The Judgment of the Court was delivered by

Chandrasekhara Menon, J.:— In this case, the following question has been referred to this Court on the application of the Revenue by the Income-tax Appellate Tribuoal, Cochin Bench.

“Whether on the facts and in the circumstances of the case, and in the absence of a reserve account being created for the relevant previous year, the assessee is entitled to claim deduction for the Development Rebate.”

2. The assessee is a Limited Company. The concerned accounting year is Calendar Year 1974 During this year the assessee had installed certain machineries. It is not disputed that if the conditions in S. 34 of the Indian Income-tax Act are satisfied, the assessee would be entitled to development rebate. S. 33 of the Act provides for deduction of a sum by way of development rebate as specified in clause (b) of the said section in respect of a new ship, new machinery or plant (other than office appliances or road transport vehicles) which is owned by the assessee and is wholly used for the purpose of the business carried on by him in accordance with and subject to the provisions of this Section and of S. 34. The deduction referred to in S. 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) by distribution of profits; or (ii) for remitances outside India as profits or the creation of any asset outside India. Though the assessee claimed a deduction of Rs. 22,341/- by way of development rebate it is an admitted position that during the accounting year concerned the assessee-Company had not created such reserve. The Income-tax Officer did not allow this claim for deduction. However on appeal by the assessee, the Appellate Assistant Commissioner held that the assessee is entitled to the rebate. He found as a fact that in the prior accounting years 1965 to 1973, the assessee had created reserves which were much more than required in respect of the development rebate for the years. The reserve created in 1966 was Rs. 14,985/- and the reserve created in 1967 was Rs. 15,483. These amounts had not been written although the period of eight years for which the reserve should be kept was over as far as these years were concerned. The Appellate Assistant Commissioner took the view that under the circumstances the assessee was having a development rebate reserve which was sufficient to cover all the investments made in respect of the machineries. He pointed out that there was nothing in the Act which says that the equivalent of the development rebate claimed should be debited in the Profit and Loss Account of the relevant year for entitlement to the claim for deduction. That will only be an exercise in accounting.

3. On the Revenue's appeal to Tribunal in respect of this question, the Tribunal took the view that the Appellate Assistant Commissioner's order is correct and therefore to be upheld. The Tribunal on the basis of two decisions of the Calcutta High Court—C.I.T v. Calcutta Tramways Co. Ltd. (1978) 112 ITR. 643 and Calcutta Tramways Co. Ltd. v. C.I.T (1978) 112 ITR. 1041 held that there was no justification in construing S. 34(3) as a statutory obligation to maintain a separate fund known as development reserve rebate nor is there any legal bar against the inclusion of such amount in the balance sheet under a separate account such as share holder's account. If there were funds available in that account the assessee should be construed to have complied with the statutory requirements. Or if there were sufficient funds available in another account which could be earmarked for development rebate reserve that would be sufficient for the purpose of compliance with the statutory provisions.

4. In answering the question before us, we would first look at the relevant statutory provision. S. 34(3)(a) reads as follows:—

“The deduction referred to in S. 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 S. 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.”

5. In looking into the meaning of the provision, one has to take note of the general principle of construction of taxing Act. Tax and equity are strangers and an equitable construction cannot be put upon the words of a taxing statute as pointed out as early as in Partington v. Attorney General ((1869) LR 4 HL 100, 122). Justice Rowlatt pointed out in Cape Brandy Syndicate v. IR. (1921) 1 QB 64 at 71 that:

“In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.”

6. This dictum had been approved by the Supreme Court in Commissioner Of Income Tax, Madras v. The Ajax Products Limited (55 ITR. 741) and in CIT v. Shahzada Nand (60 ITR, 392). No doubt, we have to look into the context where the provision appears and to the other parts of the statute. While circulars or general directions issued by the Central Board of Direct Taxes would be binding under S. 119 on all officers and persons employed in the execution of the Act, the court will have to put its own construction upon the provisions of the Act regardless of the practice of the Department and the directions for the guidance of the officials. While it is certainly true that when an interpretation of a fiscal enactment is open to doubt, and even where a literal construction would defeat the obvious intention of the legislation and produce a wholly unreasonable result, the court must try its best to achieve the obvious intention and produce a rational construction. We do not think that the approach by the appellete tribunal to the question that though on a strict rendering of the section the assessee will not be entitled to the deduction, valuable rights and liabilities of an assessee cannot be decided on such meaningless excercises like drawing out the excess from any fund, credit it to the profit and loss account, and debit the amount for the creation of a development rebate reserve, is correct.

