N.N Sharma, J.:— This reference under s. 256, sub-cl. (1), of the I.T Act, is being disposed of by this order. It was initiated by the Commissioner of income-tax and arose out of the Tribunal's order in Income-tax Appeals Nos. 1502 and 1503 (Allahabad) of 1972-73. The following two questions have been referred to this court:

“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the assessee's claim for development rebate in respect of assets installed up to September 30, 1968, was rightly considered by the Appellate Assistant Commissioner in the assessment year 1970-71, even though this claim had been rejected by the Income-tax Officer in the assessment order for 1969-70 and the grounds raised by the assessee had been treated as irrelevant by the Appellate Assistant Commissioner while disposing of the appeal for that year?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in upholding the Appellate Assistant Commissioner's order allowing the assessee's claim of development rebate of Rs. 5,52,247 in the assessment years 1970-71 and 1971-72?”

2. The facts as gathered from the statement of the case briefly stated are that assessee is a company running a Five Star Hotel known as Clark Shiraz at Agra. The assessment years under consideration are assessment years 1970-71 and 1971-72. The respective accounting years ended on September 30, 1969, and September 30, 1970. The dispute relates to the assessee's claim for development rebate on plant and machinery installed up to September 30, 1968. It appears that the assessee-company was incorporated in 1961. It suffered losses in the initial years of its business and for the first time made some profit in the accounting year ending on September 30, 1968, which was the previous year for assessment year 1969-70. The assessee claimed development rebate in respect of the various items of plant and machinery acquired by it up to September 30, 1968, for the first time in assessment year 1969-70. The total claim was for Rs. 5,53,400 out of which Rs. 3,89,993 were claimed in the assessment year 1969-70. The balance amount of Rs. 1,63,407 was claimed in assessment year 1970-71.

3. The assessee also created a development rebate reserve of Rs. 2,25,000 in assessment year 1969-70. Reserve of Rs. 2,15,600 was created in the assessment year 1970-71.

4. The ITO rejected the assessee's claim for development rebate while completing the assessment for 1969-70 on the reasoning:

1. The development rebate reserve created by the assessee was less than the statutory amount. According to the ITO the amount of development rebate which could have been allowed to the assessee Was Rs. 3,35,587. The reserve should, therefore, have been of Rs. 2,51,690, being 75% of this amount. The reserve of Rs. 2,25,000 created by the assessee was thus insufficient.

2. The development rebate reserve created by the assessee had been utilised for declaration of dividends. The assessee had declared dividends of Rs. 1,05,389 on its preference shares in the shareholders' meeting held on March 28, 1969. The profit and loss appropriation account for this year, however, showed that after set off of the past losses the company had profits of Rs. 11,001 only. This showed that the dividend had been declared out of development rebate reserve of Rs. 2,25,000 created by the assessee in that year. The assessee had thus violated the provisions of s. 34(3)(a)(i) of the I.T Act.

5. Assessee's claim of development rebate was accordingly rejected and assessment was completed on a total income of Rs. 25,026 after set off of the past losses.

6. Assessee went up in appeal to the AAC challenging the findings of the ITO.

7. Pending this appeal, the assessee pointed out to the AAC that its appeals for the assessment years 1966-67 to 1968-69 were pending before him. If relief of more than Rs. 26,026 was allowed in those appeals the loss brought forward from those years would completely wipe off the income for that year and in that event the assessee would have no objection if the grounds relating to non-allowance to development rebate in that year were treated as irrelevant.

8. The AAC found that after his orders for assessment years 1966-67 to 1968-69 the total income as assessed by the ITO for that year would be reduced to nil and, therefore, the grounds relating to non-allowance of development rebate did not survive. The same, therefore, was treated as irrelevant.

9. In assessment year 1970-71, the assessee's claim for development rebate was allowed by the ITO in respect of the machinery and plant purchased during that year. However, so far as the claim for development rebate on machinery and plant installed in earlier years was concerned the ITO pointed out that the same had already been rejected while making the assessment for the assessment year 1969-70. The assessee's income had been computed at Rs. 26,026 in that year. The claim of development rebate could not, therefore, be carried forward and considered in that year.

