S.B. Majmudar, J.@mdashThe Income Tax Appellate Tribunal has referred questions for our opinion arising out of its judgment dated March 31, 1977. Some of the questions are referred at the instance of the Revenue and the remaining are referred at the instance of the assessee. The referred questions read as under :
At the instance of the Revenue :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the transfer of development rebate reserve to the general reserve would not amount to the utilisation of the development rebate reserve for any of the prohibited purposes under sub-section (3) of section 34 of the Act ?
(2) Whether the Tribunal was right in law in holding that the assessee was entitled to development rebate of Rs. 5,61,443 in the year under consideration ?
(3) Whether the Income Tax Appellate Tribunal was justified in law in allowing the assessee expenditure of Rs. 27,000 being contribution to the superannuation fund and Rs. 12,000 being contribution to the provident fund in respect of the directors of the company ?"
At the instance of the assessee :
"(4) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in confirming the disallowance of service line charges of Rs. 36,918 ?
(5) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that on acquisition of assets of the value of more than the development rebate reserve, without making any entry in the development rebate reserve account, it could not be held that the same was utilisation of development rebate reserve for the said purpose ?
(6) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessee is not entitled to weighted deduction u/s 35B of the Act on expenditure of Rs. 1,15,310 ?"
2. Out of these six questions, question No 6 which is referred at the instance of the assessee was not pressed before us at the time of final hearing of this application by the learned advocate for the assessee, and hence this judgment will be confined to the remaining five question only. The sixth question will stand disposed of as not answered on account of not being pressed.
3. In order to appreciate the nature of the controversy underlying these questions, a few introductory facts become necessary to be noticed at the outset.
4. Introductory facts. - The assessment year is 1971-72. The assessee is a limited company. At the relevant time, it had under its control different divisions, viz., Sarabhai Chemicals, Swastic Oil Mills, Sarabhai Common Services, Sarabhai Glass and Sarabhai Glass and Sarabhai Machineries. The assessee-company was previously known as Karamchand Premchand Private Limited but subsequently, it underwent a change and it was known as Shahibag Entrepreneurs Private Limited and that is why the name of the assessee-company was permitted to be altered in the appellate proceedings before the Tribunal from Karamchand Premchand Private Limited to Shahibag Entrepreneurs Private Limited.
5. The activities of the assessee were at Baroda and Bombay with the head office at Ahmedabad. In the accounting year of the assessee which was from April 1, 1970, to March 31, 1971, corresponding to the assessment year 1971-72, the assessee created a development rebate reserve of Rs. 4,42,975 with a view to enabling the assessee to have development rebate of Rs. 5,61,443. After the close of the accounting year, in the next accounting year ending on March 31, 1972, the assessee transferred this development rebate reserve to the general reserve account. It is the case of the assessee that this was done as the development rebate reserve had got exhausted by being utilised in purchase of new plant and machinery which had a far larger value as compared to the development rebate reserve. In that year, the opening balance in the general reserve account was Rs. 410, lakhs, and in addition to the transfer of the development rebate reserve, a further sum of Rs. 126 lakhs was transferred from the profit and loss account bringing the total roughly to Rs. 542 lakhs. out of this sum, the assessee declared a divided of Rs. 29,000. The Income Tax Officer disallowed the claim for development rebate as, according to him, once development rebate reserve was transferred to the general reserve, when a dividend of Rs. 29,000 was paid out of the same, it could be said that the amount in the development rebate reserve was utilised for paying dividend which was prohibited user of such reserve and, consequently, according to the Income Tax Officer, the assessee was not entitled to deduction of the said rebate as per section 34(3)(a) of the Income Tax Act 1961, as applicable at the relevant time. The Income Tax Officer held that the development rebate reserve should be a distinct and separate reserve which can be utilised for authorised purposes only and, if it was utilised for one of the prohibited uses during the period of eight years, the Revenue was competent to withdraw the development rebate u/s 155. As this had come to the notice of the Income Tax Officer before the assessment for the relevant year was finalised, following the decision of this court in
6. The assessee carried the matter in appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner came to the conclusion, agreeing with the assessee, that it was entitle to get the benefit of development rebate as the assessee had fulfilled all necessary conditions for allowance of development rebate. He noted the fact that development rebate reserve was transferred to the general reserve but, according to him, as they were funds available to the assessee for distribution of dividend from the profits earned, and even otherwise, from the large balance in the general reserve account, distribution of dividend cannot be attributed to the amount mentioned in the development rebate reserve and, therefore, in the view of the Appellate Assistant Commissioner, the assessee was not disabled from claiming the said rebate.
7. The Revenue carried the matter is second appeal before the Tribunal. The Tribunal, agreeing with the Appellate Assistant Commissioner, dismissed the appeal of the Revenue. So far as the contention of the Revenue about disallowance of the provident fund contribution was concerned, the same was not accepted by the Tribunal.
8. We shall deal with the other points arising out of the Revenue''s appeal and the assessee''s appeal as dealt with by the Tribunal at the appropriate stage. As noted earlier, from the common decision of the Tribunal, the aforesaid five questions have been referred for our opinion.