7. There cannot be any doubt that the statutory provision concerned which we have quoted earlier requires the debiting of an amount equal to the seventy-five per cent of the actual amount allowed and crediting 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. In Indian Overseas Bank Ltd. v. CIT. (1970) 77 ITR. 512, the Supreme Court has considered the question whether creation of a reserve in compliance with S. 17 of the Banking Companies Act is sufficient compliance with the requirements of S. 10(2)(vib), proviso (b), of the Indian Income-tax Act, 1922. The authorities under the Act as well as the High Court had answered the question in the negative. What happened in that case was that the appellant-Company had transferred a sum of Rs. 6 lakhs from the profit and loss account to the reserve fund which sum was sufficient to meet the requirements of S. 17 of the Banking Companies Act, 1949, as well as of proviso (b) to S. 10(2)(vib) of the said Act. But, no separate reserve fund as required by proviso (b) to S. 10(2)(vib) has been created. The contention of the appellant was that as the transfer to the reserve was sufficient to meet the requirements of S. 17 of the Banking Companies Act, as well as of proviso (b) to S. 10(2)(vib) of the Act, in substance, it had complied with the requirements of law, and therefore it was entitled to the allowance of the rebate claimed. The relevant portion of the proviso considered there reads:—

“…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 purposes of the business of the undertaking, except…”

8. The Supreme Court said that the creation of the reserve contemplated by this provision is a condition precedent for obtaining the allowance of development rebate. Admittedly, the appellant therein had not created any such separate reserve. The reserve contemplated by that proviso is an independent reserve. The amount transferred to that reserve cannot be utilised for business purposes and 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 Supreme Court quoted with approval the observations of the Madras High Court in Commissioner of Income-tax v. Veeraswami Nainar (1965) 55 ITR. 35 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 business and that amount cannot be distributed by way of dividend. It is also pointed out that it was 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.

9. In Surat Textile Mills Ltd. v. C.I.T (1971) 80 ITR. 1 a Division Bench of the Gujarat High Court consisting of Chief Justice Bhagwati and Justice Divan, held that the benefit of the development rebate cannot be granted to the assessee because of non-compliance with the requisite condition laid down in clause (b) of the proviso to S. 10(2)(vib) of the Indian Income-tax Act, 1922. Under the said clause, 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.

10. In New Sevan Sugar & Gur Refining Co. Ltd. v. CIT. (1969) 74 ITR. 7. Justice Ramaswarai speaking for a Bench of three Judges of the Supreme Court, considering the question “whether additional depreciation and development rebate should be allowed”, pointed out that the duty of the court is to interpret the words that Parliament has used and it cannot supply the gap disclosed in an Act or make up the deficiencies. Lord Brougham's observations in Gwynne v. Burnell (1840) 7 Cl. & F. 572, 696) was quoted with approval where the learned Judge had said:

“If we depart from the plain and obvious meaning on account of such views we do not in truth construe the Act, but alter it. We add words to it, or vary the words in which its provisions are couched. We supply a defect which the legislature could easily have supplied, and are making the law, not interpreting it.”

11. In that view, the Supreme Court held that the assessee was not entitled to additional depreciation and development rebate.

12. Another Bench of the Gujarat High Court consisting of Chief Justice Divan and Justice Mehta in Keshavlal Vlthaldas v. C.I.T (1976) 105 ITR. 601, had considered the requirement of development rebate reserve of the firm in a case where the reserve was not created when the profit and loss account was prepared and later profit and loss account revised and development reserve created. The question was whether development rebate could be allowed. Chief Justice Divan, speaking for the Bench pointed out that when the profit and loss account was first prepared, the net profit was distributed amongst the partners of the concern by making the necessary entries in the books of account. At the time when what was referred to as the general profit and loss account for the previous year was drawn up later, 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. The appellate tribunal in that case held that 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 must be made at the time of making up the profit and loss account and this was not done in that case and the conditions required for allowance of development rebate were not fulfilled. Agreeing with the Tribunal, the Gujarat High Court pointed out that in the case of development rebate, one of the conditions precedent to the allowance of the 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 the profit and loss account. It was pointed out there that the Supreme Court in Indian Overseas Bank Ltd.'s Case referred to earlier, had made it clear that the transfer to the reserve fund should be made at the time of making up the profit and loss account and once that profit and loss account is made up, it is no longer open to transfer any amount to the development rebate reserve and that the amount to be transferred to that account is to be debited before the profit and loss account is made up. Further it might be noted that Justice Sikri, had pointed out in C.I.T v. Swadeshi Cotton & Flour Mills Pvt. Ltd. (1964) 53 I.T.R 134 (SC.) that the system of reopening accounts does not fit in with the scheme of the Indian Income-tax Act. The position would be the same whether it is a reopening of accounts as far as receipts are concerned as well as in respect of expenses.

