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Bombay High Court

Bombay High Court


Prakash Cotton Mills Pvt. Ltd. vs Commissioner Of Income-Tax on 11 February, 1993
Equivalent citations: 1993 203 ITR 75 Bom
Author: M S Manohar
Bench: S V Manohar, U Shah
JUDGMENT
Mrs. Sujata Manohar, J.
1. These are cross references by the Department and the assessee. The relevant assessment year is 1972-73 for
which the previous year ended on June 30, 1971. The question which is referred to us at the instance of the
Commissioner is as follows :
"Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in sustaining
the Appellate Assistant Commissioner's direction with regard to the weighted deduction under section 35B of
the Income-tax Act, 1961 ?"
2. It is an accepted position that in view of the decision of this court in I. T. R. No. 89 of 1977 - CIT v.
Prakash Cotton Mills P. Ltd. [1991] 188 ITR 713, that is to say, in the case of the present assessee itself and
dated February 22, 1991, this question requires to be answered in the affirmative and in favour of the assessee.
The question is answered accordingly.
3. The question which is referred to us at the instance of the assessee is as follows :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the
assessee-company was entitled only to the amount of development rebate attributable to the actual reserve
created by the assessee or the sum of Rs. 29,841 and not entitled to the development rebate of Rs. 2,23,811
claimed by the assessee ?"
4. The relevant facts in this connection are that during the relevant previous year which ended on June 30,
1971, the assessee had purchased new machinery worth Rs. 14,92,073. The assessee should have created
development rebate reserve on the basis of 15 per cent. of this amount equal to Rs. 2,23,811, 75 per cent. of
this latter amount which comes to Rs. 1,49,208, being the requisite reserve under the provisions of section 33
read with section 34 of the Income-tax Act, 1961. Instead, the assessee has created a reserve of only Rs.
29,841.
5. The assessee contended before the Appellate Assistant Commissioner, as also before the Tribunal that this
amount of Rs. 29,841 was a mistake. According to the assessee, the figure which they intended was Rs.
2,98,414, which is equivalent to 20 per cent. of the value of the new machinery which was purchased, i.e., to
say, 20 per cent. of Rs. 14,92,073. The assessee tried to rectify this mistake by creating additional reserve to
the extent of the shortfall in its accounts for the year ending June 30, 1974, which was before the completion
of assessment for the assessment year 1972-73. This assessment was made only on February 14, 1975. The
Tribunal has rejected the contention of the assessee in this behalf and upheld the directions given by the
Appellate Assistant Commissioner to the Income-tax Officer to allow development rebate to the extent that it
is attributable to the actual reserve of Rs. 29,841.
6. Before us, the assessee has relied upon the circular issued by the Central Board of Direct Taxes, dated
October 14, 1965, as clarified by another circular of the Central Board of Direct Taxes, dated January 30,
1976, which is reproduced in [1976] 102 ITR (St.) 90. As per the later circular dated January 30, 1976, the
original circular issued by the Central Board of Direct Taxes, dated October 14, 1965, dealt with three
contingencies which are set out in paragraph 1 of that circular at (a), (b) and (c). We are concerned here with
Prakash Cotton Mills Pvt. Ltd. vs Commissioner Of Income-Tax on 11 February, 1993
Indian Kanoon - http://indiankanoon.org/doc/564355/ 1
contingency (c) which is as follows (at page 90 of 102 ITR (St.)) :
"1(c). Where there was no deliberate contravention of the provisions, the Income-tax Officer may condone
genuine deficiencies subject to the same being made good by the assessee through creation of adequate
additional reserve in the current year's books in which the assessment is framed."
7. The circular of January 30, 1976, after referring to various judgments of the Supreme Court and the High
Courts in paragraphs 2, 3 and 4, has clarified that only part (a) in paragraph 1 stands superseded by the
decision of the Supreme Court referred to therein. Parts (b) and (c) of paragraph 1 hold good. It is, therefore,
clarified that the withdrawal of the circular dated October 14, 1965, was confined only to part (a) of paragraph
1.
8. After this clarificatory circular was issued, the Supreme Court has had an occasion to consider in passing
part (b) of the circular of October 14, 1965, in the case of Shri Shubhlaxmi Mills Ltd. v. Addl. CIT [1989] 177
ITR 193. The Supreme Court in that case was required to construe section 33(1), section 34(3)(a) and
Explanation. The Supreme Court has held that in order to claim a deduction on account of development rebate
under section 33(1), it is obligatory that the debit entry 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
first put to use. It has observed (at page 197) :
"The circular dated January 30, 1976, does not affect the true position in law."
9. In view of section 34 which has been subsequently amended retrospectively, we need not, however, go into
this aspect of the case relating to the binding nature of this circular at any length. We will assume for the sake
of the present reference that part (c) of paragraph 1 of the circular dated January 30, 1976 (see [1976] 102 ITR
(St.)) 90), is in force and the Department is bound to give the benefit of this part of the circular to the assessee.
But in order that the assessee can claim the benefit of this part of the circular, it is contemplated that there
should be no deliberate contravention of any provision of law by the assessee; only then the Income-tax
Officer is given the power to condone any genuine deficiencies subject to the assessee making good the
deficiency through creation of additional reserve in the current year's books on which the assessment is
framed. In the present case, however, even if we assume that the assessee made a mistake in putting down the
figure of Rs. 29,841 instead of the figure of Rs. 2,98,414, the assessee had not made a calculation of the
reserve to be so created in accordance with law. The assessee was entitled, in the first place, to calculate the
reserve not at 20 per cent. of the outlay but only at 15 per cent. of the outlay. Moreover, only 75 per cent. of
this amount could be created as a reserve. This exercise was not undertaken by the assessee at all although its
books of account are being regularly and properly audited by a firm of chartered accountants. The entire basis
of calculation adopted by the assessee was wrong. In our view, in such a situation, paragraph (c) of the
circular dated January 30, 1976 (see [1976] 102 ITR (St.) 90), is not attracted. This is not a case of condoning
any genuine deficiencies as contemplated under that circular.
10. In this view of the matter, we are not examining the question relating to the binding character of the
circular issued by the Central Board of Direct Taxes even though it may grant a relaxation in respect of the
law as laid down under the Income-tax Act, 1961. As the benefit of the circular is not available to the
assessee, in our view the Tribunal has rightly come to the conclusion that it has come to, though we hold so on
slightly different grounds. Therefore, the question referred to us at the instance of the assessee is answered in
the affirmative and against the assessee.
11. No order as to costs.
Prakash Cotton Mills Pvt. Ltd. vs Commissioner Of Income-Tax on 11 February, 1993
Indian Kanoon - http://indiankanoon.org/doc/564355/ 2

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