9. We shall deal with these questions topic-wise.
10. Questions Nos. 1, 2 and 5 - These questions deal with the allowance of development rebate. Mr. Shelat, for the Revenue, in support of questions Nos. 1 and 2 submitted that on a proper interpretation of sections 33 and 34 read with section 155 of the Act, it should be held that the assessee was not entitled to development rebate of Rs. 5,61,443 as claimed by it as, after having created the development rebate reserve, the assessee had not kept it intact but had closed that account and had transferred it to the general reserve account. That once dividend was declared by the assessee, it can be said that the amount represented by the development rebate reserve also got utilised pro tanto in paying the dividend and hence, following the ratio of the decision of the Supreme Court in
11. On the other hand, Mr. K. C. Patel, for the assessee, vehemently contended that questions Nos. 1 and 2 should be answered in favour of the assessee. He also took exception to the observations of the Tribunal found in para 15A of the judgment which has resulted in question No. 5 at his instance. So far as question Nos. 1 and 2 are concerned, Mr. Patel submitted that the only conditions precedent for earning development rebate are to the effecting that new plant and machinery must be owned by the assessee and must be wholly utilised for the purpose of business and that, for earning such development rebate at the rate provided by section 33(1)(b), the assessee was required to create a development rebate reserve of an amount equivalent to 75 per cent. of the development rebate to be actually allowed on such machinery by debiting such amount to the profit and loss account to the relevant previous year in respect of amount to a reserve account. If these conditions precedent are satisfied, the assessee would be entitled to earn development rebate and that it was for the Revenue to show that such development rebate and that it was for the Revenue to show that such development rebate which was granted would be liable to be recalled if it was established as per section 155(5) of the Act that the amount set apart in the development rebate reserve account was utilised by the assessee during the period of eight years for any prohibited purposes, i.e., for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India. On the facts of the present case, the Revenue has failed to establish its case about utilisation of the development rebate reserve amount for any such prohibited purposes. On the contrary, there was sufficient evidence on record to show that the entire reserve had got exhausted and the equivalent amount earmarked therein was utilised in installation of fixed assets during the relevant period. Thereafter, nothing further was required to be done about the development rebate reserve and, as per the settled accountancy principles, it was rightly taken back to its source, viz., the general reserve. Mr. Patel also submitted that, looking to the profits earned by the general reserve account, especially the opening balance, payment of Rs. 29,000 by way of dividend can, by no stretch of imagination, have been ascribed to the balance of development rebate reserve account. On the other hand, there was overwhelming evidence to show that fixed assets at a very large cost were installed by the assessee during the relevant year. Hence, it cannot be said or even whispered that the assessee had utilised the amount of development rebate reserve for any prohibited purpose by way of distribution of dividend. In this connection Mr. Patel vehemently relied upon a number of decisions of this court and other High Courts to which we will make reference hereafter. He also submitted that u/s 205 of the Companies Act dividends have to be distributed only out of the profits of the year and any other mode of distributing dividend is prohibited. As the profits of the year were very large, there was no question of utilising the development rebate reserve for paying dividend.
12. So far as question No. 5 was concerned, Mr. Patel submitted that it is difficult to appreciate how the Tribunal could have entertained a doubt as reflected in para 15A of the judgment that the assessee cannot urge that only because some assets have been acquired, it should be deemed that it was utilisation of development rebate reserve for that purpose and that the Tribunal agreed that something more was necessary for this purpose, and even if clear entries are not passed linking up this reserve with the acquisition of assets. Some other material may perhaps be necessary. In this connection, it was urged that there was overwhelming evidence on record to show that a huge amount was in fact spent by the assessee during the relevant year for acquisition of new fixed assets and that as there was no clear earmarked fund as development rebate reserve, it would be impossible to suggest that specific entries should be made in that account and if it was shown, as has been done in the present case, that, as compared to the development rebate reserve account balance, a higher amount was spent by the assessee during the relevant year for purchasing fixed assets, the purpose of creation of the development rebate reserve can be said to have been exhausted and fulfilled and nothing was left to be done, save and except carrying forward balance of that account to the general reserve account and that was not de hors the well established principles of accountancy which are uniformly being followed by such concerns. It was, therefore, contended that question No. 5 should be answered in favour of the assessee.
13. In the light of these rival contentions, we may now proceed to a consideration of these questions. As noted earlier, all these questions pertain to the same topic of grant of development rebate. It would, therefore, be profitable to have a look at the relevant statutory provisions on the topic. Section 33 of the Act deals with development rebate. Section 33(1)(a) with which we are concerned reads as under :
"In respect of a new ship or new machinery or plant (other than office appliances or road transport vehicles) which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section and of section 34, be allowed a deduction in respect of the previous year in which the ship was acquired or the machinery or plant was installed or, if the ship, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year, a sum by way of development rebate as specified in clause (b)."
14. It becomes obvious that this provision has to be read with section 34 as it is made expressly subject to the provisions of section 34. The assessee who claims development rebate on account of installation of new plant or machinery during the relevant year, has to satisfy the requirements of both sections 33(1)(a) as well as section 34. When we turn to section 34, the relevant provision thereof on this aspect is as under :
"34. (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 any previous year in respect of which the deduction is to be allowed under sub-section (2) of that section or any earlier previous year (being a previous year not earlier than the year in which the ship was acquired or the machinery or plant was installed or the ship, machinery or plant was first put to use) and credited to a reserve account to be utilised by the assessee during a period of eight years next following for the purpose 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 assets outside India."
15. A conjoint reading of these provisions projects the following picture :
(i) Before an assessee can claim development rebate on account of installation of new machinery or plant, he must show that he has installed new machinery or plant owned by him and it is wholly used for the purpose of his business.
(ii) He must debit an amount equal to 75 per cent. of the development rebate to be actually allowed on such machinery or plant to the profit and loss account of the relevant previous years.
(iii) He must credit the said amount to a separate reserve account, i.e., development rebate reserve account; and
(iv) The amount earmarked for such reserve account has to be utilised by the assessee during the period of eight years for the purpose of business of the undertaking other than for distribution by way of dividend or profits or for remittance outside India as profits or for the creation of any asset outside India.
16. Once the aforesaid conditions are satisfied, the claim for development rebate would get fructified. We may now turn to section 155(5) which deals with the right of the Revenue to recall wrongly allowed development rebate. It reads as under :
"(5) Where an allowance by way of development rebate has been made wholly or partly to an assessee in respect of a ship, machinery or plant installed after the 31st day of December, 1957, in any assessment year u/s 33 or under the corresponding provisions of the Indian Income Tax Act, 1922 (11 of 1922), and subsequently -
(i) at any time before the expiry of eight years from the end of the previous year in which the ship was acquired or the machinery or plant was installed, the ship, machinery or plant is sold or otherwise transferred by the assessee to any person other than the Government, a local authority, a Corporation established by a Central, State or Provincial Act or a Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956), or in connection with any amalgamation or succession referred to in sub-section (3) or sub-section (4) of section 33; or
(ii) at any time before the expiry of the eight years referred to in sub-section (3) of section 34, the assessee utilise the amount credited to the reserve account under clause (a) of that sub-section -
(a) for distribution by way of dividends or profits; or
(b) for remittance outside India as profits or for the creation of any asset outside India; or
(c) for any other purpose which is not a purpose of the business of the undertaking,
the development rebate originally allowed shall be deemed to have been wrongly allowed, and the Assessing Officer may, notwithstanding anything contained in this Act, recompute the total income of the assessee for the relevant previous year and make the necessary amendment; and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) if that section being reckoned from the end of the previous year in which the sale or transfer took place or the money was so utilised."
