Masud, J.:— The short point to be decided in this reference under section 256(1) of the Income-tax Act, 1961, is whether, on the facts of this case, the assessee is entitled to development rebate under section 34(3) read with section 33 of the said Act. The following question of law has been raised:

“Whether, on the facts and in the circumstances of the case, the entries in the balance-sheet as on 31st December, 1961, regarding the sum of £ 9,473 constituted a ‘reserve ‘as contemplated by section 34(3) of the Income-tax Act, 1961, so as to justify allowance of development rebate under section 33 of that Act?”

2. Before the relevant portions of the balance-sheet are set out, it is necessary to discuss the material provisions of section 34 of the said Act.

“34. Conditions for depreciation allowance and development rebate.— (1) The deductions referred to in sub-section (1) of section 32 shall be allowed only if the prescribed particulars have been furnished and the deductions referred in section 33 shall be allowed only if the particulars prescribed for the purpose of clause (i) and clause (ii) of sub-section (1) of section 32 have been furnished by the assessee in respect of the ship or machinery or plant……..

(3)(a) 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 ……..”

3. Deduction referred to in the said section, 34(3)(a) is allowed to a company as development rebate for the purpose of giving incentive to carry on, or to continue to carry on, business in respect of new ship acquired or new machinery or plant installed which is owned by the assessee and is wholly used for the purpose of the business carried on by the latter. It is obvious from section 34(3)(a) that such allowance is not permissible unless a sum 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 for purposes other than the exceptions. The balance-sheet of the assessee, the Calcutta Tramways Company Ltd., has referred to the development rebate reserve in the following manner s

“SPECIAL ACCOUNTS (in accordance with the agreement dated 30th August, 1951, between the Government of the State of West Bengal and the company):

Shareholders” Account Balance as at August 31, 1951 … £ 2,71,456 Less amount transferred to Dev. Rebate Reserve to conform with the Indian Finance Act, 1958 £ 9,473 Total … £ 2,61,983 Add Reserve created in respect of above transfer £ 9,473 £ 2,71,456 Special Reserve … £ 98,017 £ 3,69,473

4. Mr. Balai Pal, counsel for the revenue, has contended that the conditions set out in the said section 34(3)(a) have not been complied with in view of the fact that development rebate reserve has been deducted from the shareholders' account and added back to the identical account and that no special reserve has been set apart as contemplated under the said subsection. Reliance has been placed by him on Indian Overseas Bank Ltd. v. Commissioner Of Income Tax, Madras , [1970] 77 ITR 512 (SC). Mr. Ginwalla, counsel for the assessee, on the other hand, has strenuously argued that his client is entitled to get the development rebate inasmuch as there has been express disclosure in the balance-sheet showing that the development rebate as provided under the said sub-section has been set apart. Reference has also been made by him to Clayton's case Devaynes v. Noble, [1816] 35 ER 781, in support of his said contention.

5. Before the contentions of the counsel for the parties are examined, reference may be made to clause 4(1) of the First Schedule to the Calcutta Tramways Act, 1951, whereby the Government of West Bengal has been empowered to acquire the undertaking of the Calcutta Tramways Company. The said Act mentions the agreement between the Government of the State of West Bengal and the assessee which was executed on August 30, 1951. Reference has been made to clause 4(1) of the said agreement set out in the First Schedule to the Act. Clause 4(1) reads as follows:

“4.(1) The company shall apply its revenue in the manner following, that is to say:—

(a) Firstly, paying all expenses of managing, maintaining and working the undertaking, including debenture interest;

(b) Secondly, paying all Indian and United Kingdom taxes payable by the company;

(c) Thirdly, setting aside in each accounting year in Renewal and Replacement Reserve Account, the sum of eighty thousand pound sterling or such greater sum as the directors of the company for the time being may in consultation with the Government consider necessary in the light of experience and in view of the expansion of the undertaking or increase price;

(d) Fourthly, setting aside in each accounting year in a fund (hereinafter called ‘the shareholders’ account’ the following sums:—

(i) £ 87,457 together with

(ii) four per cent, upon any additions outside share capital raised by the company with the consent of the Government after the date of agreement;

(e) Fifthly, accumulating any surplus in a Special Reserve Account the balance of which (after providing for losses, if any) will eventually accrue to the benefit of the Government (before such transfer, however, of a loss against the credit standing in the Special Account, the Government should be consulted), the final decision on such matter nevertheless being reserved in the company.

(2) If in accounting year the reserve arising from the undertaking are insufficient to provide for all the matters enumerated in the preceding sub-clause of this clause, such revenue shall be so applied in the priority there set out.”

