http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 9  

PETITIONER: SHUBHLAXMI MILLS LIMITED

       Vs.

RESPONDENT: ADDITIONAL COMMISSIONER OF INCOME-TAX,GUJARAT

DATE OF JUDGMENT28/03/1989

BENCH: PATHAK, R.S. (CJ) BENCH: PATHAK, R.S. (CJ) MISRA RANGNATH

CITATION:  1989 AIR 1406            1989 SCR  (2)  86  1989 SCC  (2) 465        JT 1989 (2)     1  1989 SCALE  (1)724

ACT:             Income Tax Act, 1961--S. 33(1) read with S. 34(3)(a) a nd         Explanation  thereto--Creation  of  a reserve  fund  in  t he         relevant previous year is a condition precedent for claimi ng         deduction on account of ’development rebate’.

HEADNOTE:             Sub-s. (1) of S. 33 of the Income Tax Act, 1961 provid es         that subject to the provisions of s. 34 thereof  developme nt         rebate  may  be claimed as a deduction in respect of  a  n ew         machinery or plant. Clause (a) of sub-s. (3) of s. 34 stip u-         lates that the said deduction shall not be allowed unless an         amount  equal  to 75 per cent of the development  rebate is         debited  to  the  profit and loss account  of  the  releva nt         previous  year  and credited to a reserve account;  and  t he         Explanation thereto provides that the deduction shall not be         denied  by  reason only that the amount so credited  to  t he         reserve  account exceeded the amount of the profit  of  su ch         previous year.             The appellant-assessee which had a textile mill  claim ed         a sum as development rebate for the assessment year 1962-6 3.         The Income Tax Officer rejected the claim on the ground th at         the  assessee had not created a reserve as  contemplated by

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 9  

       sub-s. (3) of s. 34 and his order, on appeal, was upheld by         the  Assistant Commissioner. In second appeal, the claim by         the  assessee found favour with the Appellate Tribunal;  b ut         on  a reference made by it at the instance of  the  Revenu e,         the  High Court held that the assessee had failed to  comp ly         with  the conditions of sub-s. (3) of s. 34.  The  appella nt         contended that the view taken by the High Court was  erron e-         ous and that it was not necessary that a reserve should ha ve         been created in the previous year.         Dismissing the appeal,             HELD:  In  order to claim the deduction  on  account of         development rebate under sub-s. (1) of s. 33 it is obligat o-         ry that the debit entries in the profit and loss account a nd         the credit entry in a reserve account should be made in  t he         relevant previous year in which the         87         machinery  or  plant is installed or first put to  use.  T he         development  rebate  contemplated  by sub-s. (1)  of  s. 33         cannot  be allowed as a deduction unless a  reserve  accou nt         has been created in the previous year in which the install a-         tion or first use occurs. Any doubt in so reading the prov i-         sions  because of a want or insufficiency of profit in  su ch         previous year has been removed by the Explanation to  clau se         (a) of sub-s. (3) of s. 34. [91D-E]             What  is contemplated is the creation of a Reserve  Fu nd         in the relevant previous year irrespective of the result of         the  profit and loss account disclosed by the books  of  t he         assessee. Mere book entries will suffice for creating such  a         Reserve Fund. The debit entries and the entries relating to         the Reserve Fund have to be made before the profit and  lo ss         account is finally drawn up. That is a condition for  secu r-         ing the benefit of development rebate. [89E-F]             West Laikdihi Coal Co. Ltd., Calcutta v. Commissioner of         Income-tax, West Bengal 11, [1973] 87 ITR 501;  Commission er         of  Income-tax,  Delhi Central v. Modi  Spinning  &  Weavi ng         Mills  Co. Ltd., [1973] 89 ITR 304 and Indian Overseas  Ba

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 9  

nk         Ltd.  v. Commissioner of Income-tax, Madras, [1970]  77  I TR         512, distinguished.             Additional  Commissioner of income-tax v. Vishnu  Indu s-         trial  Enterprises, [1980] 122 ITR 919 and  Commissioner of         Income-tax  v. U.P. Hotel and Restaurants Ltd.,  [1984]  1 45         ITR 598, overruled.             Dodballapur  Spinning  Mills  Ltd.  v.  Commissioner of         Incometax,  Karnataka-2  and  Anr., [1980] 121  ITR  94  a nd         Indian  Oil Corporation Ltd. v. S. Rajagopalan,  Income  T ax         Officer, Companies Circle H(I) Bombay and Others, [1973] 92         ITR 241, referred to.

