COMMISSIONER OF INCOME-TAX VS SAKTHI SUGARS LTD.
2001 PTD 3160
[240 1 T R 8681
[Madras High Court (India)]
Before N. V. Balasubramanian and P. Thangavel, JJ
COMMISSIONER'OF INCOME‑TAX
Versus
SAKTHI SUGARS LTD.
Tax Case No. 193 of 1984 (Reference No. 142 of 1984), decided on 29/10/1997.
Income‑tax‑‑‑
‑‑‑‑Rectification‑‑‑Mistake apparent from record‑‑‑Development rebate ‑‑‑Pre conditions for claiming rebate ‑‑‑Assessee not creating requisite development rebate reserve either in year of installation of machinery, i.e., 1971‑72 or year in which deduction was allowed, namely, 1972‑73‑‑‑ITO withdrawing development rebate granted in original assessment by rectifying assessment for assessment year 1972‑73‑‑‑Tribunal finding that no failure to create reserve but reserve created fell short of amount required to be created and shortfall made‑up in subsequent assessment year‑‑‑Tribunal holding that no allowance of excessive rebate by mistake which required rectification‑‑ Conflict of views among High Courts on question whether development rebate credited in earlier year could be taken into account in later year‑‑‑View taken by circular issued by C.B.D.T. in 1965 and 1979 not consistent‑‑No mistake apparent from record‑‑‑Rectification not permissible‑ Indian Income Tax Act, 1961, Ss. 34(3)(a) & 154‑‑‑C.B.D.T. Circulars Nos. F. No. 10/49/65‑ITA‑I, 189 and 259, dated 14‑10‑1965, 30‑1‑1976 and 11‑7‑1979.
The assessee claimed development rebate under section 34 of the Income Tax Act,. 1961, of a sum of Rs.1,14,359 for the assessment year 1971‑72 in respect of new machinery purchased during that year. The Income‑tax Officer disallowed the claim of the assessee. On appeal, the Appellate Assistant Commissioner held that since the assessee had incurred a loss and there was no assessable income during that year, the requirement of creating a reserve had to be waived in view of Circular No. 10/49/65‑ITA‑I, dated October 14, 1965 issued to the C.B.D.T. Thereafter, 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. In the assessment year 1972‑73, the assessee claimed 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 and 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, rectified the assessment under section 154 of the Act and withdrew the excess development rebate allowed amounting to Rs.1,14,114. On appeal, the Appellate Assistant Commissioner affirmed the order of the Income‑tax Officer. On further appeal, the Tribunal took the view that the total claim of the assessee for both the years was Ks.10,76,781 and the assessee had created a reserve of Rs.7,22,000 The Tribunal, therefore, held that this was a case where be assessee had create reserve in the year in which there was a good profit even though the total income assessed was nil and it was not a case of a failure on the part of the assessee to create a reserve but 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 Tribunal, placing reliance on the Circular of Board No.259, dated July 11, 1979;,h6ld that 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 yeas 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. On a reference:
Held, (i) that there was a conflict of views among the various High Courts on the question whether development rebate credited in the earlier year could be taken into account in a later year. The Bombay High Court in CIT v. Caltex Oil Refining (India) Ltd. (1979) 1 Y9 ITR 216 and the Karnataka High Court in International Instruments (P.) Ltd. v. CIT (1980? 123 ITR 11 took the view that the excess development rebate credited in the earlier year could be taken into account to cover the reserve in a later year also and it was not necessary to create a separate reserve for the later year. whereas the Madras High Court in CIT. v. Aruna Sugars Ltd. (1980) 123 ITR 619 and CIT v. Arasan Co. (1985) 152 ITR 206 took the view that when the assessee had not debited any amount to the profit and loss ac n of the relevant previous year, the statutory requirements could not be said to have been complied with and consequently the debit made in the subsequent previous year or in the, earlier previous year would not be sufficient for the assessee to claim the deduction for the development rebate for the year in question.
