DIVAN, J. - (1.) IN this case, at the instance of the Revenue, the following two questions have been referred to us by the Tribunal : "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee cannot be denied the benefit of carry forward of development rebate ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in directing that the ITO should determine the development rebate and such development rebate should be allowed to be carried forward and set off when profits are available and if, in that year, the assessee fulfils the necessary requirements for such allowance like creation of adequate reserve ?"
(2.) IN the instant case we are concerned with the asst. year 1962 63. The assessee before us is a limited company and at the relevant time was running a textile mill at Combay in the State of Gujarat. The accounting period of the assessee for the asst. year 1962 63 was the calendar year 1961 ending on December 31, 1961. For this particular year the assessee claimed that a sum of Rs. 1,26,223 should be considered as the development rebate allowable to it under the provisions of S. 33 of the IT Act, 1961. The assessee had not created a reserve as contemplated by S. 34(3) of the Act of 1961. The ITO declined to entertain the claim on the ground that the assessee had not complied with the conditions of admissibility under S. 34(3) of the Act of 1961. Before the AAC the same contention was urged as regards the claim for development rebate. This appellate officer agreed with the views of the ITO and held that, as the assessee had not satisfied the preconditions mentioned in S. 34(3), the assessee could not claim the development rebate. The matter was carried in further appeal before the Tribunal by the assessee and so far as development rebate was concerned, the contention of the assessee was that the ITO should have determined the development rebate and allowed the assessee to carry forward the development rebate to subsequent years as in the relevant previous year the assessee had incurred a loss in its business. The Tribunal found that in the relevant year the business income of the assessee was Rs. 1,31,169, but it was taken at nil in view of the set off of earlier years' losses to the extent of the business income. The return of income as filed by the assessee had shown a loss of Rs. 1,53,300. The Tribunal held that though development rebate could not be allowed in asst. year 1961 62, the assessee could not be denied the benefit of carry forward of such development rebate which should be calculated in the course of assessment for the asst. year 1961 62 but should be carried forward and set off in any subsequent year as permitted by law when the assessee fulfilled the necessary requirements for allowance like creation of adequate reserve. Thereafter, at the instance of the Revenue, the two questions hereinabove set out have been referred to us for our opinion. In order to understand the rival contentions and in order to read the remarks in the different decided cases on the point of development rebate in their proper perspective, it is necessary to refer to the historical background of development rebate. Prior to April 1, 1955, under the Indian IT Act, 1922 (hereinafter referred to "the Act of 1922"), there was no provision for development rebate. The Finance Act, 1955, introduced w.e.f. April 1, 1955, cl. (vib) in S. 10(2) of the Act of 1922 and made provision for development rebate. Under the scheme of S. 10(2) provision was made for different types of allowances which were permitted in the computation of income from business and under newly added S. 10(2)(vib), in respect of machinery or plant being new, which had been installed after the 31st day of March, 1954, and which was wholly used for the purposes of the business carried on by the assessee, a sum by way of development rebate in respect of the year of installation equivalent to twenty five per cent. of the actual cost of such machinery or plant to the assessee was to be allowed as a deduction in the computation of the income from business for that particular year. The proviso to S. 10(2)(vib) required that no allowance for development rebate could be made unless the particulars prescribed for the purpose of cl. (vi), that is, for depreciation allowance, had been furnished by the assessee in respect of such machinery or plant. It may be noted that this was the only provision which came into effect from April 1, 1955. There was no provision in S. 10(2)(vib) as originally enacted in 1955 for carry forward or for any setting up of reserve. This provision continued till 1958 when the Finance Act, 1958, substituted w.e.f. April 1, 1958, an entirely new clause for the clause as it existed from April 1, 1955, onwards. The new cl. 10(2)(vib) provided for development rebate not only in respect of new machinery or plant but also in respect of new ship acquired after the 31st day of March, 1954. The percentage of development rebate was forty per cent. in the case of a new ship if purchased after the 31st day of December, 1957, and in the case of a ship acquired before the 1st day of January, 1958, and in the case of any machinery or plant, twentyfive per cent. of the actual cost of the ship or machinery or plant to the assessee. Under the new cl. (vib) of S. 10(2), Explanation 1 was added by which it was provided that where the total income of the assessee for the year of acquisition or installation (the total income for this purpose being computed without making any allowance for development rebate) was nil or was less than the full amount of the development rebate, calculated at the rate applicable thereto under cl. (vib), the sum to be allowed by way of development rebate for that year under cl. (vib) was to be only such amount as was sufficient to reduce the said total income to nil ; and the amount of the development