JUDGMENT:             CIVIL  APPELLATE JURISDICTION: Civil Appeal No. 47  (N T)         of 1975.             From  the  Judgment  and Order dated  3.10.1974  of  t he         Gujarat High Court in I.T. Reference No. 30 of 1973.         Bishambar Lal for the Appellant.         V.S. Desai, B. Rao and Ms. A. Subhashini for the Responden t.         M.B. Lal for the Intervener. (N.P.)         88         The Judgment of the Court was delivered by             PATHAK,  C.J. This appeal by certificate granted by  t he         High  Court of Gujarat is directed against the  judgment of         the High Court on the following questions referred to it by         the Appellate Tribunal:              "1.  Whether, on the facts and in the circumstances of         the case, the Tribunal was fight in holding that the  asse s-         see cannot be denied the benefit of carry forward of  deve l-         opment rebate?               2.  Whether, on the facts and in the circumstances of         the  case, the Tribunal was justified in directing that  t he         Income-tax  Officer should determine the development  reba te         and such development rebate should be allowed to be  carri ed         forward  and set off when profits are available and  if, in         that  year, the assessee fulfils the necessary  requiremen ts         for such allowance like creation of adequate reserve?"             The assessee is a limited Company. It has a textile mi ll

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 9  

       at  Cambay in the State of Gujarat. For the assessment  ye ar         1962-63, the previous year being the calendar year 1961, t he         assessee  claimed that a sum of Rs. 1,26,233 should  be  a l-         lowed  as development rebate under s. 33 of  the  Income-t ax         Act, 1961. The Income-tax Officer rejected the claim on  t he         ground  that the assessee had not created a reserve as  co n-         templated  by  sub-s. (3) of s. 34 of  the  Income-tax  Ac t,         1961.  The  Appellate Assistant Commissioner of  Income  T ax         dismissed the appeal filed by the assessee. In second appe al         the  claim by the assessee found favour with the Income  T ax         Appellate  Tribunal.  At  the instance of  the  Revenue  t he         questions set forth earlier were referred to the High  Cou rt         for  its opinion. The High Court has answered the  questio ns         in  favour of the Revenue and against the assessee.  It  h as         held that the assessee had failed to comply with the  cond i-         tions of sub-s. (3) of s. 34 of the Act.             In this appeal by the assessee it is urged that the vi ew         taken  by  the High Court is erroneous and that  it  is  n ot         necessary  that a reserve should be created in the  previo us         year during which the machinery or plant was installed.             Sub-s. (1) of s. 33 provides that development rebate m ay         be  claimed as a deduction in respect of a new machinery or         plant installed         89         after  31 March, 1954 which is owned by the assessee and is         wholly  used for the purposes of the business carried on by         him,  and that the allowance of the deduction is subject to         the  provisions  of s. 34. CI. (a) of sub-s. (3)  of  s. 34         provides  that the deduction referred to in s. 33 shall  n ot         be  allowed  unless an amount equal to 75 per  cent  of  t he         development rebate to be actually allowed is debited to  t he         profit  and loss account of the relevant previous  year  a nd         credited to a reserve account to be utilised by the assess ee         during  a period of eight years next following for the  pu r-         poses  of  the business of the undertaking, other  than  f

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 9  

or         distribution  by way of dividends or profits or  for  remi t-         tance  outside India as profits or for the creation  of  a ny         asset outside India. The Finance Act, 1966 added an Explan a-         tion  to  this  clause. The Explanation  declared  that  t he         deduction referred to in s. 33 could not be denied by reas on         only that the amount debited to the profit and loss  accou nt         of the relevant previous year and credited to the  aforesa id         reserve  account exceeded the amount of the profit  of  su ch         previous  year  (as arrived at without  making  the  depos it         aforesaid)  in accordance with the profit and loss  accoun t.         The Explanation was inserted with retrospective effect  fr om         the  commencement  of the Act. Before  the  Explanation  w as         enacted a difference of opinion had existed between the Hi gh         Courts  on  the question whether the  statute  required  t he         creation of a reserve in the previous year in which the  n ew         machinery  or  plant was installed, when the amount  of  t he         profit of that previous year was either nil or  insufficie nt         for  the purposes of enabling the creation of such  reserv e.         It  is not necessary to refer to these cases, for  it  see ms         clear  to  us  that the Explanation, which  applied  to  t he         assessment  year under consideration before us, removes  t he         doubt altogether. What is contemplated is the creation of  a         Reserve  Fund in the relevant previous year irrespective of         the  result of the profit and loss account disclosed by  t he         books  of the assessee. Mere book entries will  suffice  f or         creating  such  a Reserve Fund. The debit  entries  and  t he         entries relating to the Reserve Fund have to be made  befo re         the  profit and loss account is finally drawn up. That is  a         condition for securing the benefit of development rebate a nd         if  that condition is not satisfied we fail to see  how  t he         deduction on account of development rebate can be claimed at         all.             Learned counsel for the assessee relies on West Laikdi