(ii) That the view taken by the C.B.D.T. was no better. In Circular No. 259, dated July 11, 1979, the Board had taken the view that the condition for creation of the reserve would be satisfied if the sum total of the reserve credited either in the year of creation or the subsequent year or years is equal to 75 per cent. of the actual allowance of the development rebate in any year or years. But in the earlier Circular No. 10/49/65/ITA‑I, dated October 14, 1965, the Board had taken a view that if the provision for development rebate reserve in the earlier year was in excess of the required amount, such excess could not be taken into account in determining the quantum of statutory deduction required to be made in the subsequent year, but, however, it would be open to the assessee to transfer the earlier excess of the development rebate for the purpose of making use of the same in the later year. A reading of the Board's Circulars, dated October 14,' 1965 and July 11, 1979, showed that the stand taken by the Board, was also not consistent.
(iii) That the order of the assessment in the instant case was made on September 30, 1976. But when the revision was made on April 18, 1977 there was no decision of the Madras High Court but only the Board's Circular No. 10/49/65‑ITA‑I, dated October 14, 1965, was available under which it was enough for the assessee to transfer the excess reserve to the year in which the development rebate was claimed. Subsequently, the C.B.D.T. took a different view in Circular No.259, dated July 11, 1979. The Income -tax Officer had initiated rectification proceedings and had passed the order of rectification even before the decision was rendered by the Madras High Court. Therefore, when the mistake was not apparent from the record and there was conflict of views among the various High Courts and when there was possibility of more than one view, the Income‑tax Officer was not justified in rectifying the mistake for the assessment year 1972‑73 under section 154 of the Act by withdrawing the rebate granted in the original assessment.
CIT v. Arasan & Co. (1985) 152 ITR 206 (Mad.); CIT v. Aruna Sugars Ltd. (1980) 123 ITR 619 (Mad.); CIT v. Caltex Oil Refining (India) Ltd. (1979) 119 ITR 216 (Bom.); Indian Overseas Bank Ltd. v. CIT (1970) 77 ITR 512 (SC) and International Instruments (Pvt.) Ltd. v. CIT (1980) 123 ITR 11 (Kar.) ref.
C.V. Rajan for the Commissioner.
P.P.S. Janarthana Raja for the Assessee.
JUDGMENT
N.V. BALASUBRAMANIAN, J.‑‑‑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 had 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.
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‑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 Appellant 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 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.
Aggrieved by the decision of the Tribunal, the Revenue has sought for and obtained a reference to this Court and on the basis of the direction of this Court under section 256(2) of the Act, the Tribunal has stated a case and referred the following question of law:
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the Income‑tax Officer was not justified in rectifying the assessee's assessment for 1972‑73 by withdrawing the development rebate of Rs.1,14,114 in respect of 1971‑72?"
From the facts set out above, it is clear that the case involves proper interpretation of the provisions of section 34(3) of the Income‑tax Act, 1961. Section 34 of the Act sets out the conditions for the grant of development rebate. The material portion of section 34 of the Act relating to the condition for the grant of the development rebate reads as under:
"34.(3)(a) The deduction referred to in section 33 shall not be allowed unless an amount equal to seventy‑five percent of the development rebate to be actually allowed is debited to the profit and loss account of the relevant previous year and credited to a reserve account be utilised by the assessee during a period of eight years next following for the purposes of the business of the undertaking other than:
(i)for distribution by way of dividends or profits; or am
(ii)for remittanceoutside India as profits or for the creation of any asset outside India."
