1. In this case at the instance of the assessee the following question has been referred to us for our opinion :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that conditions for allowing development rebate were not fulfilled in the case of the assessee ?"

2. We are concerned in the present case with the assessment year 1968-69. The assessee is a registered partnership firm and carries on the business of manufacturing Sat-Isabgul. The assessee maintains its accounts on the basis of Samvat year and the previous year for the purposes of the assessment year under reference is Samvat year 2023, that is, the period November 13, 1966, to November 2, 1967. For the assessment year 1968-69, the assessee filed its return on August 18, 1969. In Samvat year 2023, machinery worth Rs. 2,73,771 was installed. When the profit and loss account of the partnership firm was first prepared, no provision for development rebate reserve was made nor was a reserve created at that time. But, some time prior to the filing of the return, the exact date not being known, development rebate reserve was created by drawing up what was referred to by the assessee as the general profit and loss account of Samvat year 2023. When the profit and loss account was first prepared, the net profit amounting to Rs. 1,13,960.70 was distributed amongst the five partners by making the necessary havala entries in the books of account. At the time when what is referred to as the general profit and loss account for Samvat year 2023 was drawn up some time before the return was filed, entries were made and the amount of the development rebate reserve was proportionately debited to the accounts of the partners and was credited to the development rebate reserve account. An amount of Rs. 61,692 being the amount of the reserve was credited in this manner. It may be mentioned that the amount was debited to the capital accounts of the different partners. At the time of assessment the Income-tax Officer held that the reserve was not created before the books of account were closed and hence he disallowed the claim. When the assessee went in appeal against the decision of the Income-tax Officer, the Appellate Assistant Commissioner reversed the decision of the Income-tax Officer and allowed the assessee's appeal on this aspect of creation of development reserve. The Appellate Assistant Commissioner relied upon the decision of the Rajasthan High Court in Commissioner of Income-tax v. Mazdoor Kisan Sahkari Samiti, and drew support for his conclusion from that decision for the proposition that necessary entries may be permitted by the Income-tax Officer to be made even after the return had been filed. Against the decision of the Appellate Assistant Commissioner, the matter was taken in appeal to the Tribunal. The Tribunal relied on the decision of this High Court in Surat Textile Mills Ltd. v. Commissioner of Income-tax . The Tribunal also referred to the decision of the Madras High Court in Commissioner of Income-tax v. Veeraswamy Nainar . The Tribunal held that the assessee had first of all finalised the profit and loss account and the resultant profits were credited to the partners' accounts. Later, another account called general profit and loss account was created where the entire profit was credited. There was another credit for the development reserve which was debited to partners' accounts; on the debit side there was an entry for transfer of Rs. 61,692 to the development reserve account and of the entire profit transferred to partners' accounts without such deduction of development rebate. The Tribunal noted that at the time of making up the general profit and loss account the assessee had made two separate entries, one a credit entry for the share in profits and the other a debit entry for the proportionate debit in the account of each of the partners. According to the Tribunal, the requirements of the law were that the reserve contemplated must be debited before the profit and loss account was made up and the transfer had to be made at the time of making up the profit and loss account. According to the Tribunal, this was not done in the present case and the conditions required for allowance of development rebate were not fulfilled in this case. The Tribunal allowed the appeal of the revenue and thereafter at the instance of the assessee, the question set out hereinabove has been referred to us for our opinion.

3. As has been pointed out by the Allahabad High Court in Commissioner of Income-tax v. Modi Spinning & Weaving Mills Co. Ltd., during the last few years a number of cases have come up before the courts involving the consideration of proviso (b) to section 10(2)(vib) of the Indian Income-tax Act, 1922, equivalent to section 34(3) of the Income-tax Act, 1961.

4. Section 10 of the Act of 1922 provides by sub-section (1), that 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 of vocation carried on by him. Sub-section (2) of section 10 provided that such profits or gains shall be computed after making the allowance mentioned therein. Under clause (vib) of section 10, sub-section (2), provision was made for allowance by way of development rebate and under the proviso to section 10(2)(vib) it was laid down that no allowance under this clause shall be made unless, inter alia, an amount equal to 75 per cent. of the development rebate to be actually allowed was 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 purposes of the business. We are not concerned in the present case with the rest of the provisions of section 10(2)(vib).

