Ramaswami, J.:— The following question has been referred under section 256(1) of the Income-tax Act, 1961, for decision:

“Whether, on the facts and in the circumstances of the case, the assessee was entitled to development rebate on the four new buses put on road after December 31, 1957?”

2. The assessee is a registered firm engaged in various businesses including the running of bus service. During the accounting year ended March 31, 1958, it had purchased seven new buses, of which four were put on the road after December 31, 1957. In respect of the bus service business it filed a return on February 26, 1959, in which depreciation totalling Rs. 2,00,252 was claimed by the assessee. This included development rebate on seven new buses. The total development rebate in respect of the seven new buses claimed was Rs. 62,216, out of which a sum of Rs. 35,727 related to the development rebate on the four new buses put on the road after December 31, 1957. The Income-tax Officer rejected the claim of the assessee for development rebate in respect of the seven buses purchased during the year of account on the ground that buses cannot be “installed” within the meaning of section 10(2)(vib) of the Indian Income-tax Act, 1922, which is a condition precedent for allowing such a claim. The assessment was completed on March 20, 1959. The assessee filed an appeal to the Appellate Assistant Commissioner.

3. One of the points appealed against was the rejection of the claim for deduction of development rebate amounting to Rs. 62,216. In the course of the appeal proceedings, the assessee filed a revised income and expenditure account for the year ending March 31, 1958, as also a balance-sheet as on March 31, 1958. In the income and expenditure account a sum of Rs. 62,216 was debited as development rebate reserve on buses. Correspondingly in the balance-sheet there was an account called “development rebate reserve” to which this amount had been credited.

4. In the view that necessary debiting of the development rebate to the profit and loss account and crediting the development rebate reserve having been made before the disposal of the appeal, the conditions required under section 10(2)(vib) have been complied with, the Appellate Assistant Commissioner held that the assessee was entitled to claim development rebate reserve even at the appeal stage. He was of the view that the assessee could not be denied the allowances on the ground that the entries had been made after the completion of the assessment. The department filed an appeal before the Tribunal. The Tribunal held that, by implication, the proviso to section 10(2)(vib) requires the creation of a reserve at least before the completion of the assessment and that therefore it is the state of affairs existing at the time of assessment that one has to look into to determine whether the assessment has been made in accordance with law. Hence, the Tribunal was of the view that unless the assessee had created the reserve before the assessment was completed he could not be said to have complied with the requirements of the proviso enabling the Income-tax Officer to allow the development rebate. In support of its decision the Tribunal also relied on the decision of this court in Commissioner of Income-tax v. Veeraswami Nainar [1965] 55 I.T.R 35 Mad...

5. It is relevant to mention that though the orders dealt with the development rebate amounting to Rs. 62,216 in respect of all the seven buses, the dispute related only to the development rebate allowable in respect of the four new buses put on the road after December 31, 1957, which came to Rs. 35,727. At the instance of the assessee, the above question has been referred. This reference relates to the dispute regarding the grant of development rebate in respect of the four new buses put on the road after December 31, 1957.

6. In this reference, it is the contention of the learned counsel for the assessee that the proviso to section 10(2)(vib) itself did not require the creation of the development rebate reserve within a particular point of time, and that, therefore, the Tribunal was not correct in not relying on the amended income and expenditure account and the balance-sheet filed before the Appellate Assistant Commissioner. The learned counsel was not definite as to the outer limit of time before which the assessee could debit the development rebate reserve to the profit and loss account and create a development reserve or rewrite his accounts. Section 10(2) sets out the various allowances that are to be made when computing the profits and gains of any business, profession or vocation carried on by an assessee. Section 10(2)(vib) provides for an allowance called “development rebate” in respect of a new machinery or plant “installed” after March 31, 1954, which is solely used for the purpose of the business carried on by the assessee. But clause (b) of the proviso to section 10(2)(vib) requires two conditions to be complied with before a development rebate could be allowed. They are: (1) in the case of machinery or plant installed after December 31, 1957, an amount equal to 75% 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; and (2) this reserve has to be utilised by the assessee during a period of ten years next following for the purposes of the business of the undertaking but shall not be used for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India.