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 9  

hi         Coal Co. Ltd., Calcutta v. Commissioner of Income-tax,  We st         Bengal 11, [1973] 87 ITR 501 and Commissioner of Income-ta x,         Delhi  Central  v. Modi Spinning & Weaving Mills  Co.  Ltd .,         [1973] 89 ITR 304. Those were cases decided under the prov i-         sions  of the Indian Income-tax Act, 1922 and there  was no         Explanation such as we have before us. Re-         90         ference  was  made to the decision of this Court  in  Indi an         Overseas  Bank  Ltd. v. Commissioner of  Income-tax  Madra s,         [1970]  77 ITR 512. In that case, however, the question  w as         whether  the creation of a reserve in compliance with s. 17         of the Banking Companies Act constituted sufficient  compl i-         ance with the requirements of proviso (b) to s. 10(2)  (vi b)         of the Indian Income-tax Act, 1922. Reference has also  be en         made to Additional Commissioner of Income-tax v. Vishnu  I n-         dustrial Enterprise, [1980] 122  ITR 919. We do not find it         possible to agree with the view taken by the Allahabad  Hi gh         Court in that case that the development reserve need not be         created  in the relevant previous year during which the  n ew         machinery or plant is installed, and that a profit must ha ve         been earned during the previous year to permit the  creati on         of  a reserve fund. We think that the Explanation is  clea r,         and  that there can be no doubt that it envisages the  cre a-         tion  of  a Reserve Fund notwithstanding that  there  is no         profit or insufficient profit from which such reserve may be         provided.  To contemplate otherwise would be to  negate  t he         entire  scheme incorporated in s. 33 read with s. 34 of  t he         Act.  For the same reason we are unable to affirm  the  vi ew         taken  by  the  Allahabad  High  Court  in  Commissioner of         Income-tax  v. U.P. Hotel and Restaurants Ltd.,  [1984]  1 45         ITR 598. Our attention has been drawn by the learned couns el         for  the  assessee  to Dodballapur Spinning  Mills  Ltd. v.         Commissioner of Income-tax, Karnataka-2 and Anr., [1980] 1 21

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 9  

       ITR 94 where reference has been made to a circular issued by         the  Central Board of Direct Taxes dated 14th October,  19 65         and to a subsequent circular dated 30 January, 1976. We ha ve         carefully considered the matter and we do not think that t he         circulars affect the true position in law.             On behalf of the assessee reliance was placed on  Indi an         Oil Corporation Ltd. v. S. Rajagopalan, Income-tax  Office r,         Companies Circle II (1) Bombay and others, [1973] 92 ITR 2 41         where  the  Bombay  High Court has held that  there  was no         obligation  on the assessee to create a reserve in the  ye ar         of installation if there was no taxable income in the  rel e-         vant  year. Some of the submissions addressed in  that  ca se         may  be  set forth in detail. A powerful  argument  was  a d-         dressed  by  learned  counsel for the assessee  and  it  w as         pointed out that the expression "shall be allowed" in clau se         (a)  of sub-s. (1) of s. 33 indicated that  the  developme nt         rebate is to be assessed and thereupon it becomes allowabl e,         and  that sub-s. (2) of s. 33 which provides for the  allo w-         ance  of  development rebate mentions that the  sum  "to be         allowed"  by  way of development rebate for  the  assessme nt         year  shall  be only such amount as shall be  sufficient to         reduce the total assessable income to nil and the amount of         development rebate to the extent to which         91         it  has  not been allowed shall be carried  forward  to  t he         following  assessment  years  for  eight  subsequent  year s.         Reference  was  also  made to the  distinction  between  t he         expressions  "to be allowed" and "actually allowed" used in         the relevant provisions. It was also argued that the  util i-         sation by the assessee of the development rebate reserve f or         the purposes of the business of the undertaking contemplat ed         the existence of an actual fund which could be utilised  f or         the  purposes  of the business, and that an  illusory  deb it         entry in the profit and loss account and an illusory  cred it

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 9  

       entry  in  the development rebate reserve account  were  n ot         contemplated.  The  High Court accepted the  submission  a nd         concluded that it was not mandatory that the necessary deb it         and  credit  entries  must be made in  the  assessment  ye ar         following the year of installation in which the  developme nt         rebate  is  determined under s. 33.  Having  considered  t he         matter  at some length in the present case, it seems  to us         clear  that  in order to claim the deduction on  account of         development rebate under sub-s. (1) of s. 33 it is obligat o-         ry that the debit entries in the profit and loss account a nd         the credit entry in a reserve account should be made in  t he         relevant  previous year in which the machinery or  plant is         installed  or first put to use. The development rebate  co n-         templated  by  sub-s. (1) of s. 33 cannot be  allowed  as  a         deduction  unless a reserve account has been created in  t he         previous year in which the installation or first use occur s.         Any doubt in so reading the provisions because of a want or         insufficiency  of  profit  in such previous  year  has  be en         removed by the Explanation to clause (a) of sub-s. (3) of s.         34.  The  significance of the words  "actually  allowed" in         clause (a) of sub-s. (3) of s. 34 has been considered by t he         High  Court  in  the judgment under appeal, and  we  are in         entire  agreement with the view taken by the High  Court in         that’ regard.             A number of other cases have also been placed before us         by  learned counsel for the assessee, but as they deal  wi th         the  point on the basis of considerations substantially  t he         same as have been referred to in the cases mentioned  earl i-         er, we think it unnecessary to deal with them specifically .             Upon the aforesaid considerations we hold that the  Hi gh         Court  is right in answering the questions in favour of  t he         Revenue and against the assessee.         In the result, the appeal is dismissed but there is no ord er         as to costs.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 9  

       H.L.C.                                          Appeal  di s-         missed.         92