10. Assessee filed appeals to the AAC for both the years, i.e, assessment years 1970-71 and 1971-72. Both these appeals were disposed of by a consolidated order. The AAC allowed the assessee's claim for allowance of development rebate on machinery and plant installed up to September 30, 1968. This claim amounted to Rs. 5,52,247 and the AAC directed that this should be allowed in assessment year 1970-71 to the extent of the income available in that year and the balance should be allowed in assessment year 1971-72.

11. The Department went up in appeal to the Tribunal against the above-mentioned findings of the AAC. The Tribunal held that the AAC was justified in considering the assessee's claim for this development rebate while disposing of these appeals. The assessee had positive income for the first time in assessment year 1970-71 and it was only in that year that the assessee could get deduction for development rebate. The income for the assessment year 1969-70 having been reduced to nil, the assessee could not have been allowed any development rebate in that year.

12. The Tribunal further held that the development rebate reserve had to be created in the year in which development rebate was to be actually allowed. In the instant case development rebate was for the first time allowed to the assessee in the assessment year 1970-71 and the reserve had, therefore, to be created in that year. Therefore, it had to be found in the assessment year 1970-71 only as to whether the assessee had or had not complied with the conditions laid down under s. 34(3)(a) of the I.T Act. It found that the total reserve created by the assessee up to this year in respect of the assets installed up to September 30, 1968, amounted to Rs. 4,15,000 which was more than the statutory amount. The profit earned by the assessee up to September 30, 1968 (the last date of the accounting year for the assessment year 1970-71) (sic) was also more than enough for covering the declaration of dividend of Rs. 1,05,389 and it could not, therefore, be said that any part of the development rebate reserve was utilised by the assessee for payment of dividends. The Tribunal had, therefore, held that the assessee had complied with all the conditions laid down in s. 34(3) and the AAC had rightly allowed its claim in the assessment year 1970-71. The Tribunal thus upheld the order of the AAC. The Department feeling aggrieved has initiated this reference as laid above.

13. We have heard Sri Markandey Katju for the Department and Sri V.B Upadhyaya for the assessee.

14. The contention put forward by Sri Markandey Katju before us was that the claim related to assessment year 1969-70. That claim had been considered and rejected by the ITO in that year. In appeal, the assessee told the AAC that the grounds relating to this claim might be treated as irrelevant. These grounds was accordingly rejected holding them to be irrelevant. The matter has thus been concluded and it was not open to the assessee to reagitate the same in appeal for the assessment year 1970-71. The Tribunal was, therefore, unjustified in entertaining the assessee's claim in the appeals for these years. That point did not even arise out of the assessment order in appeals before the Tribunal.

15. In support of his contention Sri Katju relied upon CIT v. Somendra Kumar Neogi, [1981] 131 ITR 592 (Cal). It appears that in that case the assessee was carrying on a proprietary business and converted it into a private company in May, 1968, i.e, subsequent to the end of the accounting year relevant to the assessment year 1968-69. The ITO was aware of this fact when he made the assessment for the assessment year 1968-69 and hence refused to allow development rebate. The AAC and the Tribunal held that the development rebate should be allowed and withdrawn subsequently. On a reference it was held that the ITO was justified in his action and the refusal to allow development rebate was proper. It appears that in that case the assessee was an individual for the assessment year 1968-69, for which the previous year ended on 31st March, 1968. In the course of the assessment proceedings, the ITO took the view that development rebate was not allowable as the assessee's business had been converted into a private limited company which was not “succession” within the meaning of s. 33 of the I.T Act, 1961. He, accordingly, rejected the claim for the development rebate for 1968-69. There was an appeal before the AAC. The AAC was of the view that the ITO was right in so far as he held that the conversion of the proprietary business into a limited company could not be considered to be a succession within the meaning of s. 33 of the Act. But, having noticed that the existence of the limited company was only with effect from 1st May, 1968, which was within the accounting period relevant to the assessment year 1969-70, the AAC held that the assessee had carried on business as a proprietary concern and the claim for development rebate was made in respect of machinery purchased and installed during that year. The AAC, also found that the ITO had noticed that on 1st May, 1968, the business of the assessee was converted into that of a limited company. The AAC, accordingly, held that the condition required under s. 34(3)(a) of the I.T Act, 1961, had been complied with by the assessee inasmuch as the conversion of the proprietary business into a limited company took place only on the 1st May, 1968. The AAC came to the conclusion that the change of the constitution of the assessee's business took place during the accounting year relevant to the assessment year 1969-70. He held that the ITO should have complied with the provisions of s. 155(5) of the Act for withdrawing the development rebate in respect of the assessment year 1968-69. The assessee was entitled to development rebate which could have been withdrawn by the ITO under s. 155(5) of the Act inasmuch as the assessee should be deemed to have been allowed development rebate wrongly under s. 34(3) of the Act and that the withdrawal of such development rebate should be under s. 155(5). He, therefore, held that the ITO was not justified in refusing the allowance of the development rebate for the assessment year 1968-69.