5. Under the Act of 1961, section 28 provides that the income mentioned in one or the other clause of section 28 shall be chargeable to income-tax under the head "profits and gains of business or profession" and under clause (i), the profits and gains of any business or profession carried on by the assessee at any time during the previous year is to be so chargeable. Section 29 provides that the income referred to in section 28 shall be computed in accordance with the provisions contained in sections 20 to 43A. Obviously, therefore, section 33 which provides for development rebate in the Act of 1961, is one of the sections for making allowances. Section 34, sub-section (3), lays down the requirements that have to be satisfied before the development rebate referred to in section 33 can be allowed and it is provided that a deduction referred in section 33, that is, 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. The rest of the provisions of section 34(3) are not material for the purpose of this judgment. Thus, it is obvious that the provisions of section 34(3) are substantially the same as the provisions of the proviso to section 10(2)(vib) of the Act of 1922, with only this difference that whereas the period referred to in the proviso to section 10(2)(vib) of the Act of 1922 was ten years, under section 34(3) of the Act of 1961, the period is eight years.

6. The Supreme Court has considered the requirements of the proviso to section 10(2)(vib) of the Act of 1922 in Indian Overseas Bank Ltd. v. Commissioner of Income-tax . The assessee in that case was a banking company and it transferred a sum of Rs. 6 lakhs from the profit and loss account to the reserve fund. This sum was sufficient to meet the requirements of section 17 of the Banking Companies Act, 1949, as well as of proviso (b) to section 10(2)(vib) of the Indian Income-tax Act, 1922, but no separate reserve fund as required by proviso (b) to section 10(2)(vib) had been created. On these facts, it was held, that the assessee was not entitled to the development rebate. The grant of this rebate was a concession subject to the fulfillment of the conditions prescribed under the proviso, and the creation of a reserve fund under section 17 of the Banking Companies Act was not sufficient compliance with the proviso even though the amount so carried to the reserve fund might be large enough to cover both requirements. Hegde J., delivering the judgment of the Supreme Court, observed at page 514 of the report :

"The reserve contemplated by that provision is a separate reserve. The amount transferred to that reserve cannot be utilised for business purposes. The reserve contemplated by proviso (b) to 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 purposes 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, that 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 clear 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."

7. In Surat Textile Mills Ltd. v. Commissioner of Income-tax, a Division Bench of this court considered the decision of the Madras High Court in Commissioner of Income-tax v. Veeraswami Nainar and the decision of the Supreme Court in Indian Overseas Bank Ltd. v. Commissioner of Income-tax. It also considered the decision of the Madras High Court in Indian Overseas Bank Ltd. v. Commissioner of Income-tax, which was confirmed by the Supreme Court in Indian Overseas Bank Ltd. v. Commissioner of Income-tax . After considering these decisions and also the decision of the Andhra Pradesh High Court in Veerabhadra Iron Foundry v. Commissioner of Income-tax and of the Rajasthan High Court in Commissioner of Income-tax v. Mazdoor Kisan Sahkari Samiti, at page 13 of the report, the principles that were culled out from the various decisions were as follows :

"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, secondly, the transfer to the reserve 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."

8. This decision in Surat Textile Mills Ltd.'s case was followed by this High Court in Additional Commissioner of Income-tax v. Shri Subhlaxmi Mills Ltd. At page 204 of the report it was observed :

"In Surat Textile Mills Ltd. v. Commissioner of Income-tax a Division Bench of this High Court has held that under 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, secondly, the transfer to the reserve fund should be made at the time of making up of the profit and loss account. We agree with that conclusion because that conclusion follows from the decision of the Supreme Court in Indian Overseas Bank Ltd. v. Commissioner of Income-tax and the earlier decision in Commissioner of Income-tax v. Veeraswami Nainar ."

