The Judgment of the Court was delivered by
Deb, J.:— We are concerned with the assessment year 1962-63 in this reference under s. 256(1) of the I.T Act, 1961. The accounting year ended on December 31, 1961.
2. The assessee is a company. The company was a distributor of petroleum products including petroleum gas for cooking purposes. Petroleum gas was supplied to the company by a “refinery”. In earlier years, the company purchased many specially made iron cylinders for the purposes of distributing gas to the consumers. The consumers returned the cylinders to the company after the gas was exhausted. They were refilled again and supplied to the consumers and were returned in the usual way. No revenue expenditure nor any depreciation on the cylinders was claimed or allowed in the past. The company sold the cylinders to the refinery in the accounting year for Rs. 82,19,947 against their original cost of Rs. 1,09,63,754. The refinery continued to supply gas in those very cylinders to the company and the company, in its turn, distributed gas in those cylinders to the consumers. The company claimed before the ITO that those cylinders were “returnable packages” within the meaning of that expression used in item M(2)(2)(d)(1) of Pt. I of the Depreciation Schedule, App. I of r. 5. of the I.T Rules, 1962. It also claimed that it had incurred a loss of Rs. 27,43,807 on the sale of those cylinders and that this loss should be allowed as deduction either under the aforesaid item or under s. 32(1)(iii) of the I.T Act, 1961. The ITO did not allow the aforesaid claim for the reasons recorded in the assessment order.
3. There were some excess amounts in the development rebate reserve account created by the company in the earlier years. In the accounting year, the company claimed development rebate of Rs. 24,15,622. The reserve to be created at the statutory rate of 75% in respect of this claim was Rs. 18,11,715 against which the actual reserve created by the company in its account was Rs. 18,03,531. Thus, there was a shortfall in that reserve account in the accounting year. The ITO allowed rebate only on such value of the machinery as Rs. 18,03,531, being the reserve, would represent and disallowed the shortfall which he computed at Rs. 34,827.
4. The company lost before the AAC and filed appeal before the Tribunal. The Tribunal held that the cylinders were “returnable packages” and the “loss of” Rs. 27,43,807 “incurred by the company in the disposal of the cylinders is a loss allowable as a revenue expenditure within the meaning of” r. 5. The Tribunal did not deal with the company's claim under s. 32(1)(iii) of the Act, for, in its opinion, the company's “arguments” on that section “do not survive”.
5. Though there was a shortfall in the development rebate reserve account and the company did not make up the said deficiency by debiting the aforesaid excess amounts of the earlier years in the profit and loss account of the instant accounting year and by crediting the same in the reserve account, the Tribunal allowed the full amount of the development rebate of Rs. 24,15,622 claimed by the company for the reasons stated in its order which need not be adverted to by us, because the allowability of this amount has been sought to be justified on different grounds before us on behalf of the company.
6. The Commissioner applied for a reference on two questions of law which were decided by the Tribunal against the department. The company opposed that application and also formulated two questions of law in its reply. The Tribunal referred the following questions of law for the determination of this court:
“(1) Whether, on the facts and in the circumstances of the case, the loss of Rs. 27,43,807 arising on the sale of gas cylinders was allowable as a revenue expenditure as provided for in the remarks against returnable packages under the classification ‘Mineral oil concerns’ in item M(2)(2)(d) under the heading ‘(iii) Special rates to be applied to other machinery and plant’ in Part I of Appendix 1 to r. 5 of the I.T Rules, 1962, or under s. 32(1)(iii) of the Act?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the shortfall in the statutory provision for development rebate reserve created by the company for the year under consideration could be made up by the excess provision for development rebate reserve created in the earlier years and that the full amount of development rebate of Rs. 24,15,622 could be allowed in that year on the basis of such adjustment?”
7. Mr. Ajit Sengupta, learned counsel for the revenue, argues that the Tribunal had no power to refer the second part of question No. 1 either suo motu or at the instance of the company on the Commissioner's application for reference, because it was not raised by the Commissioner in his aforesaid application under s. 256(1) of the Act. In this behalf, he cites the case of CIT v. A.K Das, [1970] 77 ITR 31 (Cal) in which a Division Bench of this court, by following the decision of the Supreme Court in the case of CIT v. Scindia Steam Navigation Co. Ltd., [1961] 42 ITR 589, has held that on the Commissioner's application for reference the Tribunal has no power to refer any question of law suo motu or at the instance of the assessee.