6. Relying upon the said Clause 4(1)(d) and 1(e), Mr. Pal has substantiated his contention by submitting that there is additional statutory liability of the assessee in maintaining a “special reserve account” in addition to the “shareholders’ account”. According to him the inclusion of development rebate reserve in the “shareholders’ account “is not permissible in law. In any event, the failure to maintain a’ special reserve account” as set out in clause 4(1)(e) would amount to a statutory breach of the Calcutta Tramways Act and the taxing authorities who are not parties to the agreement between the assessee and the Government of West Bengal cannot be asked to overlook such breach. Mr. Pal has added that the said sub-sections contemplate two independent separate accounts, viz., “shareholders’ account” and “a special reserve account” and need not necessarily include development rebate reserve, which is provided under section 33 of the Income-tax Act entirely on different considerations. The “special reserve account” has to be maintained under the said agreement after setting apart a sum of £ 87,457 in the shareholders account in priority to depositing the surplus, if any, in a “special reserve account”. Clause 4(1)(d) necessitates the deposit of £ 87,457 in a “fund” described as “shareholders’ account”. But clause 4(1)(e) does not mention the word “fund “at all. Thus, although a separate fund has to be expressly earmarked as the “shareholders’ account” no such fund has been referred to in clause 4(1)(e). On the contrary, reference to the said sub-clauses sup ports the contention of Mr. Ginwalla that no “reserve fund” is to be separately earmarked under the head “development reserve account”.

7. Further, Mr. Pal's contention that the assessee is not entitled to development allowance under section 34(3)(a) cannot be accepted inasmuch as, on a proper construction of the said sub-section, 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. The statute requires that if an assessee claims development rebate under section 33 such amount should be credited to a reserve account to be utilised by the assessee during a period of eight years next following, for the purpose of the assessee's business. The only two exceptions which disentitle the assessee to get advantage of the development allowance are stated in the said sub-clause which are as follows:

Firstly, the assessee will not get the advantage of such rebate if the development reserve is utilised for distribution by way of dividends or profits within the said eight years. Secondly, the income-tax authorities will deny the assessee development allowance if the money set apart in the reserve account for remittance outside India as profits or for the creation of any asset outside India during the said eight years. Section 34(3)(a) being a taxing statute has to be construed meticulously and, as such, I find no justification in construing the said sub-section as the statutory obligation of the assessee to maintain a separate fund described as “development rebate reserve account”. The legislature does not mention the word “fund” nor has it provided that such amount is to be credited in the reserve account and must have been set apart and not spent. Nor there is legal bar under section 34(3)(a) itself against inclusion of such amount in the balance-sheet under a separate account Such as “shareholder s’ account” as provided in Clause 4(1)(d). Mr. Pal's argument impliedly assumes that the allotment of such amount under separate head has introduced a restraint or limitation on the assessee to utilise money for business purposes. Section 34(3)(a) has made it clear that the fund is to be utilised by the assessee for the purpose of the business excepting in the two cases which have been provided in sub-clause (3)(a)(i) and (ii). This construction is substantiated by the provisions in section 155, sub-clause (v), which provides that if such amount is used for business purposes by way of distribution of profits, or remittance outside India as profits for the creation of any asset outside India, or for any other purpose which is not a purpose of the business of the undertaking within eight years next following, the development rebate already allowed would be forfeited. Thus, it is clear that the fund earmarked for development allowance normally can be utilised for the purpose of business other than the aforesaid exceptional cases. Mr. Pal has relied upon Indian Overseas Bank Ltd. v. Commissioner Of Income Tax, Madras , [1970] 77 ITR 512 , where the Supreme Court has refused to allow development, rebate to the assessee under section 17, Banking Companies Act, 1949, read with proviso (b) to section 10(2)(vib) of the Indian Income-tax Act, 1922, provisions of which are substantially identical with the provisions of section 34(3)(a) of the Income-tax Act, 1961. He has laid stress upon the following observations of Hegde J. at page 514:

“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.”

8. The Supreme Court has construed section 17 of the Banking Companies Act, 1949, and in that context has made the aforesaid observations. In that case, the appellant, a public limited company, carrying on banking business claimed allowance, by way of development rebate under proviso (b) of section 10(2)(vib), amounting to Rs. 1,37,836 in the computation of its business income. Admittedly, there also no separate reserve fund as required by proviso (b) to section 10(2)(vib) had been created. Under the Indian Income-tax Act, 1922, also the grant of rebate is made subject to conditions prescribed in proviso (b) to section 10(2)(vib). The Supreme Court has made the observation at page 514:

“The creation of the reserve contemplated by this provision is a condition precedent for obtaining the allowance of development rebate.” But the learned judges have arrived at the said conclusion on the basis of the express provision in section 17 of the Banking Companies Act, 1949, which reads as follows:

“Every banking company incorporated in India shall maintain a reserve fund, and shall, out of the net profits of each year and before any dividend is declared transfer a sum equivalent to not less than 20% of such profits to the reserve fund until the amount of the said fund is equal to the paid up capital.”

9. Thus there is a mandatory requirement of every banking company under the Banking Companies Act for maintaining a separate reserve fund which has been construed in the said Supreme Court decision at page 514 thus:

“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 nature of the two reserves are different.”

10. The ratio of the said judgment cannot be said to apply to the instant case where there is no scope for setting apart a reserve in the nature of one provided in section 17 of the Banking Companies Act. Again in section 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.