16. The Revenue went up in appeal before the Tribunal. The Tribunal found that the ITO was not justified in refusing the allowance of development rebate for the assessment year 1968-69. It was held by the High Court that the ITO was justified in his refusal to grant development rebate for the assessment year 1968-69. It appears that the said authority was concerned about the meaning of “succession” within the meaning of s. 33 of the Act and so this controversy was not before that court in that case.

17. Next reliance was placed upon [1971] 80 ITR 1 (Guj), (Sural Textile Mills Ltd. v. CIT) where the facts were as below:

The assessee-company purchased a cheese dyeing plant in the accounting year 1951-52 for Rs. 1,44,575 and it was installed in 1959. The company had not created any development rebate reserve in the profit and loss account of the year 1959. But in the accounts of the company for the accounting year ended on December 31, 1961, with the permission of the CBR, the company transferred an adequate amount to the reserve fund from the profit and loss account brought forward from earlier years and in the assessment for 1960-61, the development rebate was allowed by an order dated March 20, 1962. In 1964, the ITO made an order rectifying the assessment order of 1962 on the ground that the order allowing development rebate was an error apparent on the record. Subsequently, the Supreme Court decided in Indian Overseas Bank Ltd.'s case, [1970] 77 ITR 512, that, unless the reserve was created in the very same accounting year, development rebate should not be granted, agreeing with the view of the Madras High Court and overruling the decisions of the Andhra Pradesh and Rajasthan High Courts.

18. Held, (i) following the aforesaid decision of the Supreme Court, the benefit of the development rebate cannot be granted to the assessee in the instant case because of non-compliance with the requisite condition laid down in cl. (b) of the proviso to s. 10(2)(vib).

19. Held also, as there was a mistake of law so far as the original assessment was concerned and this mistake was apparent from the record of the case, the provisions as to rectification set out in s. 154 of the I.T Act, 1961, were clearly attracted to this case, and the order of rectification was valid.

20. It appears that in that case plant and machinery had been installed in 1960. The development rebate was claimed for the assessment year 1960-61 and an income of Rs. 2,57,029 was declared for that year. No development rebate was originally claimed in the return but when the attention of the assessee was drawn to the fact that it was entitled to the rebate it made the necessary entry creating development rebate reserve on July 23, 1967, i.e, after the end of the assessment year in which development rebate was claimed. The development rebate was actually allowed but was later on disallowed as a result of a notice under s. 154 of the I.T Act. The Gujarat High Court also disallowed the rebate; thus it is obvious that it was a case in which no development reserve was created during the assessment year 1960-61, and although there was a profit far exceeding the development rebate of Rs. 36,144 claimed. An entry allowed to have been made after the end of the assessment year was held not to have complied with the condition of creation of development reserve in the relevant year. So that was not a case where development reserve was not created for want of profit. This authority is not in point. It appears that this authority came up for consideration before a Division Bench of this court in Addl. CIT v. Vishnu Industrial Enterprises, [1980] 122 ITR 919, and was dissented from. Sri Markandey Katju, learned advocate for the Department, repeatedly referred to s. 34, sub-cl. (3)(a) of the Act, which is worded as below:

“34. (3)(a) Conditions for depreciation allowance and development rebate.— 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 the relevant previous year 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 (LIV of 1948), or where the ship has been acquired or the machinery or plant has been installed before the 1st 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.