A fair reading of the provision clearly shows that the grant of development rebate is subject to a condition of creation of development rebate of an amount equal to‑‑75 per cent. of the development rebate by debiting the profit and loss account of the relevant previous year and crediting the same it, a reserve account. The reserve credited has to be utilised by the assessee during the period of eight years next following for the purposes of the business of the undertaking other than those items mentioned in clauses (i) and (ii) of section 34(3)(a) of the Act. There is no doubt that this is a pre‑condition for the grant of relief by way of development rebate. In this case, the assessee has not created the requisite development rebate during the assessment year 1971‑72. It is also clear from the order of the authorities that the assessee had not created the requisite development rebate during the assessment year 1972‑73 in which the development rebate was allowed as a deduction. The assessee had created the reserve which was adequate to allow the deduction for the claim of the development rebate for the assessment year 1972‑73. The Income‑tax Officer, however, allowed the deduction of Rs.1,14,114 in the original order of assessment. Later, on realising that the development rebate allowed without creating the reserve was a mistake, he rectified the same and the view of the Income‑tax Officer was confirmed by the Appellate Assistant Commissioner. The Tribunal, however, has taken a view that it is a case of only a shortfall and in the subsequent as assessment year 1973‑74,. there was an excess reserve of Rs.3,97,068 which would be more than adequate to cover the shortfall in respect of the claim of the assessee of Rs.1, 14,114.
Mr. C.V. Rajan, learned counsel for the Revenue, submitted that unless an amount equal to 75 per cent. of the development rebate to be actually allowed is debited to the profit and loss account of the relevant previous year and credited to a reserve account to be utilised by the assessee during the period of eight years next following for the purposes of the business of the undertaking, the ,assessee is not eligible to claim the development rebate. He, therefore, submitted that in the absence of the reserve, the Tribunal was in error in directing the Income‑tax Officer to grant the allowance. He submitted that the presence of a larger amount in the development rebate reserve in the subsequent year cannot be taken as satisfying the specific requirements of section 34(3)(a) of the Act, viz., of a debit to the profit and loss account of the relevant previous year and the credit to reserve account. He, therefore, submitted that the Tribunal was not correct in law in holding that the excess development rebate of 1973‑74 can be taken into consideration in allowing the development rebate for the earlier assessment year 1972‑73.
Mr. Janarathana 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 yeas. He has submitted that the shortfall was made good by the assessee by creating the reserve in the subsequent assessment 1973‑74. He placed strong reliance on the Circulars of the Boars' Nos. 10/49/65‑ITA‑1, 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 in 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.
Mr. C.V. Rajan, on the 9ther hand, submitted that the Board's Circulars are not binding on this Court for a proper interpretation of section 34(3)(a) of the Act. He strongly placed reliance on a decision of the Supreme Court in the case of Indian Overseas Bank Ltd. v. CIT (1970) 77 ITR 512, and the decisions of this Court in the cases of (i) CIT v. Aruna Sugars Ltd. (1980) 123 ITR 619 and (ii) CIT v. Arasan Co. (1985) 152 ITR 206, in support of his plea that the reserve must be created in the relevant previous year.
We have carefully considered the submissions made by learned counsel for the parties. As already seen, we are not only concerned with the provisions of section 34(3)(a) of the Act. but also the action of the Income -tax Officer in passing the order of rectification under section 154 of the Act. No doubt there is force in the contention of learned counsel for the Revenue the condition of debiting an amount equal to 75 per cent. of the development rebate to be claimed in the profit and loss account relating to the previous year and crediting the same to the reserve account for utilisation during the period of eight years next following for the purpose of business undertaking is a condition precedent for claiming the grant of relief by way of development rebate. When the assessee has not debited admittedly any amount to the profit and loss account of the relevant previous year, the statutory requirements cannot be said to have been complied with. The section no doubt, provides that the debit to the profit and loss account should be made in the relevant previous year and, consequently, the debit made in the subsequent previous yes or in the earlier previous year would not be sufficient for the assessee to claim the deduction for development rebate for the year in question. This is the view taken by this Court in CIT v. Aruna Sugars Ltd. (1980) 123 ITR 619 and CIT v. Arasan Co. (1985) 152 ITR 206. However, it is relevant to notice that the judgment of this Court in Aruna Sugars Ltd.'s case (1980) 123 ITR 619, was delivered on July 11, 1979 and the judgment in Arasan Co.'s case (1985) 152 ITR 206 (Mad.), was delivered on November 14, 1983. In Arasan Co.'s case (1985) 152 ITR 206 (Mad.) this .Court also noticed the view taken by the Bombay High Court in CIT v. Caltex Oil Refining (India.) Ltd. (1979) 119 ITR 216 and did not agree with the view expressed by the Bombay High Court. The Bombay High Court in that case delivered the judgment on January 30, 1979, and in that case, the Bombay High Court held that the excess development rebate credited in the earlier year can be taken into consideration and the assessee would be entitled to development rebate claimed by it. The Bombay High Court has taken into account the excess amount credited in the earlier year and held that would be sufficient compliance of the provisions of section 34(3)(a) of the Act to claim the full amount of development rebate. In the case of International Instruments (P.) Ltd. v. CIT (1980) 123 ITR 11, the Karnataka High Court by judgment delivered on August 3, 1978, has noticed the Board's Circular in F. No:10/49/65 ITA‑1, dated October 14, 1965, and the Circular No.189 (see (1976) 102 ITR (St.) 90), dated January 30, 1976, and held that the earlier Circular, dated October 14, 1965, remained intact and as per the circular, the excess development rebate credited in the earlier year can be taken into account to cover the reserve in the later year also and it is not necessary to create a separate reserve for the later year.