8. In substance, the Madras High Court has also taken the same view in the cases of Commissioner Of Income-Tax, Madras v. S.K Srinivasan, [1970] 75 ITR 93, CIT v. Ramdas Pharmacy, [1970] 77 ITR 276 and Commissioner Of Income-Tax (Central), Madras v. Inden Biselers., [1973] 91 ITR 427. Therefore, it is submitted that this reference on the second part of question No. 1 is incompetent and this court, in any event, should decline to answer it.
9. Mr. K. Ray, learned counsel for the company, argues that he is entitled to rely on s. 32(1)(iii) of the Act in view of the observations made in the case of Shashibala Navnitlal v. CIT, [1964] 54 ITR 478 (Guj) at page 483 of the report. But his contention must fail, for we are bound by the aforesaid Division Bench judgment of our court. He then cites the case of Muir v. IRC, [1966] 43 TC 367 (CA) and repeats his aforesaid argument. But Muir's case, [1966] 43 TC 367 is based on Attorney-General v. Avelino Aramayo & Co., [1925] 1 KB 86 (CA) and the Supreme Court has uprooted this base in the case of Scindia Steam Navigation Co. Ltd., [1961] 42 ITR 589 at pages 607-08 of the report. Therefore, Muir's case, [1966] 43 TC 376 must leave the field along with his contention.
10. Mr. Ray also argues that the company considered question No. 1 formulated by the Commissioner as defective and, accordingly, it suggested the exact question of law in this behalf in terms of r. 42 of the Appellate Tribunal Rules, 1963. He further argues that it cannot be said that the second part of question No. 1 has been referred by the Tribunal either suo motu or at the instance of the company. He also argues that the Tribunal has merely reframed question No. 1 formulated by the Commissioner. Now, r. 42 reads thus:
“……If the question formulated by the applicant is defective, the reply shall state in what particular the question is defective and what is the exact question of law which arises out of the said order.”
11. The expression “the said order” refers to the appellate order of the Tribunal. The company in its reply has not stated in what particular question No. 1 formulated by the Commissioner was defective. Mr. Ray makes no attempt to point out any defect in that question. We also do not find any defect in it.
12. R. 42 does not allow the respondent to raise any question of law. It is only where the question formulated by the applicant is defective that this rule permits the respondent to state the exact question of law after giving particulars of defect in the question formulated by the applicant. Therefore, this rule has been wrongly invoked by Mr. Ray and we overrule his contentions.
13. As already stated, the Tribunal did not deal with the company's claim under s. 32(1)(iii) of the Act and said that those arguments did not survive. Therefore, the “Tribunal must be deemed to have decided the question” of law under s. 32(1)(iii) of the Act against the company in view of the decision of the Supreme Court in the case of Scindia Steam Navigation Co. Ltd., [1961] 42 ITR 589 at page 610 of the report.
14. Though the question of law under s. 32(1)(iii) arises out of the order of the Tribunal, the Commissioner was not aggrieved by it and did not apply for a reference on it. The company raised that question in its reply. The Tribunal reframed it and then referred it as the second part of question No. 1. Even if it is held that this part of question No. 1 has not been referred at the instance of the company, the only conclusion that can be reached is that the Tribunal has referred it suo motu. Therefore, we reject his contentions.
15. Mr. Ray then argues as follows:
(i) the real controversy between the company and the department before the Tribunal was whether the loss of Rs. 27,43,807 was deductible in the computation of the business income of the company;
(ii) on that controversy, the parties made arguments on r. 5 read with the aforesaid item M(2)(2)(d)(1) and also on s. 32(1)(iii) of the Act;
(iii) these two provisions of law are two aspects of the same question, namely, as to whether this amount was deductible as a loss; and
(iv) the company is, therefore, entitled to rely on s. 32(1)(iii) on the question of allowability of this loss.
16. The first contention of Mr. Ray must fail in view of paragraph 1 of the appellate order of the Tribunal which runs thus:
“The first and the main point is whether the difference of Rs. 27,43,807 between the cost of gas cylinders purchased and the sale value is allowable as revenue expenditure. The second point is against disallowance of the claim of development rebate of Rs. 34,807.”