17. A conjoint reading of these provisions makes it clear that once the assessee satisfies the positive conditions for earning development rebate as laid down in sections 33 and 34(3)(a) by installing the machinery in question and by utilising the same for his own business purposes and by creating the necessary development rebate reserve by debiting the amount to the profit and loss account, the assessee would become entitled to claim development rebate and if the deeming provisions of section 155(5) are to be brought into force, it will have to be established by the Revenue that the development rebate reserve amount was spent by the assessee during the period of eight ears after creation of the reserve for any prohibited purposes as enumerated in sub-clauses (a), (b) and (c) of clause (ii) of sub-section (5) of section 155 of the Act. It is of course true, as held by the Division Bench of this Court in
18. Now, so far as the facts of the present case are concerned, it is not dispute that the assessee, during the relevant year, had debited the profit and loss account and had a created development rebate reserve as required u/s 34(3)(a) of the Act. It also cannot be seriously disputed that the assessee, during the relevant previous year, had installed additional fixed assets by way of plant and machinery at a huge cost going much more beyond the amount reflected by the development rebate reserve. Thus, the main conditions for earning development rebate were established in the present case. However, the grievance of the Revenue appears only to the effect that, having created a development rebated reserve, it was not allowed to continue for eight years and it was carried to the general reserve. Now, so far as this grievance is concerned, it becomes obvious that nowhere in section 34 it has been laid down as a separate condition that the development rebate reserve created by debiting the profit and loss account should be kept intact by the assessee for eight years. On the contrary, section 34(3)(a) shows that the assessee is given liberty and latitude to utilise the amount standing in the said reserve account at any time during the period of eight years next following for any of the permissible purposes of business. It does not mean that the amount cannot be utilised within a period of eight years at any time. All that has to be shown is that the credited amount should be utilised by the assessee for the purposes of his business and the said utilisation was not for any prohibited purposes like distribution by way of dividend or distribution of profit. The Income Tax Officer''s grievance was that because the said reserve account was closed and was credited to the general reserve account from which ultimately Rs. 29,000 were paid as dividends, it can be said that the development rebate reserve account was utilised for distribution by way of dividends. But, before such conclusion can be reached, it has to be shown on the evidence on record that it was that balance amount which was actually utilised by the assessee for distribution by way of dividends. If this is not established, no case would survive for the Revenue to go u/s 155(5) and to the recall grant of development rebate to the assessee once all other conditions precedent for earning such rebate were established by the assessee. On the scheme of the sections as they stand, it is not possible to agree with the extreme contention of the Revenue that the development rebate reserve account should be kept intact for eight years. In fact, in fairness to the learned advocate for the Revenue, it must be stated that he submitted that even he would not subscribe to such an extreme position. But his contention was that, in order to earn development rebate, the assessee must show that he had utilised the reserve account amount only for permissible business purposes and entries in the account maintained by him must clearly indicate this fact and, in the absence of such entries, it would be impossible for the Revenue to trace movement of this fund and this would disentitle the assessee from claiming development rebate. Even this contention of Mr. Shelat does not logically flow from the aforesaid statutory scheme, where it is nowhere indicated by the Legislature that the reserve fund account created must either be kept for eight years intact or that such reserve account balance cannot be carried, after its purpose is exhausted, to the general reserve account or that any particular entry should be posted in such account after it is once created. Postings of entries as contemplated by the Legislature by enacting section 34(3)(a) are only of two types (i) debiting to the profit and loss account of the amount equivalent to 75 per cent. of the development rebate to the actually allowed to the assessee and (ii) crediting this amount to the reserve account. Once these entries are posted, the legislative mandate laying down conditions precedent for earning development rebate would get satisfied. Further, posting of entries by way of condition precedent is not contemplated by the said provision and, therefore, the treatment to be meted out to such reserve account created as per the statutory requirements would abide by general accountancy practice to which we will advert hereafter; but, before we do so, we may refer to the factual position which emerges on record.