It is clear that there is a conflict of views amongst various Courts on the question whether the development rebate credited in the earlier year could be taken into account in the later year. As already seen the Bombay as well as the Karnataka High Court took one view and this Court in the two decisions referred to above took a diametrically opposite view. The view of the Central Board of Direct Taxes is no better. In Circular No.259 (see (1981) 131 ITR (St.) 70), dated July 11, 1979, the Board has taken a view that the condition for creation of the reserve would be satisfied if the sum total of the reserve credited either in the year of creation or. in the subsequent year or years is equal to 75 per cent. of the actual allowance of the development rebate in any year or years. (emphasis supplied by underlining the relevant portion) but, in the earlier Circular, dated October 14, 1965, the Board has taken a view that if the provision for development rebate reserve in the earlier year is in excess of the required amount, such excess will not be taken into account in determining the quantum of statutory deduction required to be made in the subsequent year, but, however, it will be open to the assessee to transfer the earlier excess of the development rebate for the purpose of making use of the same in the later year. A reading of the Board's Circular, dated October 14, 1965, and July 11, 1979, shows that the stand taken by the Board, is also not consistent.
That apart, there is a conflict of views amongst various High Courts. The Board has taken one position in the year 1965 and another in the year 1979. It is only in the light of the conflict of views expressed by the various High Courts and the Board, that the question whether the Income‑tax Officer was justified in invoking the provisions of section 154 of the Act has to be seen.
The ambical order of assessment in this case was made on September 30, 1976. But, when the revision was made on April 18, 1977, there was no decision of this Court. It was only the Board's Circular that was available and under the Board's Circular October 14, 1965, it was enough for the assessee to transfer the excess reserve to the year in which the development rebate is claimed. Subsequently, the Board has taken a view that even to the subsequent year the reserve can be taken into. When there is a room for judicial difference of the view, and as a matter of fact, there is conflict of views among the various High Courts and the Board has taken a liberal view, we are of the view that the act of the Income‑tax Officer to have recourse to .the provisions under section 154 of the Act to rectify the mistake is not justified as it is not on the, basis of the decision of this Court. The Income‑tax Officer has initiated rectification proceedings and he has passed the order of rectification even before the decision rendered by this Court. Therefore, when the mistake was not apparent and the nature of the question is such that it has generated so much of conflict of views among the various High Courts and when there is possibility of more than one view, we are of opinion that the Income‑tax Officer was not justified in invoking the provisions of section 154 of the Act to rectify the mistake on the basis that the mistake was apparent on the face of the records. In the view we have taken that the Income‑tax officer has no jurisdiction to invoke the provisions of section 154 of the Act, it is unnecessary to consider the question on the merits of the case. We are, therefore, of the view that the conclusion of the Tribunal can be justified on the ground that the rectification made by the Income‑tax Officer, for the, assessment year 1972‑73 was not justified in law. In this view of the matter, we answer the question of law referred to us in the affirmative and against the Revenue. However, there will be no order as to costs.
M.B.A./389/FCReference answered.