7. A reading of this provision makes it clear that the debiting of the profit and loss account and crediting of the development rebate reserve account should be at the time when the profit and loss account is made or finalised. It may be that the assessee could amend or correct his accounts before he submits the return to the Income-tax Officer but that is not to say that the assessee could readjust the accounts for the purpose of claiming development rebate at any time he chooses. Section 10(2)(vib) being a concession or an exemption, subject to the fulfilment of the conditions under the proviso, the conditions will have to be strictly complied with before the benefit under that section could be claimed.

8. In Commissioner of Income-tax v. Veeraswami Nainar this court had to consider a similar point. In that case the assessee, Hindu undivided family, was doing business in cement and fertilisers and had also a business in public transport and lorry service. In the return submitted for the assessment year 1959-60, the assessee had claimed development rebate on a new lorry and a new bus which were purchased and put to use subsequent to December 31, 1957, but during the year of account. The assessee had not in his account debited 75% of the development rebate to the profit and loss account and there was no development rebate reserve also. The Income-tax Officer refused to allow the development rebate on the ground that neither the bus nor the lorry could be regarded as “plant and machinery” which could be “installed” within the meaning of section 10(2)(vib). The Appellate Assistant Commissioner on appeal by the assessee accepted the contention that even in respect of buses and lorries development rebate is allowable but on the ground that the proviso to section 10(2)(vib) had not been complied with inasmuch as the assessee had not set apart 75% of the development rebate to the reserve account, he sustained the order rejecting the allowance towards development rebate reserve. On appeal, the Tribunal held that, in their opinion, it will be enough if the assessee carries out the condition even at a later stage. In their view, what all that was required by the statute was that there must be book entries in support as a kind of only a follow up of the assessee's claim and in that view directed the Income-tax Officer to compute the development rebate on the lorry and bus on the assessee producing his books before him containing the reserve entries. On a reference to this court, this court held:

“The entries in the account books required by the proviso are not an idle formality. The assessee being obliged to credit the reserve fund for a specific purpose, he cannot draw upon the same for purposes other than those of the business, and if the assessee were a company for exemption, that amount could not be distributed by way of dividend. It is also clear from the terms of the proviso that the reserve should be made at the time of making up the profit and loss account. The Tribunal was clearly in error when it held that it would be open to the assessee to readjust the account by making the reserve at a later period of time. Any account maintained by a business should reflect its financial transactions correctly. If at the time of the closing of the accounts for a year, a particular appropriation had not been made, but the moneys had been spent otherwise, it would indeed be futile to direct the assessee to readjust the account. For, then, it will not be a true account. The Tribunal has stated that the requirement as to creation of a reserve fund is of a highly theoretical nature, which need not be complied with to the letter of the statute. This view is opposed to all principles of statutory construction. As we pointed out, section 10(2)(vib) provides for exemption from taxation. The proviso to that section states that no allowance under that clause shall be made unless the conditions contained in sub-clauses (a) and (b) thereto have been complied with. That means that the assessee will not be entitled to allowance unless he had complied with the conditions referred to therein.”

9. This decision really concludes the point now in issue. We may also mention that this decision was followed in another decision of this court in Indian Overseas Bank Ltd. v. Commissioner Of Income Tax, Madras and later approved by the Supreme Court in Indian Overseas Bank Ltd. v. Commissioner Of Income Tax, Madras [1970] 77 I.T.R 512 S.C.. In the latter case the Supreme Court held that the creation of the reserve contemplated by the proviso to section 10(2)(vib) is a condition precedent for obtaining the allowance of development rebate and that the transfer to reserve fund should be made at the time of making up the profit and loss account.

10. For the foregoing reasons, we answer the reference in the negative and against the assessee with costs. Counsel's fee Rs. 250.

11. Reference answered in the negative.