9. Thus, the view which this High Court has taken following the observations of the Supreme Court in Indian Overseas Bank Ltd.'s case is consistent, viz., that in the case of the development rebate, one of the conditions precedent to the allowance of that development rebate is that the amount to be transferred to the reserve contemplated by law must be debited before the profit and loss account is made up and, secondly, that the transfer to the reserve fund should be made at the time of making up of the profit and loss account.

10. It may be pointed out that the High Court of Punjab and Haryana in Commissioner of Income-tax v. Sardar Singh Sachdeva has taken a view contrary to the decision of this High Court in Surat Textile Mills Ltd.'s case . The Punjab and Haryana High Court has there held that it is not necessary that entries about development rebate reserve should be made in the accounts on or before the last day of the accounting year or even before the preparation of the profit and loss account. It is open to the assessee to make the entries at any time before the assessment is completed. The entries become final only when the assessment is made. Till then, they are in a fluid state and any defect or error in them could be corrected. The Punjab and Haryana High Court followed the decision of the Andhra Pradesh High Court in Veerabhadra Iron Foundry v. Commissioner of Income-tax and of the Rajasthan High Court in Commissioner of Income-tax v. Mazdoor Kisan Sahkari Samiti . The Punjab and Haryana High Court in fact referred to the decisions of the Madras High Court in Commissioner of Income-tax v. Veeraswami Nainar and of the Supreme Court in Indian Overseas Bank Ltd.'s case. At page 389 it has been observed :

"We cannot read something more into the statutory provision. If the intention of the legislature was that the entries had to be made before the close of the account year or before the completion of the profit and loss account, it would have said so. It is well-known that the profit and loss account cannot be made immediately on the close of the year. It depends upon the facts and circumstances of each case as to at what time the profit and loss account can be made. It is no doubt true that in the profit and loss account he is to make the debit entry regarding the development rebate but the question is up to what point of time it can be done ? If a reference is made to section 22(3) of the Income-tax Act, the assessee has a right to modify his return right up to the date before the assessment is made which indicates that he can also correct the mistakes in his account books or the statement or profit and loss account. This provision fully justified the conclusion at which the learned judges of the Andhra Pradesh High Court reached while interpreting section 10(2)(vib), proviso (b), and we are entirely in agreement with that decision."

11. The revenue urged before the Punjab and Haryana High Court that the requirements of the proviso to section 10(2)(vib) should be complied with before the close of the account year or before the making up of the profit and loss account but the High Court repelled that contention and held that it was open to the assessee to make these entries at any time before the assessment is completed. With respect, we are unable to agree with the learned judges of the Punjab and Haryana High Court and for the reasons which have been stated in Surat Textile Mills Ltd.'s case we read the decision of the Supreme Court in Indian Overseas Bank Ltd. v. Commissioner of Income-tax in the same manner as has been set out in Surat Textile Mills Ltd.'s case and we see no reason to differ from the view taken by this court in Surat Textile Mills Ltd.'s case which was followed in Shri Subhlaxmi Mills Ltd.'s case.

12. Before the Allahabad High Court in Commissioner of Income-tax v. Modi Spinning and Weaving Mills Co. Ltd. the decision of this court in Surat Textile, Mills Ltd.'s case was cited. At page 309 of the report, Pathak J., as he then was, delivering the judgment of the Allahabad High Court, after referring to the passage which we have extracted from the judgment in Indian Overseas Bank Ltd.'s case observed :

"It is urged that the Supreme Court took the view that the entries must be made at the time when the profit and loss account is made up originally and that they cannot be made the profit and loss account is made up originally and that they cannot be made later. That is how, it is pointed out, those observations were construed by the Gujarat High Court in Surat Textile Mills Ltd. v. Commissioner of Income-tax .

It seems to us that what the statute contemplates is merely that an amount equal to 75% of the development rebate to be actually allowed should be 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 ten years next following for the purposes of the business of the undertaking. The statute does not specify any period of time within which the relevant entries must be made."