17. Cost of packages actually used up is allowable as revenue expenditure under the aforesaid item M(2)(2)(d)(1). Therefore, no loss or difference can be allowed under this item. Similarly, no revenue expenditure can be allowed under s. 32(1)(iii). Revenue expenditure is not a loss, nor a capital loss is a revenue expenditure. A question of law under item M(2)(2)(d)(1) and a question of law under s. 32(1)(iii) are two different and independent questions of law and they cannot be said to be two aspects of the same question. Therefore, we reject the other arguments of Mr. Ray.
18. Mr. Ray then cites the cases of Commr. of Agrl. I.T v. Sultan Ali Gharami, [1951] 20 ITR 432 (Cal), CIT v. Breach Candy Swimming Bath Trust, [1955] 27 ITR 279 (Bom), CIT v. C. Parakh & Co. (India) Ltd., [1956] 29 ITR 661 (SC), Ismailia Grain Merchants Association Limited v. Commissioner Of Income-Tax, Bombay, [1957] 31 ITR 433 (Bom), Central India Industries Ltd. v. CIT, [1975] 99 ITR 211 (Cal) and V.L Dutt v. CIT, [1976] 103 ITR 634 (Mad), and argues that the proper question which the Tribunal should have framed in this behalf is:
“Whether, on the facts and in the circumstances of the case, the assessee was entitled to the allowance of the loss of Rs. 27,43,807 in computing its business profits?” He submits that we should, accordingly, reframe question No. 1 in the terms quoted above and allow him to argue on the question of allowability of this loss under s. 32(1)(iii) of the Act.
19. The question of law under s. 32(1)(iii) is a new and an independent question of law. The Tribunal, not having dealt with it, “must be deemed to have decided it against” the company. The company did not apply for a reference on that question and, therefore, the second part of question No. 1 was “closed by the ‘appellate’ order of the Tribunal” and we cannot, by reframing the question as suggested by Mr. Ray, reopen this closed chapter in view of the decision of the Supreme Court in the case of Commissioner Of Income Tax West Bengal,Calcutta v. Smt Anusuya Devi, [1968] 68 ITR 750.
20. Further, we have no power to entertain a new or an independent question of law which the Commissioner in his application for reference has not called upon the Tribunal to refer to this court: vide Scindia Steam Navigation Co. Ltd., [1961] 42 ITR 589 at pages 609-10 of the report. Therefore, the submissions of Mr. Ray must fail.
21. Though Mr. Ray is not entitled to argue on the second part of this question, nevertheless we have heard him on its merits and will deal with this part of question No. 1 after disposing of its first part.
22. The first part of question No. 1 has not been properly framed by the Tribunal as rightly agreed between the learned counsel for both the parties, because r. 5 of the I.T Rules, 1962, and the aforesaid item M(2)(2)(d)(1) do not deal with any loss arising out of a sale of returnable packages.
23. Item M(2) deals with “mineral oil concerns”. In item M(2)(2)(d) under the heading “Distribution”, item (1) is “returnable packages”. No depreciation is allowed on these packages. What is allowed is the cost of packages actually used up as revenue expenditure. As already stated, a loss is not a revenue expenditure. Similarly, a cost is not a loss. Therefore, we reject the argument of Mr. Ray that the Tribunal has rightly held that “the loss incurred by the company in the disposal of the cylinders is a loss allowable as a revenue expenditure” under this item.
24. As already stated, the Tribunal has not properly framed this part of this question and, therefore, to pinpoint the issue, we reframe it as follows:
“Whether, on the facts and in the circumstances of the case, Rs. 27,43,107 realised (sic) (less realised?) by the assessee, on sale of the cylinders was allowable as revenue expenditure under rule 5 of the I.T Rules, 1962, read with item M(2)(2)(d)(1) of Part 1 of Appendix 1 to the said Rules?”
25. At the outset, we reject the contention of Mr. Pal, learned senior of Mr. Sengupta, that the cylinders are not packages. The finding of the Tribunal, namely, that the cylinders are returnable packages is a pure question of fact. Revenue has not challenged this finding on the ground of perversity. Therefore, this finding is binding on the revenue in this reference.
26. Since the company has used the cylinders for distribution of petroleum gas for cooking purposes, Mr. Pal urges that it cannot be said that the company has used the cylinders in its business as a mineral oil concern and as such has failed to comply with the conditions of s. 32(1) of the Act. But we do not agree with him.
