Divan, J.

1. This reference under section 256(1) of the Income-tax Act, 1961, made at the instance of the assessee, arises under the following circumstances :

The relevant year of account is calendar year 1959 and the assessment year is 1960-61. The assessee is a limited company and carries on the business of manufacturing and selling textiles. In the calendar year 1959, the company had installed what is called a cheese dyeing plant, the total cost of which came to Rs. 1,44,575. This plant was installed in the year 1959, though it had been purchased earlier, and it had started working with effect from November 1, 1959. When the return for the assessment year 1960-61 was filed by the assessee, it had not claimed any development rebate in respect of the sum of Rs. 36,144, which worked out at 25% of the original cost of instalment. In its return the assessee had claimed initial depreciation in accordance with the law prevailing at the time when the cheese dyeing plant was purchased by the assessee. The assessee appears to have been informed that for the material assessment year, the assessee would be entitled to development rebate if the conditions required for the grant of the allowance were fulfilled. The assessee was also informed that the scheme of giving initial depreciation had been deleted as per the Income-tax Act and the company realized that the condition of creation of development reserve as required by law had not been satisfied by it so far as the profit and loss account of the year 1959 was concerned. Under these circumstances, by its letter, dated April 14, 1961, a representation was made by the assessee to the Central Board of Revenue, Ministry of Finance, Government of India, New Delhi requesting the Board to direct the Income-tax Officer concerned to relax the condition for the purpose of assessment for the assessment year 1960-61 and to allow the assessee to create an additional reserve "in the current year's account books" and to allow rebate to them. In response to this representation, by his letter, dated July 7, 1961, the Income-tax Officer informed the assessee as follows :

"Development rebate may be admissible on the condition that the board of directors passes a confirmed at the next general meeting to the effect that out of Rs. 56,707 brought forward in the profit and loss account a sufficient amount be transferred to development rebate reserve account so as to raise the latter to 75% of the development rebate."

2. After receiving this letter from the Income-tax Officer, the board of directors of the assessee-company passed the following resolution on July 23, 1961 :

"RESOLVED THAT a sum of Rs. 36,144 representing development rebate @ 25% on Rs. 1,44,575 of the cost of the cheese dyeing plant be set aside out of the brought forward amount of Rs. 58,735 in the profit and loss account of the year 1960, which includes fully the brought forward amount of Rs. 56,707 of the year 1959, by crediting it to 'development rebate reserve account' AND RESOLVED FURTHER THAT the board doth hereby undertake to get it confirmed at the next annual general meeting of the company. RESOLVED FURTHER THAT the managing agents of the company be and they are hereby authorised to forward a copy of the resolution to the Income-tax Officer, Surat"

3. At its annual general meeting held on June 30, 1962, the company confirmed this resolution of the board of directors. In the meanwhile, on March 20, 1962, the Income-tax Officer, Surat passed the assessment order and he allowed the development rebate as claimed by the assessee. The company had also filed a revised return under section 22 (3) of the Income-tax Act, 1922; and it was only after the revised return was filed that the assessment order was passed on March 20, 1962. The assessment order clearly stated that the claim of development rebate was put up and the matter was decided by the Central Board of Revenue and that the revised return had been filed after making due provision for the development rebate as directed by the Board.

4. On June 1, 1964, the Income-tax Officer gave a show cause notice to the assessee under section 154 of the Income-tax Act, 1961, corresponding to section 35 of the old Act, calling upon the company to show cause why the mistake in the assessment order regarding the allowance of the development rebate should not be rectified. After the explanation of the company was received, the following order was passed on August 13, 1964 :

"In this case, at the time of original assessment, development rebate of Rs. 41, 281 was granted. The company has made provision for Rs. 5,000 only which falls short of the statutory percentage.

I, therefore, withdraw the development rebate granted previously by this order after giving full opportunity of being heard."