Explanation.— For the removal of doubts, it is hereby declared that the deduction referred to in section 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.”

21. The gamut of his argument was that as development rebate reserve had to be created in the year in which the machinery and plant was installed, irrespective of the fact whether the assessee had profits or had suffered losses, the reserve created by the assessee in the assessment year 1969-70 was insufficient and the assessee was, therefore, disentitled to development rebate. “1969-70 was not the relevant previous year as contemplated by section 34, sub-clause (3)(a) aforesaid.” The development rebate reserve had to be created only within a single year, viz., 1969, and its creation could not be spread over more than one year.

22. This provision is to be read along with s. 33. Section 33(1)(a) allows a deduction, subject to s. 34, in respect of the previous year in which the ship or machinery or plant was installed, a sum by way of development rebate as specified in cl. (b). Clause (b) provides rates for different kinds of ship, machinery or plant. The ship, machinery or plant should be owned by the assessee and be wholly used for purposes of business carried on by him.

23. There is no express provision that the reserve must be created in the year for which the rebate is to be determined. The reserve can be created only if profits are earned; else it will be forcing the assessee to create a reserve out of its capital or by borrowings, either of which events will defeat the object of enabling the company to accumulate funds to be used for its development.

24. Sub-section (2) of s. 33 clarifies the position. Under it, if the total income of the assessee for the year in which machinery or plant, etc., was acquired or installed is nil or is less than the full amount of the development rebate allowable:

(1) The sum to be allowed shall be only such amount as is sufficient to reduce the said total income to nil; and

(2) 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 assessment year, and development rebate to be allowed for the following assessment year shall be such amount as is sufficient to reduce the total income of the assessee assessable for that assessment year, to nil, and the balance of the development rebate, if any, still outstanding shall be carried forward for a total period of eight years. Thus, it is obvious that the allowability of the development rebate is not confined to the first year. It can be carried forward and allowed against the income accruing in the succeeding seven years.

25. The development rebate can be calculated in relation to the cost in the very first year but its allowability shall depend on as to when assessable income is available.

26. It has been shown above that the income for the assessment year 1969-70 of the assessee had been reduced to nil and so the assessee could not possibly claim any development rebate in that year. The assessee had positive income for the first time in the assessment year 1970-71, when it could be allowed a development rebate. The income for the assessment year 1969-70 having been reduced to nil no development rebate was allowable in that year, even if it transpired that the claim had been wrongly rejected by the ITO. In this connection we may refer Indian Oil Corporation Ltd. v. S. Rajagopalan, ITO, [1973] 92 ITR 241, 244 (Bom), where the facts were as below:

“The position of the petitioner with regard to development rebate for assessment years (hereinafter an assessment year is referred to as ‘A.Y’), is as follows:

(1) For the A.Y 1961-62, the petitioner's development rebate was determined at Rs. 25,819 and was allowed to be carried forward without creation of development rebate reserve as there were no profits.

(2) For A.Y 1962-63, the development rebate was determined at Rs. 8,62,934 and was allowed to be carried forward without creation of development rebate reserve as the petitioner-company made no profits.

(3) For A.Y 1963-64, the development rebate was determined at Rs. 36,98,149. The petitioner-company created the development rebate reserve of Rs. 43,44,000 out of the profits of the year and the entire development rebate for this year and the preceding two years was actually allowed to it.

(4) For A.Y 1964-65, the development rebate of the petitioner was determined at Rs. 33,15,335. The petitioner created a further development rebate reserve of Rs. 33,35,200 out of profits and the entire development rebate for this year was actually allowed to it.

(5) For A.Y 1965-66, the development rebate of the petitioner including that of Indian Refineries Ltd. which had since been amalgamated with the petitioner-company was determined at Rs. 4,82,68,525. This included the development rebate of Indian Refineries Ltd., for A.Y 1962-63 to A.Y 1964-65, for three years. The petitioner did not create any development reserve in respect of the development rebate determined by the respondents as there were no profits. It was allowed to carry forward the development rebate.