27. Petroleum is a mineral oil. Petroleum gas is a product of petroleum oil. In our opinion, the expression “mineral oil concerns” includes the concerns dealing in mineral oil and its by-products and that the purpose for which the mineral oil or its by-products is sold or distributed is wholly an irrelevant consideration under this item.
28. The department also did not argue before the Tribunal that the company was not a mineral oil concern. The company, as the owner of the cylinders, has used them as a “mineral oil concern” in its mineral oil business. It has, therefore, satisfied the conditions of s. 32(1) of the Act.
29. Mr. Ray argues that the word “cost” means the difference between the purchase price and the sale price. But we reject it. Such difference may either be a profit or a loss. A profit or loss can never be a cost.
30. Mr. Ray then argues that the expression “actually used up” includes both total and partial use up and that whether these packages were “actually used up” or not should be determined with reference to the company and their actual usefulness to the company at the time of the aforesaid sale and not with reference to their subsequent user by the “refinery” and the company. He also argues that, as due to some administrative difficulties the company had sold the cylinders to the refinery, it should be held that they were “actually used up” and thus the aforesaid amount is allowable as a revenue expenditure under the aforesaid item.
31. The expression “used up” means “exhausted by use, rendered unserviceable”: (See Shorter Oxford Dictionary, Vol. II, p. 2325). We are, however, concerned with a stronger term, namely, “actually used up. The adverb”. “actually” in our opinion rules out the inclusion of any partial use up of the returnable packages. The words “actually used up” read in their context mean that the packages are actually rendered un-serviceable or can no longer be used as packages.
32. The words “actually used up” qualify the word “packages”. Therefore, the contentions of Mr. Ray that whether these packages were actually used up or not should be determined with reference to the company or on their usefulness to the company, must fail.
33. A sale of returnable packages for any reason whatsoever is wholly an irrelevant consideration under this item. Moreover, they were not sold as scrap. They were sold as cylinders and the “refinery” supplied gas in those very cylinders to the company and the company in its turn distributed gas to the consumers in those cylinders. In other words, those cylinders were actually used as cylinders in the trade both by the company and the “refinery” after the said sale. Therefore, it can never be said that the cylinders were “actually used up”.
34. In the premises, we answer the first part of question No. 1 as reframed by us in the negative and in favour of the revenue.
35. Now as to second part of question No. 1. By omitting the portions which are not relevant for our purposes we read s. 32 as follows:
“(1)……the following deductions shall; subject to the provisions of section 34, be allowed—……
(iii) in the case of any……machinery, plant which is sold, discarded……in the previous year (other than the previous year in which it is first brought into use), the amount by which the moneys payable in respect of such……machinery, plant……together with the amount of scrap value, if any, fall short of the written down value thereof:
Provided that such deficiency is actually written off in the books of the assessee……”
36. S. 32(1)(iii) is a general provision in the sense that it applies to all classes of assets specified therein on fulfilment of the conditions stated therein, whereas the aforesaid item M(2)(2)(d)(1) is a special provision, for, it applies only to returnable packages. No depreciation is allowable on returnable packages under this item because their cost is allowed as revenue expenditure when they are actually used up. The finding of the Tribunal is that these cylinders are returnable packages. Therefore, s. 32(1)(iii) cannot apply to these cylinders which are returnable packages because they are governed by the special provision, namely, the aforesaid item M(2)(2)(d)(1).
37. Moreover, there cannot be any written down value of returnable packages in view of the aforesaid item. Therefore, s. 32(1)(iii) of the Act in terms cannot, in any event, apply to returnable packages.
38. Mr. Ray, however, argues that as the cost of these packages was Rs. 1,09,63,754 and as no depreciation is allowable on the returnable packages, their written down value is Rs. 1,09,63,754 and that as these packages were sold for Rs. 82,19,947, the deficiency under s. 32(1)(iii) of the Act is Rs. 27,43,807 and, therefore, this deficiency is allowable under this section.
39. Assuming that Rs. 1,09,63,754 is the written down value of the cylinders and Rs. 27,43,807 is the amount of such deficiency, the company's claim must be held to be hit by prov. to s. 32(1)(iii) of the Act, because the company has not written off Rs. 27,43,807 in its books as enjoined by the proviso.
