Sankar Prasad Mitra, J. - (1.) This is a reference under Section 66(1) of the Indian Income-tax Act, 1922. The question is whether the assessee, had to create a reserve fund out of its profits to be eligible for development rebate, under Section 10(2)(vib) of the Indian Income-tax Act, 1922.
(2.) Let us, therefore, at the outset, set out the relevant provisions of the Act. These provisions are : " 10. Business.--(1) The tax shall be payable by an assessee under the head ' Profits and gains of business, profession or vocation ' in respect of the profits or gains of any business, profession or vocation carried on by him. (2) Such profits or gains shall be computed after making the following allowances, namely :--. .... (vib) in respect of. .... new machinery or plant installed after the 31st day of March, 1954, which is 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 the installation of the machinery or plant, equivalent to,--. .... (ii) in the case of machinery or plant installed before the 1st day of April, 1961, twenty-five per cent. and in the case of machinery or plant ins'talled after the 31st day of March, 1961, twenty per cent. of the actual cost of the machinery or plant to the assessee ; Explanation 1.--In the case of ..... machinery or plant installed after the 31st day of December, 1957, where the total income of the assessee for the year of .... installation (the total income for this purpose being computed without making any allowance under this clause) is nil or is less than the full amount of the development rebate calculated at the rate applicable thereto under this clause,-- (i) the sum to be allowed by way of development rebate for that year under this clause shall be only such amount as is sufficient to reduce the said total income to nil; and (ii) the amount of the development rebate, to the extent to which it has not been allowed as aforesaid, shall be carried forward to the following year, and the development rebate to be allowed for the following year shall be such amount as is 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 shall be carried forward to the following year and so on, so however, that no portion of the development rebate shall be carried forward for more than eight years. Explanation 2.-- Where in any year development rebate is to be allowed in accordance with the provisions of Explanation ) in respect of ......machinery or plant installed in more than one year, and the total income of the assessee for that year (the total income for this purpose being computed without making any allowance under this clause) is less than the aggregate of the amounts due to be allowed in respect of the assets aforesaid for that year, the following procedure shall be followed, namely :-- (i) the allowance under paragraph (ii) of Explanation 1 shall be made before any allowance under paragraph (i) of that Explanation is made ; and (ii) where an allowance has to be made under paragraph (ii) of Explanation 1 in respect of amounts carried forward for more than one year, the amount carried forward from an earlier year shall be allowed before any amount carried forward from a later year : Provided that no allowance under this clause shall be made unless- (a) the particulars prescribed for the purpose of Clause (vi) have been furnished by the assessee in respect of the .... machinery or plant; and (b) except where the assessee is a company, being a licensee within the meaning of the Electricity (Supply) Act, 1948. ... or the machinery or plant has 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 is 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 10 years next following for the purposes of the business of the undertaking, 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 if any such .... machinery or plant is sold or otherwise transferred by the assessee to any person other than the Government or for any consideration not connected with any amalgamation or succession referred to in Clause (vic) 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 this clause shall be deemed to have been wrongly allowed for the purposes of this Act: Provided further that no allowance under this clause shall be made in respect of any machinery or plant which consists of office appliances or road transport vehicles." The assessee in the instant reference derives income from coal mining. During the calendar years 1959 and 1960 (assessment years 1960-61 and 1961-62), the assessee had installed additional machinery and plant on which it claimed development rebate of Rs. 9,468 and Rs. 2,440, respectively. Profits shown in the profit and loss accounts for the respective years came to Rs. 41,663 and Rs. 76,476.75, respectively. In order to be eligible for the rebate, the assessee should have, under the above provisions of the Act, created a reserve of seventy-five per cent. of the amounts claimed as development rebate, that is, Rs. 7,101 and Rs. 1,830, respectively. No such reserve, however, was created. But the assessments for the relevant years ended in a loss. These assessments were as follows: Assessment year Assessed income of the year (without allowance of development rebate) Brought forward unabsorbed depreciation of the earlier years Balance of unabsorbed depreciation carried forward 1 2 3 4 Rs. Rs. Rs. 1960-61 27,070 19,725 87,955 1961-62 80,018 87,955 7,957 The Income-tax Officer held that no development rebate could be allowed " as the assessee did not create any reserve as per provisions of law." The Appellate Assistant Commissioner agreed with the Income-tax Officer's order.
(3.) Before the Tribunal, the assessee contended that there was no taxable income for the assessment years 1960-61 and 1961-62. There could, according to the assessee, be no debit to the profit and loss account for the purpose of creating the reserve in these years. The assessee further pointed out that as it was permissible to carry forward an unabsorbed development rebate under similar circumstances, it should be presumed that the creation of the reserve was not called for when the total income was nil or was a minus figure. The contention of the department before the Tribunal was that the assessed figure had nothing to do with the required reserve being created because the terms of the provisions of Section 10(2)(vib) required the department to see whether there were sufficient net profits as per audited accounts of the years to justify the creation of reserve. The departmental representative submitted to the Tribunal that, having regard to the book profits of Rs. 14,663 and Rs. 76,476 for the relevant years, the assessee could have provided for the necessary reserves.;