11. In the present case, the balance-sheet for the year 1960-61 expressly mentions the fact that a sum of £9,473 has been created as development rebate reserve under the Indian Finance Act, 1958. Mr. Pal has made a grievance that the said sum of £9,473 has been debited from and credited in the “shareholders’ account” and as such the reserve created is not in compliance with section 34(3)(a). As discussed above, there is no statutory obligation under the Indian Income-tax Act for setting apart the amount equal to seventy-five per cent, of the development rebate to be actually allowed in a separate fund to be maintained for a specific purpose. The fact that such a sum has been set apart and mentioned in the balance-sheet expressly indicates that the assessee has earmarked that amount to be utilised in future for the purpose of the business other than the said exceptions. It is not quite correct to say that the said sum of £9,473 has been merged or blended in the “shareholders’ account”. The inclusion of such an amount in the balance-sheet expressly indicates that a “reserve account” as provided in section 34(3)(a) is created under the “shareholders’ account”. The words “reserve account” have not been defined in the Income-tax Act. William Pickles in his book of “Accountancy”, at page 184 (3rd Ed.), has defined “reserves” as “amounts” set aside out of profits and other surplus which are not designed to meet any liability, contingency, commitment or diminution in value of assets known to exist at the date of the “balance sheet”. In the Shorter Oxford Dictionary, “reserve” has been understood as “to keep for future use or enjoyment”, “to using or enjoying at once”, “to keep back or held over to a later time or place or for further treatment”, “to set apart, kept for Metal Box Company Of India Ltd. v. Workmen, [1969] 73 ITR 53 (SC), Mr. Sengupta on behalf of the revenue has made the distinction between “reserve” and “provision”. The Supreme Court in that decision has made it clear that “provision” as distinguished from “reserve” provides for a known liability of which the amount can be determined with substantial accuracy. There is no scope for such distinction in the present case before us inasmuch as the development rebate reserve account is not to be set apart for a known liability. Section 34(3)(a) read with section 155(5) allows the assessee to utilise such reserve account for business purposes other than the exceptions mentioned in the said sub-section. Thus, it is difficult to accept the contention of Mr. Pal that the assessee is not entitled to development rebate for failure to maintain “reserve fund” or “provision” comprising the said amount equal to seventy-five per cent, of development rebate to be actually allowed.

12. Mr. Pal has also made a comment that the requirement of a separate reserve account as provided under section 34(3)(a) has not been mentioned in the directors report. In my view, the absence of such statement in the directors report does not, in any way, help Mr. Pal's contention. The statement in the balance-sheet mentions the fact that a reserve has been created in respect of the said sum of £9,473. “Shareholders’ account” and development rebate reserve’ have been included under the main head in the balance-sheet described as “special accounts. The sum of £9,473 has been included as a part of the shareholders' account under the head “Special Accounts Thus, the silence in the directors’ report does not amount to a concealment of obligation to maintain a reserve for development rebate. Mr. Pal has laid stress on the fact that the deduction of £9,473 from shareholders' account and adding back the said sum again to the same shareholders' account amounts to a jugglery in accounts and creation of such an account is illusory. The directors' report clearly mentions that a sum of £53,252 has been credited to the shareholders' account in the relevant assessment year 1960-61. The directors have also mentioned the fact that a sum of £51,246 has been appropriated towards the payment of contribution to second debenture stock redemption account, dividend on preference shares, less income-tax. Directors have only shown the working results of the assessee's business for the 12 months. It is true that in the year 1960-61 a sum of only £2,006 remains as the balance after deduction of the said expenditure amounting to £51,246 from the fund deposited in shareholders' account in that year amounting to £53,252. But in the statement of accounts it is clearly shown that the shareholders' account includes a balance from 1960 account carried forward, amounting to £2,69,450. There would have been some force in the argument of Mr. Pal if in the shareholders' account of the assessee's business only a sum of £2,006 was left. But in this particular case, even after payment of dividend and other liabilities, the shareholders' account comprised much larger sum than the sum of £9,473 which must be held to have been included in the reserve account in compliance with section 34(3)(a) of the Act. Reference has been made by Mr. Ginwalla to Clayton's case Devaynes v. Noble, [1816] 35 ER 781 in support of the well-settled proposition of law “it is the sum first paid in, that is first drawn out”. He has applied this principle in support of the assessee's case that there is sufficient money in the shareholders' account out of which the said sum of £9,473 could be separately spent, in our view, apart from the said propositions of law it is obvious that although the assessee-company has not set apart £9,473 as a reserve account under a separate head such as development reserve, the sum required to be set apart for the purpose of development allowance has not been completely merged in the shareholders' account. On the contrary, it is a clear admission in the balance-sheet that the said sum of £9,473 would be available for the purpose mentioned in section 34(3)(a). Thus, it cannot be said that the deduction of £9,473 from the shareholders' account and adding back to the said account has been merged and not identifiable (sic). For all the reasons stated above, the question of law referred should be answered in the affirmative and in favour of the assessee.

13. The parties will bear their own costs.

S.K Mukhertee, J.— I agree.