40. In the premises, we answer the second part of question No. 1 in the negative and in favour of the revenue.
41. Other arguments on the second part of question No. 1 and the cases cited at the Bar may now be noted without expressing our opinions on them.
42. Mr. Pal argues that, as s. 32(1)(iii) is subject to s. 34(1) of the Act, the company's claim cannot be allowed because the company did not furnish the prescribed particulars relating to depreciation on the cylinders. Mr. Ray argues that the prescribed particulars, though not furnished by the company in its return of income, were before the ITO, and, therefore, there was substantial compliance with s. 34(1) of the Act and the claim of the company should be allowed in view of the decisions in the cases of Radhika Mills Ltd. v. Commissioner Of Income-Tax, Madras, [1969] 74 ITR 661 (Mad) and Ascharajlal Ram Parkash v. Commissioner Of Income-Tax, U.P, [1973] 90 ITR 477 (All).
43. Mr. Pal disputes the correctness of the aforesaid two decisions and argues that s. 34(1), s. 139(1), the then r. 12 of the I.T Rules, 1962, and Pt. VII-A of Form No. 1 read together conclusively show that the prescribed particulars under s. 34(1) of the Act must be furnished in Pt. VII-A of Form No. 1 which forms part of the return of income and the return of income on its turn must be filed on or before the dates provided under the Act. He also argues that s. 34(1) of the Act is in the nature of a mandatory provision and since the company has not complied with it, its claim cannot be allowed under s. 32(1)(iii) of the Act.
44. Since s. 32(1)(iii) of the Act uses the expression “written down value”, Mr. Ray refers to s. 43(6) of the Act, cites the cases of CIT v. Straw Products Ltd., [1966] 60 ITR 156 (SC), CIT v. Dharampur Leather Co. Ltd., [1966] 60 ITR 165 (SC), Straw Products Ltd. v. Income Tax Officer, Bhopal & Others, [1968] 68 ITR 227 (SC) and Madeva Upendra Sinai v. Union of India, [1975] 98 ITR 209 (SC) and argues that the written down value of the cylinders was Rs. 1,09,63,754 inasmuch as no depreciation on returnable packages is allowable under the Act and in any event, since no depreciation could be allowed and the company could not and did not claim any depreciation nor any depreciation was actually allowed in the earlier years, it should be held that the written down value of the cylinders was Rs. 1,09,63,754.
45. Mr. Pal, on the other hand, argues that the quantum of the written down value is a pure question of fact and there being no such finding of the Tribunal this court is not competent to hold that Rs. 1,09,63,754 was the written down value of the cylinders and that, in any event, the question as to whether this amount was the written down value of the cylinders or not does not fall within the scope and ambit of question No. 1 and, accordingly, the aforesaid cases cited by Mr. Ray do not apply to the facts and circumstances of the instant case before us.
46. Having noted all the arguments of the learned counsel on the second part of question No. 1, we will now take up question No. 2. The learned counsel for both the parties submit that this question has not been properly framed by the Tribunal and as suggested by them we reframe it as follows:
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in allowing the development rebate of Rs. 24,15,622 although there was a shortfall of Rs. 34,827 in the development rebate reserve account created by the assessee in the accounting year?”
47. Briefly speaking, development rebate is allowable under s. 33 of the Act subject to the provisions of s. 34(3)(a) of the Act which reads as follows:
“The deduction referred to in section 33 shall not be allowed unless 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 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:………”
48. There was a shortfall in the development rebate reserve account in the accounting year. The company did not debit the excess amount of the earlier years in the profit and loss account of the instant accounting year. It also did not credit the said excess amount to the development reserve account of this accounting year to make up the said deficiency.
49. Mr. Ray argues that the rule contained in s. 34(3)(a) is not inflexible and it can be relaxed in appropriate cases and this is one of such cases in which it should be relaxed. In this behalf, he cites the cases of West Laikdihi Coal Co. Ltd. v. CIT, [1973] 87 ITR 501 (Cal) and Indian Oil Corporation Ltd. v. S. Rajagopalan, ITO, [1973] 92 ITR 241 (Bom) and also refers to a portion of Circular No. 7 of 1968 (dated 8th August, 1968), the Circular No. 8-P of 1968 (dated 17th August, 1968), the Circular No. 26 (dated 6th August, 1969), a Circular from the case of Tata Iron & Steel Co. Ltd. v. N.C Upadhyaya, [1974] 96 ITR 1 (Bom) and a Circular from [1976] 102 ITR (St.) 90, all issued by the CBDT.