5. The Income-tax Officer by this order withdrew not merely the development rebate on the cheese dyeing plant but also the rebate granted in respect of some other machinery. The assessee appealed against the order of rectification and the Appellate Assistant Commissioner partially allowed the appeal so far as the development rebate in respect of the other machinery was concerned but in regard to the development rebate in connection with the cheese dyeing plant, the Appellate Assistant Commissioner upheld the withdrawal of development rebate by the order of rectification. The matter was carried in appeal to the Tribunal and the Tribunal upheld the orders of the Income-tax Officer and the Appellate Assistant Commissioner and, thereafter, at the instance of the assessee, the following three questions have been referred by the Tribunal to this court :

"1. Whether, on the facts and in the circumstances of the case, the Income-tax Officer was entitled to withdraw the development rebate granted on the cheese dyeing plant by holding that the grant of the allowance originally was a mistake apparent from the record which could be rectified ?

2. If the answer to question No. 1 is in the affirmative, whether the order of rectification should be passed under section 154 of the Income-tax Act, 1961, or under section 35 of the old Act ?

3. If the proper provision for rectification is section 35 of the old act, whether the Income-tax Officer's order under section 154 should be held to be valid ?"

6. At the hearing of this reference before us, Mr. Patel for the assessee did not press questions Nos. 2 and 3 in view of the decision of this court in P. M. Bharucha v. G. H. Venkatesan, Income-tax Officer, Circle I, Ward A, Bhavnagar. In that case, this court had followed the earlier decision of the Supreme Court in S. Sankappa v. Income-tax Officer, Central Circle II, Bangalore. In view of these two decisions, one of the Supreme Court and the other of this court, questions Nos. 2 and 4 have not been pressed by Mr. Patel and the question which remains for consideration is question No. 1 referred to us.

7. In order to appreciate the controversy, it is necessary to set out the relevant provisions of the Income-tax Act, 1922. While computing the profits and gains of business income or vocation under section 10, sub-section (1), certain allowances were permitted to be made and under clause (vib) of section 10 (2), in respect of machinery or plant being new, which had been installed after the 31st day of March, 1954, and which is wholly used for the purpose of the business carried on by the assessee, a sum by way of development rebate in respect of the year of installation equivalent to 25% of the actual cost of such machinery or plant to the assessee, may be allowed and under Explanation 2 of clause (vib) of section 10 (2), where in any year development rebate is to be allowed in accordance with the provision of Explanation 1 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 procedure laid down in Explanation 2 is to be followed. The proviso to clause (vib) provides :

"Provided that no allowance under this clause shall be made unless - ...

(b) except 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 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 ten years next following for the purpose of the business of the undertaking,......"

8. The exceptions set out in clause (b) of the proviso are not material for the purpose of this judgment.

9. It is, therefore, clear that in order to get the benefit of this allowance by way of development rebate, the proviso lays down certain conditions and the conditions are that an amount equal to 75% of the development rebate to be actually allowed must be debited to the profit and loss account of the relevant previous year and credited to a reserve account; and, secondly, this reserve account is to be utilised by the assessee during a period of 10 years following that relevant previous year such utilization being for the purpose of the business of the undertaking. In the present case, we are concerned with the question whether the appropriate amount was debited to the profit and loss account of the relevant previous year or credited to the relevant year as provided by clause (b) of the proviso.

10. Under Section 35 of the old Act and section 154 of the new Act, it is open to the authorities concerned to rectify any mistake apparent from the record of the assessment but the mistake must be apparent from the record. Acting under this power conferred upon him by Section 35 of the old Act and section 154 of the new Act, the Income-tax Officer has acted in the instant case.