19. Mr. Patel for the assessee vehemently contended that, in the present case, there was overwhelming evidence on record to show that the amount of Rs. 29,000 by way of dividend distributed to the preference shareholders was a very meagre amount. For paying the same, so help from the balance of the development rebate reserve was at all required. He submitted that as pointed out to the Income Tax Officer by the assessee, within two days of the notice received by him from the Income Tax officer, an amount of Rs. 4,42,975 was transferred from the statutory development reserve account to the general reserve account in the relevant year 1971-72, while the capital expenditure in fixed assets undertaken by the assessee during that time was Rs. 1,94,37,790. In that year, the profit after tax was Rs. 40,10,651. Thus, it was easy to visualise that, from the profit available after tax, it was not difficult to distribute a meagre amount of Rs. 29,000 by way of dividend. No need existed for distributing this dividend from the amount transferred from the statutory development rebate reserve account. It was also contended that the opening balance of the general reserve account was also quite substantial even before this amount was transferred from the development rebate reserve and, therefore, the assumption on the part of the Income Tax Officer that the amount of Rs. 4,42,975 could not have been utilised for paying dividend was totally misconceived. He submitted that the balance-sheets of a last number of years were produced before the Income Tax Officer and they showed that the opening balance as on March 31, 1970, in the general reserve was Rs. 4,12,69,856 while as on March 31, 1971, the opening balance was Rs. 4,12,69,878 and, therefore, there was no need to fall back upon the amount transferred from the statutory development rebate reserve of Rs. 4,42,975 for paying Rs. 29,000 by way of dividend. Mr. Patel, therefore, submitted that, in the facts of the present case, there was no question of utilisation of the development rebate reserve for distributing dividends as wrongly assumed by the Income Tax Officer and once it is so, no question would survive for holding that the assessee was not entitled to claim development rebate. We find considerable force in these submissions of Mr. Patel. He also invited our attention in this connection to the following facts and circumstances emerging on the record indicating the factum of utilisation of development rebate reserve amount, that is, its equivalent amount and even more, for installation of fixed assets :
(i) In the reply to the notice issued by the Income Tax Officer, it was clearly pointed out that the current assets appearing in the balance-sheet as on March 31, 1970, showed that the statutory development rebate had been utilised for capital expenditure and converted into fixed assets which are of a permanent nature and are utilised for business. That the funds utilised each year by the company in the investment of fixed assets were considerably more than the funds represented by statutory development rebate reserve of the respective previous year. For example, during the accounting year 1970-71, corresponding to the assessment year 1971-72, funds utilised in fixed assets amounted to Rs. 98,78,006 and the funds representing the statutory development rebate reserve created in the accounting year 1969-70 and brought forward in 1970-71 amounted to Rs. 4,50,118, that is to say, funds utilised in fixed assets in 1970-71, included the funds represented by the statutory development rebate reserve created in 1969-70 and, in fact, were far in excess thereof. Thus, the entire development rebate reserve fund was exhausted by utilising its equivalent and even more for capital expenditure. This aspect of the matter was not challenged by the Revenue at any stage.
(ii) The fixed assets purchased were reflected by the relevant entries in the books of account, by debiting fixed asset account and by making corresponding entries in the bank account and/or suppliers'' account in case of cash transaction or credit transaction, as the case may be.
(iii) Machinery account and the corresponding bank account entries clearly reflected this position.
(iv) Balance-sheet for the relevant year showed fixed assets and additions to the fixed assets during the relevant year and the amount spent for the same.
(v) Depreciation charge on additional machinery also established the factum of purchase of new machinery by way of fixed capital asset during the relevant year.
(vi) There was overwhelming evidence on record to show that development rebate was claimed in the subsequent years for newly installed machinery and it was granted.
(vii) The Income Tax Officer himself had granted for the subsequent year depreciation on these assets.
(viii) Not only that but the board of directors had passed a resolution dated September 7, 1972, acknowledging the fact that fixed assets were purchased and installed during the relevant years and the entire development rebate reserve account was exhausted and, consequently, the balance amount had to be transferred to the general reserve account as no longer required for fulfilling the statutory charge of utilising the same for business purposes as required by the relevant provisions.
(ix) The resolution of the board of directors was actually implemented and, accordingly, transfer entries were effected transferring the amount from the development rebate reserve account to the general reserve account.
20. Relying on these salient features which have emerged on record and which cannot be seriously disputed, Mr. Patel submitted that, on the facts of the present case, it can easily be visualised that the balance standing in the development rebate reserve account to the tune of Rs. 4,42,975 which was transferred to the general reserve account was fully utilised to the extent of its money equivalent by the assessee during the relevant year for installing new machinery and, therefore, the statutory charge imposed by the Legislature while enacting section 34(3)(a) had got fully fructified and implemented and, in fact, the development rebate reserve itself got exhausted and its purpose was fulfilled. As the equivalent amount and even more had got converted into fixed assets which were installed, there would remain no occasion for the Revenue even to contend that this balance amount would have been utilised for distribution of dividend as that occasion could not arise when the very fund matched by an equivalent amount and more was already converted into fixed assets.
21. We find considerable force in the aforesaid contentions of Mr. Patel. On the aforesaid salient features of the case, no other view is possible. It cannot be urged by the Revenue that, despite these established facts and for which no serious objection could be raised, it can still be submitted that the amount of development rebate reserve would have been utilised by the assessee for distributing dividend of Rs. 29,000. In this connection, Mr. Patel took us to section 205 of the Companies Act which lays down as under :
"205. (1) No dividend shall be declared or paid by a company for any financial year except out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub-section (2) or out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with those provisions and remaining undistributed or out of both or out of money provided by the Central Government or a State Government for the payment of dividend in pursuance of a guarantee given by that Government."
22. It becomes obvious that no dividend can be declared or paid by any company in any financial year except out of profits of the company. Consequently, if the facts of the case show that, during the relevant year, there was substantial profit earned by the company as shown by the profit and loss account and as compared to the profits earned, the distributed dividend was a very small amount, it can easily be visualised that dividend must have been paid from the profits as enjoined by the aforesaid provision.
23. Our attention was invited by learned counsel for the assessee to certain well-established practices in Advance Accountancy. Firstly, he took us to "Advanced Accounting" by Jamshed R. Batliboi, twenty-fifth edition 1970. Discussion by learned author at paras 3 and 4 regarding specimen transactions and how entries are to be effected was relied upon. It was to the following effect :
"The following illustrative transactions will serve to emphasise the two-fold effect of each business dealing and also as to how the double effect of every business transaction is reflected by one account being debited and another account being credited.
1. Bought Goods worth Rs. 500 for cash from X. - This is a cash purchase, and the accounts concerned are both Asset Accounts the Goods Account and the Cash Account. As goods have come in, Goods Account will have to be debited, and as Cash has gone out, Cash Account will have to be credited. There is no need to open X''s Account inasmuch as X has been paid cash at the time of purchase and is not therefore our creditor.
2. Bought Goods from B on credit for Rs. 600. - This is a credit purchase, and the two accounts affected are the Goods Account (Asset Account) and B''s Account (Personal Account). As goods have come in, Goods Account will have to be debited, and since B has become our creditor, his account will have to be credited. Thus, the two-fold effect of this transaction is brought into record."