(6) For A.Y 1966-67, the development rebate was determined at Rs. 14,29,80,361. There were no profits and no development rebate reserve was created and the development rebate was allowed to be carried forward.

(7) For A.Y 1967-68, the development rebate was determined at Rs. 8,01,13,245. There were no profits and no development rebate reserve was created. The development rebate was allowed to be carried forward. The development rebate accumulated by the petitioner for this and the preceding 2 years in which there were no profits amounted to Rs. 27,13,62,131.

(8) For A.Y 1968-69, the development rebate was determined at Rs. 2,97,74,791. There were no profits. Therefore, the development rebate was allowed to be carried forward. Actually on the expectation of a profit, the petitioner created a development rebate reserve of Rs. 3 crores, which was, however, written back.

(9) For A.Y 1969-70, the development rebate was determined at Rs. 5,39,78,223. For that year the petitioner had created development rebate reserve of Rs. 12 crores. There was sufficient profit during this year. In computing the total income the ITO allowed to the petitioner development rebate to the extent of Rs. 8,37,53,014 covering the development rebate determined for A.Y 1968-69 and A.Y 1969-70 only. Development rebate for A.Ys 1965-66, 1966-67 and 1967-68 aggregating to Rs. 27,13,62,131 was not allowed by the ITO on the ground that during these years the petitioner had not created any development rebate reserve. This was obviously due to a new stand taken by the ITO that in order to claim development rebate, the development rebate reserve must be created during the year in which new machinery and plant was installed or put to use irrespective of whether there were or there were no assessed profits during that year.

(10) For A.Y 1970-71, in the assessment order dated 24th January, 1973, the ITO determined development rebate allowable to the petitioner for that year at Rs. 1,27,90,906. The petitioner created further develop ment rebate reserve of over Rs. 14 crores. The development rebate reserve was actually allowed for that year and not for the years 1965-66, 1966-67 and 1967-68 for which years it aggregated to Rs. 27,13,62,131.

27. On 18th January, 1973, the respondent No. 1 served on the petitioner four rectification notices under section 154 of the I.T Act, all dated 11th January, 1973, proposing to rectify the assessments for A.Ys 1962-63, 1965-66, 1966-67 and 1967-68, during which years the petitioner was allowed to carry forward the unabsorbed development rebate and no development rebate reserve was created as there were no profits. On 31st January, 1973, the respondent No. 1 served on the petitioner two undated rectification notices under section 154 accompanied by letter of 24th January, 1973, proposing to rectify the assessments for A.Ys 1968-69 and 1969-70, on the ground that the computation made under r. 19A(3) of the I.T Rules of the capital employed by the petitioner in each of its new industrial undertakings was incorrect. The petitioner complains that the last two notices have been served on it because respondent No. 1 now takes the view that in computing the capital employed in an industrial undertaking belonging to the petitioner (the petitioner owns 4 industrial undertakings), the assets of each undertaking are to be taken separately and from the assets of each undertaking the total liability of all the 4 undertakings of the petitioner is to be deducted in order to arrive at the capital employed in each industrial undertaking of the petitioner. The present petition has been filed challenging the validity of these six rectification notices.”

28. After a perusal of ss. 33 and 34 of the I.T Act, 1961, it was held at p. 253:

“That statute envisages allowance of the development rebate in instalments over a number of years depending on the assessable income of an assessee. The words “relevant previous year” refer not to the year of the installation of the new machinery or plant, but to the year or years in which either the whole or a part of the development rebate is actually allowed. The assessee would create a reserve fund out of the development rebate to be actually allowed to him, in any particular year, and not by incurring loans or otherwise and utilise the reserve account for a period of 10 (now 8) years for the purpose of the business of the assessee's undertakings only. The Calcutta High Court held that an assessee is not obliged to create a reserve fund in any year if he had no taxable income in that year for the purpose of carrying forward development rebate to the following years. It followed the judgment of the Madras High Court in Radhika Mills Ltd. v. CIT, [1969] 74 ITR 661 (Mad).

We agree with the judgments of the Madras and the Calcutta High Courts referred to by us hereinabove when they lay down that an assessee is not obliged to create development rebate reserve if there was no taxable income in the relevant years for the purpose of enabling him to carry forward the development rebate to the following years. In our opinion, the petitioner before us was not obliged to create a reserve in order to be eligible for allowance of development rebate if there was no taxable income in the relevant years according to its assessment.”

