1966, and not as on December 31,1967, in view of the directors' report in presenting the accounts for the year ended December 31,1967. 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 section 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 December 31,1967, 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 December 31,1967. If that is so, there is an excess provision of Rs.16,00,000 transferred to the profit and loss account. 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 form the earlier years' reserve was adjusted out of the profit of Rs.32,00,000 which remains with the assessee as on December 31,1967. 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 section 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 the record warranting exercise of jurisdiction under section 154 of the Act. Accordingly, we are in agreement with the order passed by the Tribunal in confirming the order passed by the Appellate Assistant Commissioner 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.

M.B.A./3265/FC ??????????????????????????????????????????????????????????????????????????????? Order accordingly.