24. It was submitted that if capital assets are purchased by the assessee on cash basis, the assets account will be debited and the cash account will have to be credited and if it is a credit purchase, the two accounts affected will be the goods account (asset account) and the seller''s personal account and, in no case, will there by any question of making entries in any statutory, fictitious development rebate reserve account as such account has to be maintained in accordance with the relevant provisions of the Act and it has nothing to do with accounting practice. We were then taken to the discussion of the learned author at page 550 of the aforesaid book in connection with the profit and loss appropriation account where the learned author has observed thus :
"The net profit made by a company as appearing from its Profit and Loss Account is transferred to the credit of another account styled Profit and Loss Appropriation account. The object of this account is to show the amount of the net profit available for disposal and how the same has been appropriated. Any balance of profit left from the previous year will appear as the first item on the credit side of this account. On the debit side of this account will appear all such items as represent allocation or appropriation of net profits, such as dividends declared, amounts set aside for Debenture Redemption Fund, Reserve Fund, Dividend Equalisation Fund, etc. Provision made in respect of Income Tax payable, as also any percentage of the net profits payable to the general manager, should be charged to this account. This account must always show a credit balance representing profits not disposed of and will appear on the liabilities side of the Balance-Sheet."
25. We were then taken to the discussion on reserve and reserve fund at page 725 of the said book. It has been observed therein as under :
"The distinction between a Reserve Fund and a Reserve or a Reserve Account needs to be clearly drawn, as these terms are indiscriminately applied to items which are essentially different, thus giving rise to considerable confusion on the part of the layman. A Reserve or a Reserve Account is a provision for some known or expected loss, such as ''Reserve for Bad Debts'', ''Reserve for Discounts'', ''Reserve for Repairs'' and ''Renewals'', ''Reserve for Disputed Claims'', etc. It is not, therefore, a surplus - it is not represented by assets - and it is not available for dividends. While a Reserve Fund is formed as a result of appropriating profits, a Reserve Account is created by making a charge against revenue before true profits can be ascertained. Whereas it is impossible to create a Reserve Fund except out of divisible profits, a Reserve may be provided even during periods when a loss has been sustained. If these ''Reserves'' were designated ''Provisions'' and were always shown by way of deduction from the particular assets the loss on which they are intended to cover, no one could then mistake a ''Provision for Bad Debts'' or a ''Provision for Renewals'' for a Reserve Fund."
26. The learned advocate for the assessee then took us to certain observations by William Pickles in his text book on Accountancy, third edition, published by the English Language Book Society and Sir Isaac Pitman and Sons Ltd., London. At page 184 of the said text book are found observation about reserves and provisions. So far as reserves are concerned, the following observations are worth noting :
"As a preliminary to closer study, reserves and provisions may be defined as follows -
(1) Reserves-Amounts set aside out of profits and other surpluses 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.
(2) Provisions. - Amounts set aside out of profits and other surpluses to provide for :
(a) depreciation, renewals or diminution in value of assets, or
(b) any known liability of which the amount cannot be determined with substantial accuracy.
It follows, therefore, that -
(1) Any amount set aside for the purposes described in (2) (a) and (b) (above) in excess of estimated requirements must be regarded as a reserve, and
(2) Sums set aside to meet known liabilities of which the amount can be determined with substantial accuracy do not fall within the definition of a provision and should therefore be described as accruals or accrued liabilities.
Reserves are in effect part of the undistributed profits of the business and therefore part of the proprietorship, whereas provisions and accruals are a diminution of proprietorship in the form of a liability or diminution of an asset. The former are broadly appropriations of, the latter charge against, profits."
27. So far as the further observations regarding reserves are concerned, they are found at pages 185 and 186 of the said book. The learned author has observed in this connection as under :
"Reserves are with special reference to limited companies, divided into two main classes, depending upon whether or not they may be regarded as arising from normal profits or gains available for distribution through the profits and Loss Account as dividends. They are -
(1) Capital Reserves. - These are not in limited company accounting normally regarded as available for distribution as dividend; such reserves arise from;
(a) Sale of fixed assets at a profit (in practice, the surplus over book value is often taken to Capital Reserve, although strictly the capital profit is only the excess of sale proceeds over cost).
(b) Profit of a company accrued before incorporation or purchase.
(c) Premium on shares or debentures.
(d) Profit on redemption of debentures.
(e) Profit on forfeiture of shares.
(f) Surplus on revaluation of assets and liabilities.
(g) Capital redemption reserve fund.
28. These matters are dealt with in more detail in Chapter XXIII but it may be stated broadly that in certain circumstances some of these profits may be considered as revenue but the better practice is to regard them as capital; others are subject to special restrictions and treatment in accordance with the provisions of the Companies Act, 1948.
(2) Revenue Reserves. - These are normally regarded as available for distribution through the Profit and Loss account, but are themselves divided into two classes - those immediately and those not immediately so available :
(i) General Reserve. - This reserve is created by setting aside profits in order to strengthen the general financial position of the business. Such profits, however, remain available for distribution and for this reason, it is often described as a ''free'' reserve. In this group should be included any undistributed balance of the Profit and Loss Account (by deduction, if a debit balance).
(ii) Specific Reserve. - Under this heading are included amounts set aside out of profits for a specific purpose or because of a specific obligation, which, though still revenue, are not immediately available for distribution. The best example of this arises in the accounts of limited companies when a company engages to set on one side a portion of profits until debentures-which for this purpose may be considered the equivalent of a loan-are repaid; throughout the whole period of liability in respect of the loan, the reserve set aside is part of the undistributed profits and upon repayment of the loan may be transferred back to the Profit and Loss Account or to the General Reserve."
29. Relying on the observations on specific reserve, it was submitted that once the purpose of the reserve is exhausted, the balance of the reserve account has to be transferred to the profit and loss account or to the general reserve account and that is precisely what has been done by the assessee.
30. In connection with book-keeping entries to be effected while creating the specific reserve by debiting the profit and loss appropriation account, the following well-established procedure for effecting book-keeping entries was relied upon. This procedure is found at page 846 of the aforesaid book :
"The book-keeping entries are at the date of the creation of Fund :
(1) Debit Profit and Loss Appropriation Account With the yearly
Credit Sinking Fund Account sum to be set
aside.
(2) Debit Sinking Fund Investment Account With the yearly
Credit Cash sum invested.