29. In Radhika Mills Ltd. v. CIT, [1969] 74 ITR 661 (Mad), it was observed (headnote):

“The allowance of development rebate is always in respect of the year of installation and, apart from creation of the requisite reserve, depends on and goes to reduce the available total income of that year or the following previous years. If there is no such total income or it is a loss, there can be no allowance of rebate but it is to be carried forward to the following year. Total income in this regard means the income aggregated from all heads and before deduction of development rebate and as assessed. No development rebate can actually be allowed unless the two conditions in the first part of the proviso to Explanation 2 to section 10(2)(vib) are satisfied. Regarding the first condition, though it does not appear as to when the particulars should be furnished, they should be furnished at least before the assessment for the year in respect of which the claim for the allowance is made is completed. Regarding the second condition, it will not be sufficient compliance with the condition if no reserve is actually created to the extent required and mere book entries without actual reserve will not suffice. Debiting in the profit and loss account and crediting in the reserve account is not theoretical but on the basis of actual reserve created. The basis of the actual reserve created is the total profits as per the completed assessment and not book profits where there are book profits but the total income as per completed assessment is nil or the assessment results in a loss. The entries as required by the condition are a sine qua non and are not an idle formality for it is only then that it will be possible to keep track of the development rebate reserve for enforcing the particular inhibitions against its user. Previous creation of the reserve is not a condition to making the claim for rebate unlike actual allowance of it. Before completion of the assessment and as and when the development rebate to be actually allowed against the requisite reserve to be made in the light of the particulars furnished and claim made is ascertained by the officer, he will have to give a reasonable opportunity and time to the assessee to set apart an amount equal to 75 per cent, of the amount proposed to be allowed and then debit the same to the profit and loss account and credit the same to the reserve account.

Carry forward of the development rebate is allowed only if the failure to create a reserve on the part of the assessee is on account of the fact that there is no income available in the assessee's hands in the relevant year out of which the requisite reserve or any part of it could actually be created.”

30. In Addl. CIT v. Vishnu Industrial Enterprises, [1980] 122 ITR 919 (All), Messrs. Vishnu Industrial Enterprises (P.) Ltd., Kanpur, the assessee, suffered losses in the assessment years 1967-68 and 1968-69. The assessee claimed development rebate in respect of plant and machinery installed in those years. The ITO repelled the claim on the view that the assessee had not debited the profit and loss account, nor created the development reserve. On appeal, it was held that since there was no profit, development reserve could not be created, but the development rebate should have been calculated and allowed in a succeeding year in which the asssssee earned profits and created the requisite reserve. The ITO was directed to determine the development rebate admissible to the assessee. The ITO went up in appeal and the Tribunal affirmed the view of the AAC. The reference was initiated at the instance of the Commissioner in the following terms (p. 921):

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in upholding the direction given by the Appellate Assistant Commissioner to the Income-tax Officer to determine the development rebate admissible to the assessee for the years 1967-68 and 1968-69, when admittedly in those years the assessee had suffered losses and had not created the statutory reserve and carry forward the same and allow it in the years in which there are profits and when reserve is created?”

31. After a perusal of s. 33 and 34, sub-cl. (3)(a) of the I.T Act, 1961, and Explanation introduced in s. 34, sub-cl. (3)(a) aforesaid, it was observed at page 923:

“Section 34(3)(a) opens— ‘The deduction referred to in section 33 shall not be allowed unless…’ This provision comes into play at the time of actual allowance of the rebate. The conditions precedent should be complied with at that time. Before an assessee claims the deduction, he should create a reserve by debiting the profit and loss account and crediting the reserve account with the requisite amount of money. This can be done only in the year in which profits are earned. The scheme of carrying forward unabsorbed development rebate postulated by sub-s. (2) of s. 33 can be achieved only if it is permissible to create reserve by making the requisite entries to the extent the income is able to absorb the rebate. The full reserve may not be created in a single year; depending on the available income it may take more than one year to create the reserve to the full extent of the development rebate which is allowable, and which has already been determined.