50. He contends that the said shortfall arose due to a genuine mistake on the part of the company and, therefore, Rs. 24,15,622 claimed by the company should be allowed in view of the decision of the Bombay High Court in the case of Tata Iron & Steel Co. Ltd., [1974] 96 ITR 1 (Bom).
51. Mr. Ray also argues that the excess amount of the earlier years was freezed for eight years under cls. (i) and (ii) of s. 34(3)(a) of the Act and it could not be debited to the profit and loss account of the instant accounting year nor could it be credited to the reserve account of this accounting year. In this behalf, he cites the cases of West Laikdihi Coal Co. Ltd., [1973] 87 ITR 501 (Cal), Indian Oil Corporation Ltd., [1973] 92 ITR 241 (Bom) and CIT v. Veeraswami Nainar, [1965] 55 ITR 35 (Mad). But there is nothing in these decisions to support his contention.
52. Except in those cases where the CBR or the CBDT has relaxed the stringent provision of s. 34(3)(a) of the Act, there is no merit in the aforesaid contentions of Mr. Ray. In the case of Indian Overseas Bank Ltd. v. Commissioner Of Income Tax, Madras , [1970] 77 ITR 512 (SC) the Supreme Court held that the development rebate is a “concession granted but that concession is made subject to fulfilment of certain requirements” and that the “entries in the account books required by the proviso are not an idle formality”. The Supreme Court also held that “it is 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”.
53. Development rebate reserve account was not created in the aforesaid case and their Lordships of the Supreme Court were directly concerned with prov. (b) to s. 10(2)(vib) of the Indian I.T Act, 1922, which is in pari materia with s. 34(3)(a) of the I.T Act, 1961. Therefore, no development rebate under s. 33 of the Act can be allowed unless in terms of s. 34(3)(a) an amount equal to 75% of the development rebate to be actually allowed is in fact credited to the reserve account by debiting it to the profit and loss account of the relevant accounting year.
54. Further, in the aforesaid case of West Laikdihi Coal Co. Ltd., [1973] 87 ITR 501 (Cal), at page 510 of the report, our court says thus:
“The position, therefore, is that cl. (b) of the first prov. to s. 10(2)(vib) imposes two conditions. The first condition is that the assessee must debit his profit and loss account of the relevant year by an amount equivalent to 75% of the development rebate to be actually allowed in that year and credit the same to a reserve account. The second condition is that the assessee can utilise this reserve account only for the purpose specified in the statute.”
55. S. 210(1) of the Companies Act, 1956, enjoins the board of directory of a company to place the balance-sheet and the profit and loss account of the relevant year at the annual general meeting of that company. Therefore, the profit and loss account of a company has to be made up before the annual general meeting of that company is actually held.
56. The period of eight years mentioned in s. 34(3)(a) of the I.T Act, 1961, begins to run from the accounting year in which the development rebate is actually allowed. Therefore, it is imperative that an amount equivalent to 75% of the development rebate to be actually allowed must be transferred to the reserve account “at the time of making up the P/L a/c.”
57. The aforesaid judgment of the Supreme Court was considered by their Lordships of the Gujarat H.C in the case of Surat Textile Mills Ltd. v. CIT, [1971] 80 ITR 1. In the case of Tata Iron and Steel Co. Ltd., [1974] 96 ITR 1 (Bom), their Lordships of the Bombay H.C have also considered the aforesaid decision of the Supreme Court and have differed from their Lordships of the Gujarat H.C For the reasons already stated, we, however, respectfully agree with their Lordships of the Gujarat H.C on their views as to what their Lordships of the Supreme Court have actually held and with all respect to their Lordships of the Bombay H.C we are constrained to say that we are not in agreement with them on this point.
58. We are also in agreement with the decision of the Gujarat High Court in the case of Addl. CIT v. Shri Subhlaxmi Mills Ltd., [1975] 100 ITR 188 (Guj), in which it has been held that before any development rebate can be allowed as a deduction, the conditions laid down in s. 34(3)(a) of the I.T Act, 1961, must be fulfilled.