11. Mr. Patel, for the assessee, has drawn out attention to the decision of the Andhra Pradesh High Court in Veerabhadra Iron Foundry v. Commissioner of Income-tax. In that case the assessee was a registered firm and it claimed development rebate on the value of machinery installed in the relevant previous year of account. The assessee did not credit to the reserve fund and did not make relevant entries thereof before the close of the accounting year. During the course of assessment, the Income-tax Officer, brought this omission to the notice of the assessee, and the assessee made the necessary entries after the close of the relevant year of account but before the assessment was completed. It debited the profit and loss account and credited the development reserve account with the amount allowable as development rebate. The claim for development rebate was disallowed on the ground that the entries were not made before the close of the accounting year; and on these facts the Andhra Pradesh High Court held that there was no provision in the Act under which the reserve fund account should be credited with the amount of development rebate before the close of the accounting year and that, as the assessee made the necessary entries before the assessment was finalised by the Income-tax Officer, the assessee was entitled to the benefit of the rebate. The question which has arisen before us in the present proceedings was not in terms before the Andhra Pradesh High Court but the question was as to whether, after the closing of the accounts for the relevant previous year, the necessary entry can be permitted to be made in the accounts of that very year, which was the subject-matter of assessment for the purpose of showing that the necessary reserve was credited as contemplated by clause (b) to the proviso to section 10(2)(vib).

12. In commissioner of Income-tax v. Mazdoor Kisan Sahkari Samiti again a similar question arose before the Rajasthan High Court, and the Rajasthan High Court also held that under the proviso to section 10(2)(vib) of the Indian Income-tax Act, 1992 an assessee shall be permitted allowance in respect of development rebate only if he makes the debit and credit entries as mentioned therein, but as no time limit is places for makings such entries in the account books, they made at any time till the assessment proceedings are completed and it is not correct to state that they should have been made before the close of the accounting year. Under certain circumstances, the Income-tax Officer may permit the assessee to make debit and credit entries in the profit and loss account of the relevant previous year even after the return has been filed. The decision of the Andhra Pradesh High Court in Veerabhadra Iron Foundry's case was referred to and at page 259 of the report, the learned judges of the Rajasthan High Court have indicated their agreement with the view of the Andhra Pradesh High Court.

13. As against these two decisions, one of the Andhra Pradesh High Court and the other Rajasthan High Court, there are two decisions of the Madras High Court. The first of these two decisions is in Commissioner of Income-tax v. Veeraswami Nainar, There the Madras High Court has held that an assessee is not entitled to the allowance of development rebate under the provisions of section 10(2)(vib) of the Income-tax Act, 1992, if the necessary reserve in accordance with the proviso to section 10(2)(vib) has not been made. Where the assessee has filed to satisfy the conditions requisite for obtaining the allowance, it will not be for the Court to embark upon what the general objects of the exemption was, and whether the conditions imposed were of a theoretical or technical nature, which, in the interests of justice should be dispensed with. It was further held that it is not open to the Tribunal to give a direction to an assessee, who had not made the necessary book entries by the entries by the time he produced his accounts before the Income-tax Officer, that he should be allowed to rewrite them by making the requisite entries.

14. The second decision of Madras High Court which has taken a view contrary to the view of the Andhra Pradesh and Rajasthan High Court is in Indian Overseas Bank Ltd. v. Commissioner of Income-tax. In this case, the Madras High Court, following its earlier decision in Veeraswami's case held that the requirement of clause (b) to the proviso to section 10(2)(vib) is not a mere idle formality but is intended to enable the revenue to trace the fund debited as part of the development rebate in the profit and loss account, and credited to a reserve account. Unless this condition is complied with, development rebate cannot be claimed. In that case, the assessee company claimed development rebate and contended that it had set apart a sum of Rs. 6 lakhs during the assessment year out of its net profit which not only satisfied the requirements of section 17 of the Banking Companies Act, but also the requisites of section 10(2)(vib) of the Indian Income-tax Act, 1922. It was held by the Madras High Court that as the assessee when setting apart a sum of Rs. 6 lakhs had not expressed the purpose for doing so, the conditions prescribed by clause (b) to the proviso to section 10(2)(vib) were not complied with and development rebate was not allowable; and it was further held that assuming that the reserve was created under the Banking Companies Act, till the reserve created under the Banking Companies Act equals the paid-up capital it cannot be said to be available for any other purpose, i.e., any purpose other than that of the Baking Companies Act; and on facts the Madras High Court held as above. Quoting from Veeraswami's case at page 736 of the report, it was observed :

"It will be apparent from the terms of the proviso that the object of the legislature is allowing a development of the assessee's business form out of the reserve fund. 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 purpose other than those of the business...."