The proper procedure is that the amount of the development rebate ought to be determined in the first year. Its actual adjustment will be dependent on the availability of income. In the case of loss, the determination has to be done in the first year; the adjustments are to be actually made in subsequent years where profits are available.”

32. We are in respectful agreement with these observations and find that the development rebate reserve has to be created only in the year in which development rebate was actually allowed against the adequate profits and need not be created in the year in which the assets were installed but there was no profit to absorb the development rebate. As the assessee had no positive income up to 1970-71, so he could get deduction for development rebate only in that year. As the income for assessment year 1969-70 had been reduced to nil the assessee could not be allowed the income rebate in that year.

33. Addl. CIT v. Vishnu Industrial Enterprises, [1980] 122 ITR 919 (All) further reads at p. 924:

“The position was clarified by the Board of Direct Taxes in its Circular F. No. 10/49/65-ITA-I, dated 14th October, 1965, which, inter alia, explained the position regarding the creation of statutory reserve for allowance of development rebate, as follows (See [1976] 102 ITR (St.) 90):

‘(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 of law or agreement about 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.’

The Board issued Circular No. 189, dated 30th January, 1976 (See [1976] 102 ITR (St.) 91), saying in para. 5 thereof thus:

The Board have re-examined the issues involved and are of the view that except the clarification given in part (a) of para. 1 above, which stands superseded by the aforesaid decision of the Supreme Court, the clarifications given in Parts, (b) and (c) of para. 1 above hold good.’

The reference was to the decision of the Supreme Court in Indian - Overseas Bank's case, [1970] 77 ITR 512.

In Navnit Lal C. Javeri v. K.K Sen, AAC, [1965] 56 ITR 198 (SC) and in Ellerman Lines Ltd. v. CIT, [1971] 82 ITR 913 (SC), it has been held by the Supreme Court that the income-tax authorities are bound by the Board's circular and that the same are entitled to be given effect to by the courts as well. These circulars support the view that we have taken.”

34. The Tribunal has upheld the findings of the AAC in this case. It had been found that the assessee did not violate the provisions of s. 34(3)(a) while declaring the dividend of Rs. 1,05,389 on March 28, 1969, in the general meeting of shareholders when the dividend had been declared by the directors on March 27, 1968, and the amount had already been distributed on September 6, 1968, prior to the creation of development rebate reserve of Rs. 2,25,000. This is a finding of fact and is binding on us as the Tribunal is a final fact-finding authority. It is not open for us to disturb this finding of fact. In view of what has been stated above we uphold the finding of the Tribunal on the point that the question as to whether the assessee had or had not complied with the conditions laid down in s. 34(3)(a) of the I.T Act, 1961, had to be considered for the first time for the assessment year 1970-71. The total reserve created by the assessee up to the assessment year 1970-71 in respect of the income acquired and brought into use up to September 30, 1968, amounted to Rs. 4,15,000 which was more than the statutory amount. The profit earned by the assessee up to September 30, 1968, being the end of accounting year 1970-71, was also more than enough for covering the declaration of dividend of Rs. 1,05,389 and hence it could not, therefore, be held that any part of the development rebate reserve was utilised by the assessee for payment of dividends.

35. Since the income of the assessee for the assessment year 1969-70 had been reduced to nil the assessee was not entitled to get any development rebate in 1969-70 and was consequently under no obligation to create any reserve in that year. Rejection of appeals of the assessee against the assessment orders of the ITO for 1969-70 did not come in the way of the assessee's claim for development rebate in respect of the assets installed up to September 30, 1968, for the assessment year 1970-71.

36. The Tribunal was correct in upholding the AAC's order allowing the assessee's claim for an allowance of the development rebate on machinery and plant installed up to September 30, 1968. This claim amounted to Rs. 5,52,247 for the assessment years 1970-71 and 1971-72. We, therefore, answer both the questions referred to us in the affirmative, in favour of assessee and against the Department. The assessee will be entitled to costs which are assessed at Rs. 250.

37. Let this opinion and answers be transmitted to the Tribunal under the signature of the Registrar and the seal of the court.