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PETITIONER: COMMISSIONER OF INCOME TAX, DELHI CENTRAL

       Vs.

RESPONDENT: MODI SPINNING AND WEAVING MILLS CO. LTD.

DATE OF JUDGMENT26/10/1990

BENCH: PUNCHHI, M.M. BENCH: PUNCHHI, M.M. AGRAWAL, S.C. (J)

CITATION:  1991 AIR 2033            1990 SCC  Supl.  (2) 461  JT 1991 (1)    29

ACT:     Income  Tax Act,  1922--Section 10(2)(vib), Proviso  (b) and  CBDT Circular dated October 14, 1965 Explanations  (a), (b)  and  (c) Allowance of development rebate on  plant  and machinery--Entitlement to by assessee.

HEADNOTE:     In  Commissioner  of Income Tax,  Madras  v.  Veeraswami Nainar  &  9rs., 55 ITR 35, the Madras High Court  took  the view that the development rebate reserved should be made  at the time of making up the Profits and Loss Account, and this was affirmed by this Court in Indian Overseas Bank’s Ltd. v. Commissioner  of Income Tax, 77 ITR 512. A  distinction  was drawn between development rebate reserve and other  reserves createable  under the Companies Act and the Income  Tax  Act and it was required to be separately created.     Consequent  to  this  decision it was  noticed  that  an important circuit of the Central Board of Direct Taxes dated October,  4, 1965 was unwittingly mowed down. This  circular gave  the Board’s Explanation three paragraphs (a), (b)  and (c)  regarding the position for creation  statutory  reserve for allowance of development rebate.     A  spate  of litigation ensued and some  of  the  taxing authorities,  relying on the Indian Overseas Bank’s case  in some  cases, took revitional and rectificatory actions,  and these reached various High Courts.     The  Gujarat High Court in Surat Textiles Mills Ltd.  v. Commissioner  of Income-tax Gujarat, 80 I.T.R. 1  opted  for the  narrow  view in assuming that all  the  3  Explanations contained  in  the 1965 Circular stood wiped out  by  Indian Overseas Bank’s case.     The  Central Board of Direct Taxes, therefore, took  the step  of  withdrawing in the year 1972  the  Circular  dated October 14, 1965 to the extent it stood superseded by  deci- sion  in  Indian Overseas Bank’s case.  Other  High  Courts, however, took a broader view to the effect that  Explanation contained  in  para  (a) only was done  away  with  by  this Court’s  decision  in Indian Overseas Bank’s case  and  that contained in paras (b) and (c) were still alive. 462     On  account of the aforesaid difference of  opinion,  it was  represented to the Board that the earlier  instructions

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dated  October 14, 1965 represented the correct position  of law and that the withdrawal to the extent it was presumed to be overruled by the decision in Indian Overseas Bank’s  case had created unnecessary hardships to the assessees.     In the instant appeal the question, whether the respond- entassessee  was entitled to allowance rebate on  the  plant and machinery after 1.1.1958, after due compliance with  the provisions  of  proviso  (b) to section  10(2)(vib)  of  the Income  Tax Act, 1922 was answered by the Division Bench  of the  Allahabad  High  Court in favour of  the  assessee  and against the Revenue. The Revenue appealed to this Court. Dismissing the appeal, this Court,     HELD:  1. The Board itself had clarified the  matter  by Circular No. 189 dated 30th January, 1986. It states to have re-examined  the  issue  involved coming to  the  view  that except  the clarification contained in Explanation para  (a) which  stood  superseded by the decision of  this  Court  in Indian  Overseas  Bank’s case, the  clarification  given  in paragraphs (b) and (c) hold good. [465D]     2.  The  Board  itself has opted for  the  broader  view expressed  in the matter in the,Tata Iron and  Steel  Compa- nies’  case and other cases. There is, therefore, no  reason to  do  the exercise of taking any side of  the  two  views. [465E]     3.  It is undisputed that the Board’s view is  not  only valid  under  the  new Income Tax Act of 1961,  but  to  the Indian income-Tax Act, 1922 as well. [465F]     Commissioner of Income Tax, Madras v. Veeraswami  Nainar and Ors., 55 I.T.R. 35, affirmed.     Indian Overseas Bank Ltd. v. Commissioner of Income Tax, 77 I.T.R. 512, followed.     Surat  Textile Mills Ltd. v. Commissioner of  Income-Tax Gujarat, 80 I.T.R. 1, overruled. Veerabhadra Iron Foundary & Anr. v. Commissioner of Income 463 Tax,  69  I.T.R. 425; Tata Iron and Steel Co.  Ltd.  v.N.  C Upadhyaya, 96 I.T.R. 1 and The Commissioner of Income Tax v. Sardar Singh, 86ITR 387, approved.

