- (1.) JUDGMENT.- 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/ 68 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 provisions of proviso (b) to S. 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.
(2.) It would be unnecessary to detail out facts which led to the framing of the question and the answer given. The dispute centered around the timing of the creation of the reserve known as the development rebate reserve. In Commr. of Income-tax, Madras v. Vetraswami Nainar, 55 ITR 35 : (AIR 1965 Mad 533), the Madras High Court took the view that development 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 Ltd. v. Commr. of Income-tax, 77 ITR 512 : (AIR 1970 SC 1530). Both cases arose -under the Indian Income-tax Act, 1922. Distinction was drawn between development 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 important circular of the Central Board of Direct Taxes was unwittingly moved down. That circular was of October 4, 1965 and stands reproduced in Circular No. 189 dated 30th January, 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 participation 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 development 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 through creation of adequate additional reserve in the current year's books in which the assessment is framed.
(3.) This led to a spate of litigation, pressing the Indian Overseas Bank's case (AIR 1970 SC 1530) 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. Commr. of Income-tax, Gujarat (1971) 80 ITR 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. Commr. of Income-tax.;