This process will be repeated each year.
In addition, the annual interest will have to be dealt with thus :
(1) Debit Cash On receipt of
Credit Sinking Fund Account Interest.
(2) Debit Sinking Fund Investment Account On reinvestment
Credit Cash of Interest.
Upon realisation and redemption the entries are :
(1) Debit Cash On sale of
Credit Sinking Fund Investment Account Investment.
(2) Debit Debentures Account On redemption
Credit Cash of debentures.
(3) Debit Sinking Fund Account With part of
Credit Reserve Sinking Fund no
longer required."
31. Taking a clue from the aforesaid observations, it was submitted that even for a sinking fund account, when the sinking fund is realised, it is not necessary to continue it and, in that eventuality, the sinking fund account is to be debited and the reserves are to be credited.
32. Coming to the development rebate reserve, for allowance as contemplated under the Income Tax Act, the discussion of Vidya Sagar Aggarwal in Guide to Company Balance-sheet and Profit and Loss Account, published in 1986 by Hind Law House at Pune at pages 162 and 163 was relied upon. It has been observed therein :
"After the expiry of eight years or on the acquisition of new assets the amount of the development rebate reserve will be available for distribution as dividend and will be transferred to the general reserve account. The amount of development rebate is a charge to the profit and loss account."
33. It was submitted that till expiry of eight years or till acquisition of new assets, the development rebate reserve can be treated to be a charged reserve which would become free the moment the purpose of its creation is established. In this connection, the observation of the learned author on "Free Reserves" at page 184 were pressed into service :
"Free reserves includes balance in the share premium account, capital and debentures redemption reserve and such reserve that remains after redemption of preference shares or debentures. Free reserves does not include the balance in any reserve created for repayment, if any, of future liability or depreciation in assets or for bad and doubtful debts. Any other reserve shown in the balance-sheet of the company are to be treated as free reserves. It includes statutory development rebate reserve, investment allowance reserve."
34. In the book "Terminology for Accountants", revised edition by the Canadian Institute of Chartered Accountants, the meanings assigned to "profit and loss account", "reserve" and "reserve fund" at pages 69, 75 and 75 respectively, were pressed into service. So far as "profit and loss account" is concerned, the meaning assigned reads thus :
"1. The ledger account to which the balances of the revenue income, expense and loss accounts at the end of an accounting period are transferred, to show the net differences as the net income or net loss for the period.
2. (Br.) (a) Retained earnings (b) The combined statement of income and retained earnings".
35. So far as "reserve" is concerned, at page 75, the following meaning is assigned to the said term :
"1. An amount appropriated from retained earnings or other surplus, at the discretion of management or pursuant to the requirements of a statute, the instrument of incorporation or by-laws of a company or a trust indenture or other agreement, for a specific or general purpose such as future declines in inventory values, general contingencies, future plant extensions, and redemption of stocks and bonds. The reserve indicates that an undivided or unidentified portion of the net assets, in a stated amount, is being held or retained for general or specific purposes. 2. Under income tax legislation, the term has several special meanings."
36. So far as "reserves fund" is concerned, on the same page, it has been pointed out :
"A pool of designated assets, usually cash and investment securities, earmarked for a specified purpose, e.g., sinking fund for bond redemption."
37. So far as accounting practice in connection with appropriation of net income goes, reliance was placed on Dictionary for Accountants, Fourth edition, by Eric L. Kohler, Pretince-Hall Inc., Englewood Cliffs, New Jersey. At pages 30 and 31 of the said dictionary, the following observations on this topic are found :
"The disposition of non-corporate net income by the owner or partners, or of corporate net income by resolution of the directors (or, in Britain, by stock holders), sometimes summarized at the foot of an income statement; as, the setting aside or commitment of net income for dividends, the allocation of net income to a sinking fund or other appropriated surplus reserve or the transfer of net income or the balance of net income to earned surplus (retained earnings). Among corporate enterprises there is some difference of opinion as to what items are income deductions (i.e., deductions from operating revenues before the determination of net income) and what items should be regarded as net-income appropriations; as a rule, the former are unusual expense including losses; the latter transactions with stockholders or an earn marking of earned surplus. In British practice, appropriations also include ''direct'', (i.e., income) taxes. See income deduction; net income."
38. At page 370 is found relevant discussion in connection with "reserve" :
"1. A segregation or earmarking of retained earnings (earned surplus) evidenced by the creation of a subordinate account; appropriated surplus; a ''true'' reserve. The earmarking may be temporary or permanent, the purpose being to indicate to stockholders and creditors that a portion of surplus is recognized as unavailable for dividends. Examples : reserve for contingencies; reserve for improvements; sinking fund reserve.
2. The total amount of recognized shrinkage in the cost of any fixed asset or class of fixed assets, credited to a separate account; a valuation or allowance account. Examples : reserve for bad debts; reserve for (accumulated) depreciation (of fixed assets); reserve for amortization (of intangibles); see these terms.
3. Accrued liability; as, reserve for federal income tax.
4. The understatement of financial condition as employed in the phrase secret (or hidden) reserve.
5. In the federal Government, an appropriation or a part thereof not apportioned but set aside for possible future use or for return to the Treasury. Uses of the term other than in senses 1 and 5 are declining the substitution of allowance having gained considerable support in recent years."