JUDGMENT:     CIVIL  APPELLATE JURISDICTION: Civil Appeal No.  330  of 1976.     From  the  Judgment  and Order dated  13.3.1972  of  the Allahabad High Court in ITR No. 457 of 1968.     V.  Gauri Shankar, S. Rajappa and Ms. A. Subhashini  for the petitioner.     Harish N. Salve, A.T. Patra, Ms. Bina Gupta, Ms.  Monika Mohil, Rajiv Shakhdhar and Praveen Kumar for the Respondent. The following Order of the Court was delivered:     This  appeal  is  directed against  the  Judgment  dated 13.3.1972  made  by a Division Bench of the  Allahabad  High Court  in Income Tax Reference No. 457 of 1968 deciding  the following  question  of law in favour of  the  assessee  and against the Revenue. "Whether  on the facts and in the circumstances of the  case the  assessee can be said to have complied with  the  provi- sions of proviso (b) to section 10(2)(vib) of the Income Tax Act,  1922  and  was, therefore, entitled  to  allowance  of development  rebate  on the plant  and  machinery  installed after 1.1. 1958."     It would be unnecessary to detail out facts which led to the  framing of the question and the answer given. The  dis-

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pute  centered  around  the timing of the  creation  of  the reserve known as the development rebate reserve. In  Commis- sioner of Income Tax, Madras v. Veeraswami Nainar & Ors., 55 ITR p. 35, the Madras High Court took the view that develop- ment rebate reserve should be made at the time of making  up the Profits and Loss Account. This view was affirmed by this Court  in  Indian Overseas Bank’s Ltd.  v.  Commissioner  of Income Tax, 77 ITR 5 12.. Both cases arose under the  Indian Income Tax Act, 1922. Distinction was drawn between develop- ment  rebate reserve and other reserves creatable under  the Companies Act and the Income Tax Act and it was required  to be separately created. On appearance of the Indian  Overseas Bank’s case on the scene it appears that an 464 important circular of the Central Board of Direct Taxes  was unwittingly mowed down. That circular was of October 4, 1965 and  stands reproduced in circular No. 189 dated 30th  Janu- ary,  1976 at page 90 in 102 Income Tax Reports  (Statutes). The  Board’s  Explanation with regard to  the  position  for creation  of statutory reserve for allowance of  development rebate was in these terms:       (a)  In the case of certain  industrial  undertakings, particularly  those in which there is Government  participa- tion either by way of capital, loan or guarantee, and  where there are certain obligations by law or agreement about  the maintenance of reserve for development purposes, the  devel- opment rebate reserve may be treated as included in the said reserve  though  not specifically created as  a  development rebate reserve.        (b) In a case where the total income computed  before allowing the development rebate is a loss there was no legal obligation  to create any statutory reserve in that year  as no  development  rebate would actually be  allowed  in  that year.        (c)  Where there was no deliberate  contravention  of the  provisions, the Income-tax Officer may condone  genuine deficiencies  subject  to the same being made  good  by  the assessee though operation of adequate additional reserve  in the current year books in which the assessment is framed.     This  led to a spate of litigation, pressing the  Indian Overseas  Bank’s case some taxing authorities in some  cases took  revisional  and rectificatory actions.  These  reached various High Courts. The Gujarat High Court in Surat Textile Mills  Ltd.  v.  Commissioner  of  Income-tax  Gujarat,   80 I.T.R.P.  1  opted for what may be called a narrow  view  in assuming  that  besides  Explanation  (a)  reproduced  above explanations  (b)  and (c) as well too stood  wiped  out  by Indian  Overseas  Bank’s case.. In these  circumstances  the Central  Board of Direct Taxes took the step of  withdrawing in the year 1972 the Circular dated October 14, 1965 to  the extent  it stood superseded by decision in  Indian  Overseas Bank’s  case and the judgment of the Gujarat High  Court  in Surat Textile Mills Ltd. v. Commissioner of Income Tax.     Other  High  Courts took what may be  called  a  broader view. The trend of reasoning in those cases was that  expla- nation  (a) only was done away with by this Court in  Indian Overseas Bank’s case but explanations (b) and (c) were still alive. In this connection Veerabha- 465 dra  Iron Foundary & Anr. v. Commissioner of Income Tax,  69 I.T.R.  425; Tata Iron and Steel Co. Ltd. v.N.C.  Upadhyaya, 96  I.T.R.p. 1 and The Commissioner of Income Tax v.  Sardar Singh, 86 ITR 387 (Punjab) may be seen.     In the face of such difference of opinion, it was repre- sented to the Board that earlier instructions dated  October

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14,  1965 represented the correct position of law  and  that the withdrawal to the extent it was presumed to be overruled by  this  Court in Indian Overseas Bank’s case  had  created unnecessary hardship to the assessees.     It  appears  that the instant case, out  of  which  this appeal  has arisen, was decided by the Allahabad High  Court taking  the  broader view, Special leave was sought  by  the Revenue  from  this Court on the question of  resolving  the conflict between the two views. Leave was granted at a  time when the Board itself had clarified the matter vide Circular No. 189 dated 30th January, 1986 of which hint has been left earlier.  The  Board states to have  re-examined  the  issue involved  coming to the view that except  the  clarification given in paragraph (a) above, which stood superseded by  the decision  of this Court in Indian Overseas Bank’s case,  the clarifications given in paragraphs (b) and (c) quoted  above hold good. It can thus legitimately be stated that the Board has  itself  opted for the view expressed in Tara  Iron  and Steel Companies’ case and other cases of the kind taking the broader view in the matter. When the Board has itself  opted for that view and that view is being followed by Income  Tax authorities  concerned, we see no reason to do the  exercise of taking any side of the two views and leave the matter  at that.  It  is undisputed that the Board’s view is  not  only valid under the new Income Tax Act of 1961 but to the Indian Income Tax Act, 1922 as well.     For the foregoing discussions this appeal fails and  the judgment of the High Court is left untouched. In the circum- stances of the case there will be no order as to costs. V.P.R.                                         Appeal   dis- missed. 466