13. With respect, we are unable to agree with this reasoning of the learned judges of the Allahabad High Court because after the interpretation placed by the Supreme Court on clause (b) of the proviso to section 10(2)(vib) of the Act of 1922 (equivalent to section 34(3) of the Act of 1961) it is no longer open to us to construe the requirements of the proviso (b) to section 10(2)(vib) of the Act of 1922 or section 34(3) of the Act of 1961. According to the Supreme Court in Indian Overseas Bank Ltd.'s case, it is clear from the terms of the proviso that the transfer to the reserve fund should be made at the time making up the profit and loss account. Once that profit and loss account is made up, it is no longer open to transfer any amount to the development rebate and in the passage which we have set out above, the Supreme Court has pointed out in Indian Overseas Bank Ltd.'s case that the amount to be transferred to that account is to be a debited before the profit and loss account is made up. With respect, therefore, we are unable to agree with the learned judges of the Allahabad High Court when they hold that the statute does not specify any period of time within which the relevant entries should be made regarding debiting the profit and loss account with the amount of the development rebate and crediting the said amount to a separate development rebate reserve account.

14. In view of the decisions of our High Court in Surat Textile Mills Ltd.'s case and in Shri Subhlaxmi Mills Ltd.'s case Mr. Patel for the assessee contended that all that he has done in the instant case in making adjustment entries by crediting the requisite amount to the development reserve account and debiting the accounts of the partners after the net profit of Samvat year 2023 was transferred to the individual accounts of the partners by the necessary havala entries. the question then arises whether it is open to any person to reopen his account in this manner.

15. In commissioner of Commissioner Of Income Tax, Madras. v. A. Gajapathy Naidu, Madras. the Supreme Court held that the question of reopening of accounts is not relevant in the matter ascertaining when a particular income accrued or arose. At page 119 of the report, subba Rao J., as he then was, delivering the judgment of the Supreme Court observed :

"No power is conferred on the Income-tax Officer under the Act to relate back an income that accrued or arose in a subsequent year to another earlier year on the ground that the said income arose out of an earlier transaction. Nor is the question of reopening of accounts relevant in the matter ascertaining when a particular income accrued or arose. Section 34 of the Act empowers the Income-tax Officer to assessee the income which escaped assessment or was under-assessed in the relevant assessment year. Subject to the provisions of the section and following the procedure prescribed thereunder, he can include the escaped income and reassess the assessee on the basis of which the earlier assessment was made. So, too, under section 35 of the Act officers mentioned therein can rectify mistakes either of their own motion or when such mistakes are brought to their notice by a party to the proceedings. For that purpose the correct item may be taken into consideration in the matter of assessment, but strictly speaking even in those cases there is to reopening of the accounts of the speaking even in those cases there is no reopening account as of the assessee, but a reassessment is made or the mistake is corrected on the basis of the actual income accrued or received by the assessee. We do not see any relevant of the question of reopening of accounts in considering the question when an assessee acquired a right to receive an amount."

16. Apart from these general observations in A, Gajapathy Naidu's case we find, the Supreme Court dealing with this point of reopening of accounts more specifically in Commissioner of Income-tax v. Swadeshi Cotton & Flour Mills P. Ltd. At page 139 of the report, Sikri J., as he then was, delivering the judgment of the Supreme Court observed :

"We are of the opinion that this system of reopening accounts does not fit it with the scheme of the Indian Income-tax Act. We have already held in commissioner of Commissioner Of Income Tax, Madras. v. A. Gajapathy Naidu, Madras. that, as far as receipts are concerned, there can be no reopening of accounts. The same would be the position is respect of expense."