13. We cannot agree in the light of the Supreme Court pronouncements referred to earlier with what the Calcutta High Court said in C.I.T v. Calcutta Tramways Co. Ltd. (1978) 112 ITR. 643 that on a proper construction of S. 34(3)(a) of the Income-tax Act, there is no mandatory requirement for setting apart an amount equal to seventy-five per cent of the development rebate to be actually allowed, under a separate or independent head. In the above decision it was said that the ratio of the Supreme Court judgment in Indian Overseas Bank Ltd.'s Case cannot be applied to construction of S. 34(3)(a) because that deals with the reserve under S. 17 of the Banking Companies Act. Under S. 17 the fund is to be set apart out of the net profits of each year whereas the development reserve account under the Income-tax Act is to be maintained before the profit and loss account is made up or concluded and there is no scope for setting apart a reserve in the nature of one provided in S. 17 of the Banking Companies Act.

14. S. 34(3)(a) as noted earlier, requires debiting of an amount equal to seventy-five per cent of the development rebate to the profit and loss account of the relevant previous year and crediting it 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. What does it mean when it is said that the amount should be credited to a reserve account? It should be kept separate reserved for a particular purpose. Once when the profit and loss account is made up it is no longer open to transfer any amount to the development rebate reserve in the nature of the provision.

15. Mr. Radhakrishna Menon, learned counsel appearing for the assessee also referred to the decision of a Division Bench of this Court reported in Commissioner Of Income-Tax, Kerala v. T.S Venkiteswaran. (1980 Tax. L.R 321). There it had been said that in view of a circular issued by the Central Board of Direct Taxes, dated 30th January, 1976, the assessee was entitled to the benefit of development rebate. The court pointed out that the decision’ in (1978) 113 I.L.R 405 and 1979 T.L.R 1226 which emphasised the binding character of the Circulars stated that the courts are bound to take note of the circulars issued by the Board of Direct Taxes or by the Central Board of Revenue. In view of the circular to which the court's attention was drawn in that case, the assessee there was found entitled to development rebate. The relevant portion of the circular reads as follows:—

“Reference is invited to Board's 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:—

(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 by law or agreement about the 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, 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 years's books in which the assessment is framed.

2. The Supreme Court, in the case of Indian Overseas Bank Ltd. v. Commr. of Income tax (1970) 77 ITR. 512 (SC) had occasion to consider the validity of the position as explained at (a) above. In that case, the bank had not created any development rebate as such, although the books of accounts disclosed a substantial reserve under S. 17 of the Banking Companies Act of 1949. On the claim of the bank that reserve had been created for purposes of claiming development rebate, the Supreme Court held that the reserve contemplated under the Income-tax Act was altogether an independent reserve and since the tax-payer had not complied with the requirements for the creation of special development rebate reserve, it was not entitled to claim the allowance in question. The Supreme Court also observed that the entries in the account books were not idle formalities. Thus, the instructions of the Board set out above in so far as part (a) is concerned became inoperable. However, the position explained in parts (b) and (c) above were not specifically considered by the Supreme Court in that decision. Taking note of the decision of the Supreme Court in Indian Overseas Bank (1970) 77 I.T.R 512 as well as a subsequent pronouncement of the Gujarat High Court in the case of Surat Textile Mills Ltd. (1971) 80 I.T.R 1 (Guj.) the Board had withdrawn in 1972 the aforesaid Circular dated 14th October, 1965 to the extent it was superseded by the aforesaid Supreme Court decision and the judgment of the Gujarat High Court in Surat Textile Mills Ltd.'s Case.

(3). & (4). … …

5. 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 paras, (b) and (c) or para 1 above hold good.”

16. Certainly a circular issued by the Board would be binding on all officers and persons employed under S. 119 of the Act, but no instruction or circular can go against the provisions of the Act. While the Board can relax the rigour of the law or grant relief which is not to be found in the terms of the statute, such circulars making for a just and fair administration of the law, no instruction which will be ultra vires of the provisions of the statute could be issued. In the light of the discussion, we answer the question in the negative, i.e against the assessee and in favour of the Revenue. There will be no direction regarding costs.

17. A copy of this judgment under the seal of the court and the signature of the Registrar will be sent to the Income-tax Appellate Tribunal, Cochin Bench.