39. In the light of these established accounting practices, it becomes clear that for earning development rebate, as a condition precedent, development rebate reserve of the requisite amount as indicated by section 34(3)(a) has to be created by the assessee during the year mentioned in the provisions. That has been done by the assessee. As discussed earlier, there is no dispute on this point. Factually, it has also been found as discussed earlier that an amount more than equivalent to the said reserve amount was actually spent by the assessee during the relevant time for installing capital assets. Therefore, the very purpose of the development rebate reserve was exhausted. That was done within eight years of the creation of such a reserve. There is no dispute that it was so done in the very next year. If that is so, how accounting entries are effected after the purpose of the reserve was exhausted is the question which is to be answered on the anvil of the established accounting practice and on which the statute is silent. Consequently, in the light of the aforesaid settled accounting practice, it was open to the assessee to deal with the development rebate reserve which had itself become a free reserve and to carry forward the said amount to the general reserve. Consequently, posting of such entries cannot be treated to be in any way illegal or contrary to established accounting practice. All that the revenue apprehended was that the dividend might have been distributed from the general reserve out of the nucleus provided by the balance carried forward from the development rebate reserve account. We have already seen earlier that this apprehension was misconceived as in fact and also in law, dividend had to be distributed out of profits and there were huge amount of profits available for meeting the amount of Rs. 29,000 by way of dividend which was distributed. Consequently, on the facts of this case, there was no escape from the conclusion that all the conditions precedent as contemplated by section 33 read with section 34(3)(a) of the Act were satisfied by the assessee for not only earning development rebate but for retaining it and the prohibited purposes enumerated by section 34(3)(a)(i) and (ii) were absent on the facts of the present case. There was no occasion for the Revenue to fall back upon section 155(5) of the Act. This discussion would have put an end to the controversy on questions Nos. 1 and 2 but for the fact that certain authorities were pressed into service by both the sides and hence, it would be necessary to quickly glance at them.
40. Mr. Shelat for the Revenue invited our attention to a decision of the Madras High Court in the case of
41. Our attention was then invited to another judgment of the Madras High Court in
"The assessee was not entitled to the development rebate. The grant of this rebate was a concession subject to the fulfilment of the conditions prescribed under the proviso, and the creation of a reserve fund u/s 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."
42. It was further stated that (ar page 514) :
"The reserves 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 (in the present case, the period is reduced to eight years) for the purposes of the business of the undertaking. The nature of the two reserves is different. They are intended to serve two different purposes.... 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."
43. It is difficult to appreciate how the ratio of this judgment confirming the Madras High Court view can be pressed into service on the facts of the present case. In fact, it is this judgment which has prompted the Income Tax Officer to hold against the assessee. As seen earlier, it is not the Department''s case that such separate reserve was not in fact created by the assessee as required by section 34(3)(a). Once this is done, how the reserve has to be dealt with after its purpose is exhausted is entirely a different question which is not covered by the aforesaid decision. On the facts of the present case, as the condition precedent is satisfied, the assessee has definitely earned the development rebate as claimed.
44. Mr. Shelat then took us to
45. The Division Bench then examined the contention of the Revenue that, if the separate development rebate reserve created u/s 34(3)(a) was not kept intact for a period of eight years and that such reserve was merged with the general reserve at any time during the course of the specified period of eight years, the Income Tax Officer was authorised to act u/s 154 read with section 155(5) and to amend the order of assessment. The said contention which was seriously pressed for consideration by the Revenue was repelled by the Division Bench on an interpretation of the relevant provisions and it was held that, in the first place, the impugned order could have been passed only if section 155(5) was attracted, for it is by virtue of the fiction therein enacted that the development rebate originally allowed could be treated as having been wrongly allowed and action could be taken to rectify the mistake taking advantage of the enlarged period of limitation therein prescribed. Now, in order that the fiction can be invoked, it must be shown that the assessee had utilised the amount credited to the reserve account u/s 34(3)(a) before the expiry of the period of eight years, (i) for distribution by way of dividends or profits or (ii) for remittance outside India as profits, or (iii) for the creation of any asset outside India, or (iv) for any other purpose which is not a purpose of the business of the undertaking. Section 155(5) does not expressly provide that if the special reserve, which was created u/s 34(3)(a) is merged with any other reserve, the development rebate shall be straightway deemed to have been wrongly allowed. On this reasoning, the contention of the revenue that development rebate reserve could not be utilised for eight years and the reserve should be kept intact was repelled. It is true that the Division Bench thereafter examined a further aspect of the matter and came to the conclusion that, in fact, the development rebate reserve account was kept intact in a separate reserve without being utilised for a period of eight years and it was not used for any prohibited purposes and, after the expiry of the period of eight years, a decision was taken by the petitioner-company to merge the special reserve with the general reserve with effect from the last day of the completion of the period of eight years. But, even that apart, the Division Bench, in terms, interpreted the relevant provisions of the Act and held that there was no necessity to keep a separate development rebate reserve intact for all eight years and it can be used for business purposes which are not prohibited by the statute. In view of the aforesaid decision on this point, the main plank of attack of the Revenue in the present case would get displaced. As discussed earlier, the factual position in the present case in stronger than what obtained in
46. Mr. Shelat next invited our attention to
"In order to claim the deduction on amount of development rebate u/s 33(1) of the Income Tax Act, 1961, it is obligatory that the debit entries in the profit and loss account and the credit entry in a reserve account should be made in the relevant previous year in which the machinery or plant is installed or fist put to use. In view of the Explanation added with retrospective effect from the commencement of the Act, to clause (a) of section 34(3), it is clear that what is contemplated is the result of the profit and loss account disclosed by the books of the assessee. Mere book entries will suffice for creating such a reeve fund. The debit entries and the entries relating to the reserve fund have to be made before the profit and loss account is finally drawn up. This is a condition for securing the benefit of development rebate and if the condition is not satisfied, the deduction on account of development rebate cannot be claimed at all."
47. In the light of the aforesaid settled legal position, it becomes obvious that, while effecting mere book entries on creation of a development rebate reserve, necessary debit and credit and credit and credit entries have to be made before profit and loss accounts are finally drawn up. If the assessee misses to take such a step, he can be said to have missed the bus so far as the claim for development rebate is concerned. On the facts of this case, such is not the situation. In is not in dispute that debit entries of requisite amounts were effected in the profit and loss account and corresponding credit entries were made in the development rebate reserve account by the assesses. That was done before the profit and loss account was finally drawn up. Consequently, the aforesaid decision of the Supreme Court rendered on the facts before them can be of no assistance to the Revenue in the present case.