15. Against this decision of the Madras High Court, there was no appeal to the Supreme Court and the decision of the Supreme Court is in Indian Overseas Bank Ltd. v. Commissioner of Income-tax. The observations of the Madras High Court in Veeraswami's case were approved by the Supreme Court and the decision of the Madras High which was under appeal was affirmed so far as the interpretation of clause (b) to the proviso to section 10(2)(vib) was concerned. At pages 514 of the report, Hegde J., delivering the judgment of the Supreme Court, observed :

"The reserve contemplated by that provision is a separate reserve. The amount transferred to the reserve cannot be utilised for business purposes. The reserve contemplated by Proviso (b) section 10(2)(vib) of the Act is an independent reserve. The amount to be transferred to that reserve is debited before the profit and loss account is made up. That amount is required to be credited to a reserve account to be utilised by the assessee during a period of ten years for the purpose of the business of the undertaking. The nature of the two reserves are different. They are intended to serve two different purposes. As observed by the Madras High Court in Commissioner of Income-tax v. Veeraswami Nainar the object of the legislature in allowing a development of the assessee's business from out of the reserve fund is apparent from the terms of the proviso. 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 that amount cannot be distributed by way of dividend. It is also from the terms of the proviso that the transfer to the reserve fund should be made at the time of making up the profit and loss account."

16. It is thus clear that according to this interpretation placed upon clause (b) of the proviso to section 10(2)(vib) of the 1922 Act, the amount to be transferred to the reserve contemplated by that clause must be debited before the profit and loss account is made up and, the secondly the transfer to the reserves fund should be made at the time of making up of the profit and loss account. In view of this clear interpretation by the Supreme Court, it is obvious that the observations of the Andhra Pradesh High Court and the Rajasthan High Court regarding the scope of this proviso no longer hold the field. It is clear that what may be called the strict view adopted by the Madras High Court as compared to the more liberal view adopted by the Andhra Pradesh and Rajasthan High Courts has appealed to the Supreme Court. The result therefore, is that we have to ask ourselves in the instant case as to whether the necessary amount was debited to the reserve before the profit and loss account was made up and at the time of making up the profit and loss account.

17. It is clear from the narration of facts set out at the commencement of this judgment that when the profit and loss account for the relevant previous year was made up, no such reserve fund was credited; nor was the amount for the reserve fund debited before the profit and loss account for the relevant year was made up. One further fact which goes against the assessee in the instant case is that far from debiting the profit and loss account for the relevant previous year 1960, the assessee in the instant case has debited the profit and loss account for the year 1961. In view of this decision of the Supreme Court, it is clear that 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 clause (b) of the proviso to section 10(2)(vib).

18. Mr. Patel, for the assessee, had urged before us in the course of his arguments that firstly, there was no mistake of law and, secondly that even if there is a mistake, it is not apparent form the record of the case. In view of the decision of the Supreme Court it is clear that there was a mistake of law so far as the original assessment was concerned and it is also clear that this mistake is apparent form the record of the case. Hence, the provisions as to rectification set out in section 154 of the Income-tax Act, 1961 are clearly attracted to this case. A faint attempt had been made by Mr. Patel to distinguish the decision of the Supreme Court by urging that there is a doctrine of relating made in 1961, which would relate back to the profit and loss account for the year 1961 which would relate back to profit and loss account for the year 1959; but, as pointed out by the Supreme Court, the necessary debit entry in the profit and loss account of 1959 is made up and at the time of making up of such profit and loss account for the year 1959.

19. In view of the above discussion, question No. 1, which is the only question which now survives for our consideration, must be answered in the affirmative. Questions Nos. 2 and 3 are not pressed. The assessee to pay to costs of this reference to the respondent.

20. Question No. 1 answered in the affirmative.