17. Mr. Patel for the assessee contended that in the instant case there is no reopening if the accounts of the kind which was in the contemplation of the Supreme Court in Gajapathy Naidu's case or in Swadeshi Cotton & Four Mills Pvt. Ltd.'s case. He contends that what has been done is that some adjustment entries in this case were made and errors were corrected in the accounts. He contends that there is no question of any new entries regarding expenses or new entries regarding receipts having to be made in the profit and loss account or in the books of account of the company. We are unable to accept this contention of his. The moment the net profit for Samvat year 2023 was ascertained at Rs. 1,13,960.70 and that amount was distributed amongst the partners of the firm pro rate according to their shares, the profit and loss account was made up and it was closed so far as Samvat year 2023 was concerned. Subsequent entries debiting the partners capital accounts pro rata for the purpose of creating development rebate reserve of Rs. 61,692 was in effect and substance an item of expenditure on the one hand so far as the firm as was concerned and a pro rata contribution to the development rebate reserve so far as the partners individually were concerned. So far as a partnership firm is concerned, once the share of the profit of each partner is ascertained and the havala entries are made crediting the account of each partner with the share of profit coming it him, the profit and loss account for that year is made up and it cannot be said that thereafter any thing further requires to be done for making up that profit and loss account. The requirement of section 34(3) of the Act of 1961 is that the profit and loss account must be debited with the amount of the development rebate reserve before that account is finally made up. It is true, as the Supreme Court has pointed out in another context in Commissioner of Income-tax v. Mysore Electrical Industries Ltd., at page 569 :-

"It is well-known that the accounts of the company have to be made up for a year up to a particular day. In this case that day was the March 31, 1963. If it was reasonably practicable to make up the accounts up to the March 31, 1963, and present the same to the directors of the respondent on April 1, 1963, they could have made up their minds on that day and declared their intention of appropriating the said and other sums to reserve of different kinds. But the fact that they could not do so for the simple reason that the calculation and collection of figures of all the items of income and expenditure of the company for the year ending March 31, 1963, was bound to take some time cannot make any difference to the nature or quality of the appropriation of the profits to reserve as determined by the directors after the first to April, 1963. Their determination to appropriate the sums mentioned to the three separate classes of reserve on the August 8, 1963, must be related to the April 1, 1963, i.e., the beginning of the accounts for the new year and must be treated as effecting from that day.''

18. In this sense, it is clear that it is not require by law that the profit and loss account should in physical fact be made up on the very last day of the accounting year under consideration. It can be made up even some time after the close of the year after collecting figures of all the different items of income and after making the necessary calculation but once those calculations are made and the profit and loss account is made up and the actual profit arising in the course of the business is ascertained, the last moment for debiting the amount of the development rebate reserve to the profit and loss account is gone because it is before the profit and loss account for the accounting year is finally made up that the development rebate reserve has to be created by debiting the amount to the profit and loss account and crediting it to the reserve account. Once that moment of time has passed and the profit and loss account is actually finally made up and the amount of the net profit is ascertained, at no subsequent time can the amount be debited to the profit and loss account by making further necessary entries, in this case that moment of time passed when the partners made up the profit and loss account and ascertained the figure amount of profit at Rs. 1,13,960.70 and distributed that amount amongst the partners by making the necessary havala entries in the books of account of the firm, it is obvious the if the amount of the development rebate reserve of Rs. 61,692 had been debited to the profit and loss account before it was finally made up, the amount of net profit available for distribution amongst the partners would have been reduced correspondingly but that was not done and it was the amount of Rs. 1,13,960.70 without making provisions for the development rebate reserve that was distributed amongst the partners. On the facts of this case, as found by the Tribunal, it is obvious in the light of the decisions of this court in Surat Textile Mills Ltd.'s case and Shri Subhlaxmi Mills Ltd.'s case. that the partners failed to comply with the requirements of section 34(3) of the Act of 1961. By making the appropriate entries at the appropriate time regarding the development rebate reserve and since these requirements of section 34(3) were not complied with, the assessee firm was not entitled to get the benefit of the development rebate. The requirements of section 34(3) are stringent and as pointed out earlier in Surat Textile Mills Ltd.'s case the Supreme Court while interpreting the provisions similar to section 34(3) of the Act of 1922, has taken the strict view as against the more liberal view of the Rajasthan and Andhra Pradesh High Courts. Since that strict view has to be taken, it must be held that the conditions for allowing the development rebate were not fulfilled in the case of the present assessee-firm. The Tribunal was, therefore, right in law in holding that those conditions were not fulfilled in the instant case.

19. In view of these conclusions, we answer the question referred to us in the affirmative, that is against the assessee and in favour of the revenue. The assessee will pay the costs of this reference to the Commissioner.