48. Mr. Shelat then took us to
"Under section 33 of the Income Tax Act, 1961, for the purpose of grating development rebate, different categories are contemplated. One category is of the articles or things specified in the Fifth Schedule of the Act which would be entitled to development rebate of 35 per cent. of the cost of the machinery or plant. Another category is the category is the general category which governs other business entitled to development rebate at 20 per cent. Section 34(3)(a) provides that no development rebate u/s 33 can be granted unless a reserve equal to 75 per cent. of the rebate ''to be actually '' allowed u/s 33 is created by the assessee concerned. This is a condition precedent for earning development rebate u/s 33 and being a condition precedent, it is required to be strictly construed because development rebate is a special concession or relief granted by the Act which cannot be earned unless the statutory condition attached to it is satisfied."
49. Even this decision can be of no avail on the facts of the present case. It is not in dispute that the full reserve of 75 per cent. of the rebate to be actually allowed u/s 33, was in fact, created by the assessee. Consequently, there is no incomplete compliance with the condition precedent in the present case as was the case before this court in the aforesaid case.
50. Mr. Shelat then took us to the Calcutta High Court decision in
51. We were then taken to
52. Mr. Shelat then took us to
53. The resume of the aforesaid decisions cited by the Revenue shows that one of them helps the Revenue but, on the contrary, the Division Bench decision of this court in
54. We may now turn to a few of the decisions on which reliance was placed by the learned advocate for the assessee. In
"It was undisputed that the payment of loan incurred to the World Bank or to the Government was one for business and it was a user of money for the purpose of the undertaking of the assessee and was not a user prohibited u/s 155(5)(ii) of the Income Tax Act, 1961, that is these amounts were not paid for distributed of dividends or for remittance of profits outside India."
55. It was further observed (headnote) :
"It is true that, normally a reserve must be for an unspecified liability or unknown liability but it this case, we are dealing with the question of reserve account which is supposed to be used for the purpose of the business of the undertaking and that the reserve account is prohibited from being for payment of dividends or remittance of profits outside India."
56. As, factually it was not found that monies were utilised for payment of dividends to shareholders outside India, the development rebate which was earned was not liable to be withdrawn. This judgment was relied upon by Mr. Patel for the assessee in support of his contention that, if factually, it is found that the amount represented by the development rebate reserve and equivalent amount and even more amount was spent installing fixed assets, there would remain no case for the Revenue to invoke section 155(5) of the Act.
57. Mr. Patel next invited our attention to another judgment of the Division Bench of the Calcutta High Court in
58. Mr. Patel then took is to
59. In view of the aforesaid discussion, there is no escape from the conclusion that the Revenue had made out no case for withdrawal of development rebate from the assessee for the concerned year. Questions Nos. 1 and 2, therefore, require to be answered in the affirmative, in favour of the assessee and against the Revenue.
60. That leaves out of consideration the aspect reflected by question No. 5 which has been referred for our opinion at the instance of the assessee. That question flows from the observations of the Tribunal in para 15A of its judgment. So far as these observations are concerned, no exception can be taken to the view expressed by the Tribunal while agreeing with Mr. Desai for the Revenue that the assessee cannot urge that only because some assets have been acquired, it should be deemed that there was utilisation of the development rebate reserve for that purpose. No such provision is found in any part of the statute. The Tribunal was also right in saying that some other material is necessary. But, as we have already discussed earlier, there is a lot of material on record as contradistinguished from something more which was expected by the Tribunal and it could be found out that the amount earmarked in the development rebate reserve charged for utilisation for business purposes was a small amount as compared to the larger and substantial amount that was already utilised for installation of fixed assets at the relevant time. Unfortunately, all these points were not highlighted before the Tribunal and, therefore, the Tribunal felt that even if clear entries are not passed linking up this reserve with acquisition of assets, some other material may perhaps be necessary. Such observations, on the facts of this case, are not useful as there is overwhelming evidence on record to which we have made detailed reference earlier for showing utilisation of this amount for permissible business purposes.
61. When we turn to question No. 5 as framed and referred for our opinion, it becomes obvious that the said question will have to be answered in the negative for the simple reason that it cannot be said that the Tribunal was justified in holding that on acquisition of assets of value of more than the development rebate reserve, without making any entry in the development rebate reserve account, it could not be held that the same was utilisation of the development rebate reserve for the said purpose. This answer becomes obvious in the light of the settled accountancy practice discussed by us earlier. Therefore, entry or no entry in the development rebate reserve account, if independently it is shown from the evidence on record that any equivalent or higher amount far in excess of the charged amount found in the development rebate reserve account was in fact utilised at the relevant time by the assessee for permissible business purposes, the mere absence of entries in the development rebate reserve account cannot be held to go against the assessee for negativing his claim for development rebate. Consequently, question No. 5 will have to be answered in the negative, in favour of the assessee and against the Revenue.
62. Question No. 3. - So far as this question is concerned, it will have to be answered in favour of the assessee and against the Revenue as it is fully covered by the decision of a Division Bench of this court in
63. Question No. 4. - This question centres round the claim for deduction of Rs. 36,918 said to have been spent by the assessee during the relevant time by way of service line charges. Even this question is covered in favour of the assessee by a Division Bench judgment of this court in Sarabhai M. Chemicals Pvt. Ltd. v. CIT [1981] 17 ITR 74. That was a case concerning a sister concern of the present assessee. That sister concern also made payment for contribution for a new power line so that electric supply could be obtained without interruption. The amount paid by the assessee in that case as its share for cable line charges recovered by the GEB was held to be revenue expenditure and not capital expenditure. In this connection, B. J. Divan C.J., speaking for the Division Bench, has made the following pertinent observations (headnote) :
"If a payment has to be made for augmenting the productivity of the profit-making structure that payment would be revenue expenditure and not capital expenditure. Therefore, where payment is made for securing or augmenting electrical power supply, so that the profit-making apparatus or the profit-making structure can be operated with greater productivity and production can be increased, the payment will partake of the character of revenue expenditure."
64. The facts in the present case on the basis of which service line charges were claimed as permissible revenue expenditure are almost parallel. Respectfully following the aforesaid Division Bench judgment, question No. 4 will have to be answered in the negative, in favour of the assessee and against the Revenue.
65. Reference disposed of accordingly with no order as to costs.
