274. Condition for creation of reserve – Whether stands satisfied if reserve created in the year of installation or use and/or in subsequent year(s) is equal to requisite amount of 75 per cent of actual allowance in any year or years

1. The Board had an occasion to consider the question whether the development rebate reserve created in respect of a particular machinery or plant in the year of installation or use and/or in the year or years subsequent thereto, to the extent of availability of book profits, can be taken into account for the purposes of section 34(3)( a) in the year or years of actual allowance of the development rebate.

2. Sub-sections (1)(a ) and (1A)(c) of section 33 provide for deduction of development rebate, subject to fulfilment of certain conditions in respect of previous year in which the ship was acquired or the plant and machinery was installed or, if it is first put to use in the immediately succeeding previous year, then, in respect of that previous year.  According to sub-section (2) of the said section, the actual allowance in the relevant assessment year is to the extent to reduce the total income as referred to therein, to nil and the balance, if any, is allowed in the same way in the following year or years but no portion of the unabsorbed rebate is to be carried forward for more than eight assessment years immediately succeeding the relevant assessment year.  Section 34(3)(a), inter alia, provides that deduction of development rebate under section 33 shall not be allowed unless an amount equal to 75 per cent of the development rebate to be actually allowed is debited to the profit and loss account of the relevant previous year and credited to the reserve account.

3. After considering various aspects of the matter, the Board have decided that the requirements of the provisions of sections 33 and 34(3)(a) will be considered to have been satisfied if the accumulated reserve in respect of the said machinery or plant up to the year or years of actual allowance is equal to 75 per cent of the amount of development rebate to be actually allowed. This would mean that the condition for creation of requisite reserve would stand satisfied if the sum total of the reserve created either in the year of installation or use or in the subsequent year or years is equal to the requisite amount of 75 per cent of the actual allowance of development rebate in any year or years.

4. Necessary instructions may be issued to the Income-tax Officers to complete the pending assessments on the lines indicated above.  Past assessments should also be reviewed and the above-noted stand be taken in the pending appeals.

Circular : No. 259 [F. No. 202/37/78-IT(A-II)], dated 11-7-1979.

JUDICIAL ANALYSIS

APPLIED IN – This circular was referred to and applied in Bharat Vijay Mills Ltd. v. ITO [1985] 154 ITR 786 (Guj.), with the following observations :

” . . . . The authorities were . . . under an obligation, in our opinion, after July, 1979 circular not only to complete the pending assessments of the lines indicated in the circular but also to review the past assessments, and to take the appropriate stand according to the said circular in pending appeals. If, therefore, any direction was wanting in the December, 1975 circular, as contended by the Revenue, that lacuna has been completely filled in by the last circular of July, 1979. It is, therefore, obligatory, in our opinion, on the part of the income-tax authorities even where the assessments have become final and complete, to review them. The authorities can review the past assessments only by reopening them either under section 147 or section 154 or section 263. . . .” (p. 797)

EXPLAINED IN – In CIT v. Devy Ashmore India Ltd. [1993] 68 Taxman 207 (Cal.), the abovesaid circular was explained with the following observations :

“The first part of this paragraph (para 3) of the circular clearly states that the CBDT had decided that the requirements of the provisions of section 33 and section 34(3)(a) would be considered to have been satisfied if the accumulated reserve in respect of the said machinery or plant up to the year or years of actual allowance was equal to 75 per cent of the amount of development rebate to be actually allowed.  This leaves no room for doubt that requisite reserve has to be created up to the years in which the allowance could be claimed and allowed. Mr. Bhattacharjee has laid great emphasis on the latter part of this paragraph in which the Central Board had decided that the conditions would stand satisfied ‘if the sum total of the reserve created either in the year of installation or used in the subsequent year or years is equal to the requisite amount of 75 per cent of the actual allowance of development rebate, in any year or years’. Mr. Bhattacharjee’s contention is that it is not only in the year or up to the year in which the relief is claimed that this reserve can be created.  The reserve may be created subsequently.  In our view that is not the position in law.  The language of the statute is quite clear on this point.

Moreover, it is to be noted that the Supreme Court in the case of Shri Shubhlaxmi Mills Ltd. (supra) had referred to the circulars issued by the CBDT on 4-10-1965 and 13-1-1976 and observed “We have carefully considered the circulars and we do not think that the circulars effect the true position of law”.  In our view,the position of law is quite clear and the circulars have not changed the law in any way.  The creation of reserve was mandatory and as pre-condition for claiming the relief.  As the assessee had not created the requisite reserve at the material time, the assessee was not entitled to the benefit of deduction under section 32A.”

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