B.P.Jeevan Reddy, C.J. - (1.) Under Section 256(2) of the Income-tax Act, 1961, the Tribunal has stated the following question : "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that the transfer of development rebate reserve to the capital account did not amount to distribution of profits within the meaning of Section 34(3)(a) of the Act ?"
(2.) The assessee is a Hindu undivided family. The assessment year concerned is 1967-68. For this assessment year, the assessee claimed development rebate of Rs. 42,178. He created a development rebate reserve as required by Section 33 read with Section 34(3)(a) of the Act. The development rebate was, accordingly, allowed. However, in the course of the assessment proceedings for the assessment year 1972-73, the Income-tax Officer found that the development rebate reserve of Rs. 42,178 created during the previous year relevant to the assessment year 1967-68 has been transferred to the capital account within a period of eight years from the creation of such reserve. The Income-tax Officer was of the opinion that such transfer amounts to violation of the condition prescribed in Section 34(3)(a) and, accordingly, he rectified the assessment for the assessment year 1967-68 by passing an order under Section 154 of the Income-tax Act. The appeal preferred by the assessee was dismissed by the Appellate Assistant Commissioner whereupon the assessee went to the Tribunal by way of further appeal. The Tribunal held that the transfer of development rebate reserve to capital account does not amount to violation of any of the conditions prescribed in Section 34(3)(a) and, therefore, the Income-tax Officer was wrong in rectifying the assessment for the year 1967-68. Thereupon, the Revenue has applied for and obtained this reference.
(3.) Clause (a) of Sub-section (3) of Section 34 reads as follows : "(3)(a) The deduction referred to in Section 33 shall not be allowed unless an amount equal to seventy-five per cent. of the development rebate to be actually allowed is debited to the profit and loss account of [ any previous year in respect of which the deduction is to be allowed under subsection (2) of that section or any earlier previous year (being a previous year not earlier than the year in which the ship was acquired or the machinery or plant was installed or the ship, machinery or plant was first put to use)] and credited to a reserve account to 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 (ii) for remittance outside India as profits or for the creation of any asset outside India : Provided that this clause shall not apply where the assessee is a company, being a licensee within the meaning of the Electricity (Supply) Act, 1948 (54 of 1948), or where the ship has been acquired or the machinery or plant has been installed before the first day of January, 1958 : Provided further that where a ship has been acquired after the 28th day of February, 1966, this clause shall have effect in respect of such ship as if for the words 'seventy-five', the word 'fifty' had been substituted.";