rebate, to the extent to which it had not been allowed as aforesaid, was to be carried forward to the following year, and the development rebate to be allowed for the following year was to be such amount as was sufficient to reduce the total income of the assessee for that year, computed in the manner aforesaid, to nil, and the balance of the development rebate, if any, still outstanding was to be carried forward to the following year and so on, so, however, that no portion of the development rebate was to be carried forward for more than eight years. By Explanation 2, it was provided that where in any year development rebate was to be allowed in accordance with the provisions of Explanation 1, in respect of ships acquired or machinery or plant installed in more than one year, the development rebate was to be allowed as provided thereunder. We are not concerned with the provisions of that Explanation in the course of this judgment. The proviso to S. 10(2)(vib) laid down that no allowance under cl. (vib) was to be made unless, (a) the particulars prescribed for the purpose of cl. (vi), that is, for depreciation allowance, had been furnished by the assessee in respect of the ship or machinery or plant ; and (b) except where the assessee was a company being a licensee within the meaning of the Electricity (Supply) Act, 1948, or where the ship had been acquired or the machinery or plant had been installed before the 1st day of January, 1958, an amount equal to seventy five per cent. of the development rebate to be actually allowed was debited to the profit and loss account of the relevant previous year and credited to a reserve account to be utilised by him during a period of ten years, next following for the purpose of the business of the under taking, except (i) for distribution by way of dividends or profits, or (ii) for remittance outside India as profits or for the creation of any asset outside India, and, moreover, if any such ship, machinery or plant was sold or otherwise transferred by the assessee to any person other than the Government at any time before the expiry of ten years from the end of the year in which it was acquired or installed, any allowance made under cl. (vib) was to be deemed to have been wrongly allowed for the purpose of the Act.
(3.) IN 1961 certain further changes were made in S. 10(2)(vib) w.e.f. 1st April, 1960, by the Taxation Laws (Amendment) Act, 1960. It was provided by this amendment that no allowance under cl. (vib) was to be made in respect of any machinery or plant which consisted of office appliances or road transport vehicles. When the IT Act, 1961, was enacted the provisions of S. 10 (2)(vib) were divided between two sections, namely, S. 33 and S. 34. Sec. 33 of the new Act provided by Sub S. (1) what was originally provided for by cl. (vib). Sub s. (2) of S. 33 is equivalent to Explanation 1 to cl. (vib). Explanation to Sub S. (2) of S. 33 is equivalent to Explanation 2 to cl. (vib) of S. 10(2). Sub s. (3) of S. 33 provides for development rebate where a scheme of amalgamation had been brought into force and a company under such scheme of amalgamation is sold or otherwise transferred to the company formed in pursuance of the predecessor's amalgamation with that company, any ship, machinery or plant in respect of which development rebate has been allowed to the predecessor under sub S. (1) of S. 33 is also transferred. We are not concerned in the course of this judgment with the provisions of Sub S. (2). Sub s. (4) of S. 33 provides for the succession of a firm by a company in the business carried on by the firm and as a result of such succession the firm sells or otherwise transfers to the company any ship, machinery or plant, which is the subject matter of development rebate, allowed to the firm. Sec. 34 is on the same terms as the proviso to S. 10(2)(vib) and it lays down conditions for depreciation allowance and development rebate. Provisions as to development rebate are to be found in S. 34(1) and S. 34 (2). It may be pointed out that under the IT Act, 1961, the carry forward can be permitted for a period of eight years only immediately succeeding the assesment year in which the ship was acquired and the machinery or plant was installed or immediately preceding the previous year, as the case might be, and in the same manner it was provided that the reserve which was set up for the purpose of getting benefit of the allowance of development rebate should be utilised by the assessee during the period of eight years next following but, in other respects, the restrictions remain as they were under S. 10(2)(vib) of the 1922 Act. Sec. 34(3)(b) of the Act of 1961 provides that if any ship, machinery or plant is sold or otherwise transferred by the assessee to any person at any time before the expiry of eight years from the end of the previous year in which it was acquired or installed, any allowance made for development rebate under S. 33 or under the corresponding provisions of the Indian IT Act, 1922, in respect of that ship, machinery or plant shall be deemed to have been wrongly made for the purposes of the Act of 1961, and the provisions of Sub S. (5) of S. 155 regarding rectification shall apply accordingly. In 1966, by the Finance Act, 1966, and Explanation was added ; S. 9 of the Finance Act, 1966, provided that the following Explanation shall be, and shall be deemed always to have been, inserted, in S. 34, namely : "Explanation. For the removal of doubts, it is hereby declared that the deduction referred to in s. 33 shall not be denied by reason only that the amount debited to the profit and loss account of the relevant previous year and credited to the reserve account aforesaid exceeds the amount of the profit of such previous year (as arrived at without making the debit aforesaid) in accordance with the profit and loss account." ;