59. Two circulars were considered in the case of Tata Iron and Steel Co. Ltd., [1974] 96 ITR 1 (Bom). One of them is dated 16-11-1968 by which the CBDT directed the ITO to allow development rebate on the cost of rolling mill rolls. The other circular is said to be dated 21-11-1958 but it is actually dated 1-11-1958: (see CBR Bulletins, Vol. IV, 1958-59, Part II, pp. 670-71), and its relevant portions read as follows:
“Point No. (iii).—Whether any shortfall in the provision for the development rebate reserve can be made good in the next year and whether depreciation will be allowed in proportion to the provision made:
The law provides that no development rebate will be allowed in the case of plant and machinery installed on or after the 1st day of January, 1958, unless an amount equal to 75% of the development rebate to be actually allowed is credited to a reserve account by debit to the profit and loss account of the relevant year. As such, what is envisaged in the event of inadequate provision is total disentitlement of the development rebate, and not its abatement in proportion to the inadequacy of the reserve created. Where such shortfall is, therefore, intentional, there will be no question of permitting a carry forward of the difference, and the full amount of the development rebate which would otherwise be due will be liable to be disallowed. Cases where there is no deliberate contravention of this condition, and provision is actually made at the prescribed rate (75%) of the development rebate allowable according to the assessee's own bona fide computation, but the amount so provided is found by the ITO at the time of the assessment to fall short because the development rebate actually allowable according to the ITO's computation is larger than that computed by the assessee, however, stand on a different footing and will be dealt with sympathetically. In such cases, the ITOs have been instructed to condone genuine deficiencies subject to the same being made good by the assessee through creation of additional adequate reserve in the current year's books within the time allowed by the ITO.”
60. In terms of the aforesaid circulars, the petitioner, in that case, claimed development rebate for certain years on the rolling mill rolls after creating additional development rebate reserve by making necessary provisions in its accounts for the respective assessment years. The ITO, on the basis of the revised returns filed by the petitioner, allowed the development rebate for those years. Thereafter, notices under s. 154 of the I.T Act, 1961, were issued and for certain years development rebates were withdrawn. The Bombay High Court quashed those notices and set aside the rectification orders under art. 226 of the Constitution by holding that there was no mistake apparent from the records and that those shortfalls were due to the genuine mistake on the part of the petitioner. That apart, that case was decided on special and different facts as already stated and, therefore, it does not lend any assistance to the company before us.
61. Reliance on the other circulars was misplaced by Mr. Ray for they do not deal with the excess amounts of the earlier years and the shortfalls of the subsequent years. We are also not impressed by his. contentions in view of the second paragraph of Circular (one) dated the 14th October, 1965, issued by the CBDT which provides that if “the provision made for the development rebate reserve in the earlier year is in excess of the required amount, such excess will not be taken into account in determining the quantum of the statutory development rebate reserve required to be made in any subsequent year. It will be necessary to make full provision of 75% of the development rebate to be actually allowed in that subsequent year by debiting the amount to the profit and loss account of the relevant previous year. It is, however, open for the assessee to transfer an earlier excess to the development rebate account in the succeeding year for the purpose of making up the corresponding reserve in that later year”:
Having considered the arguments made on behalf of the parties, we opine as follows: (1) An excess amount in the earlier year's development rebate reserve account is not frozen by s. 34(3)(a) of the Act in view of its clear language; (2) The directors of a company are free to freeze the said excess amount and after doing so the company by debiting it in the profit and loss account and by crediting it to the development rebate reserve account can make up the shortfall of the accounting year in which the development rebate is actually claimed or allowed; (3) Except in those cases in which the CBR or the CBDT have relaxed the provisions of s. 34(3)(a) of the Act, it must be followed in order to earn the development rebate claimed in a particular year.
62. The shortfall in the development rebate reserve account created by the company in the accounting year was not made up by the company by creating an additional reserve or by debiting the excess amounts of the earlier years in the profit and loss account of the instant accounting year and by crediting the same in the development rebate reserve account of this instant year. It was not the case of the company before the authorities below that the said shortfall was unintentional or that there was a genuine mistake on the part of the company in that behalf. It is an admitted fact that the company has not transferred the excess amount of the earlier years in this accounting year for the purposes of making up the corresponding reserve. Non-compliance of the provisions of s. 34(3)(a) of the Act by the company is also an admitted fact. In the premises, we answer question No. 2 as reframed by us in the negative and in favour of revenue. We, however, do not propose to make any order as to costs.
R.N Pyne, J.:— I agree.