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Judgment
Ismail, J.—The Income Tax Appellate Tribunal, Madras Bench, u/s 256(1) of the Income Tax Act, 1961 (hereinafter referred to as ""the
Act""), has referred the following two questions for the opinion of this Court:
Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in directing the Income Tax Officer to allow
development rebate of Rs. 23,678 on gas cylinders for the assessment year 1968-69?
Whether the Appellate Tribunal is correct in holding that subsequent correction of the company''s account would meet the requirement of the
statutory provision for the assessment year 1968-69 ?"" For the assessment year 1968-69, corresponding to the accounting period ending 31st
October, 1967, the assessee made a total claim for development rebate of Rs. 72,507. The said amount was made up of two items :
Rs.
(1) Development rebate on gas cylinders of the value of Rs.
23,678
1,18,389 installed during the year
(2) Development rebate on other machinery of the value of Rs. 48,829
2,44,145 installed during the year
Total 72,507
For making the claim for development rebate, the total reserve created by the assessee was Rs. 42,657 only of which Rs. 36,622 was
necessary to sustain the claim for development rebate on other machinery. Thus, then was only a reserve of Rs. 6,035 left for the development
rebate of Rs. 23,678 claimed on gas cylinders. Since the actual reserve created for the claim for development rebate on gas cylinders was only Rs.
6,035, the development rebate admissible to the assessee, if admissible at all in respect of gas cylinders, would be only Rs. 8,046 as against Rs.
23,678 claimed by the assessee but the entire claim was disallowed by the Income Tax Officer, since he took the view that gas cylinders did not
qualify for development rebate. The accounts of the assessee in this case were adopted by the annual general meeting of the company on April 29,
1968. After the said adoption the directors of the company purported to amend the accounts by making an additional provision so as to make the
total reserve as Rs. 54,380 against Rs. 42,657 originally provided. On the basis of this action of the board of directors, a claim was made before
the Income Tax Officer that the necessary reserve as contemplated by the statute, to which we shall make reference later, had been created and
that, therefore, the assessee was entitled to the entire development rebate of Rs. 23,678 on gas cylinders, with which alone we are concerned in
the present case. The Income Tax Officer rejected this contention holding that the annual general meeting having adopted the accounts on April 29,
1968, it was not open to the directors to tamper with those accounts on July 23, 1968, and that the accounts as adopted by the annual general
meeting of the company not having created the required reserve, the assessee was not entitled to the entirety of the development rebate claimed by
it. It is under these circumstances that the Income Tax Officer rejected the claim for development rebate of the entire amount.
The assessee preferred an appeal against the above order of the Income Tax Officer and during the pendency of the appeal, the annual general
meeting of the company which took place on April 26, 1969, ratified the amendments to the accounts made by the board of directors on July 23,
1968. In view of this, the assessee contended before the Appellate Assistant Commissioner that the defect pointed out by the Income Tax Officer
was not present then and that, therefore, the assessee was entitled to the entire development rebate. The Appellate Assistant Commissioner
declined to accept this argument on the basis that at the time when the assessment was made there was no valid reserve created as required by the
statute and, therefore, the assessee was not entitled to the entire development rebate as claimed by it. However, he allowed development rebate to
the extent of Rs. 8,046 since the available reserve of Rs. 6,035 supported such allowance.
The assessee preferred a further appeal to the Income Tax Appellate Tribunal and the Tribunal by its order dated May 7, 1971, allowed the
appeal. The Tribunal took the view that there were two mistakes in the calculation of the figures which resulted in the creation of the reserve of Rs.
42,657 only, that it was those two mistakes which were subsequently rectified--in the first instance by the board of directors and later by the
annual general meeting of the company on April 26, 1969--and that such rectification as ratified by the annual general meeting of the company had
the effect of creating the required reserve from the beginning, since the accounts must be deemed to have stood as rectified from the very
beginning. For this purpose, the Tribunal relied upon the provisions contained in the CPC as well as the rectification orders contemplated by
Section 154 and Section 254(2) of the Act. In ""this view it allowed the appeal preferred by the assessee. It is the correctness of this conclusion of
the Tribunal that is challenged before us by the Commissioner of Income Tax in the form of the two questions extracted already.
Before we go into the point raised, it is necessary to refer to the actual statutory provisions. Section 33 of the Act provides for allowance of
development rebate. Sub-section (1)(a) of that section states that in respect of a new ship or new machinery or plant 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 that
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). Section 34(3)(a) of the Act provides :
The deduction referred to in Section 33 shall not be allowed unless an amount equal to seventy-five per cent. of the development rebate to be
actually allowed is debited to the profit and loss account of the relevant previous year and credited to a reserve account to be utilised by the
assessee during a period of eight years next following for the purposes of the business of the undertaking, other than-
(i) for distribution by way of dividends or profits ; or (ii) for remittance outside India as profits or for the creation of any asset outside India.
Thus, it is clear from the provisions contained in Section 34(3)(a) of the Act that the creation of a reserve of an amount equal to seventy-five per
cent. of the development rebate to be actually allowed is a condition precedent for the deduction to be allowed u/s 33. Consequently, at the time
when the Income Tax Officer considers the claim for development rebate made by an assessee, if it is not established before him that such a
reserve has been created, the assessee will not be entitled to the allowance of development rebate. This follows simply from the clear and
categorical language contained in Section 34(3)(a) of the Act.
In this particular case, as we have pointed out already, the accounts as adopted by the annual general meeting of the company for the relevant
year on April 29, 1968, had not created a reserve as contemplated by Section 34(3)(a) of the Act, but had created a reserve only for a smaller
amount. It is in view of this only that the Appellate Assistant Commissioner allowed development rebate to the extent that the reserve actually
created would sustain the claim and did not allow the claim of the assessee in its entirety. It was only after the assessment was completed by the
Income Tax Officer that the annual general meeting of the company for the next year held on April 26, 1969, ratified the amendments made by the
board of directors on July 23, 1968, by enhancing the amount of reserve to meet the statutory requirement. The question for consideration is
whether, under those circumstances, the assessee would be entitled to the development rebate to the entire extent. We are of the opinion that the
Tribunal went off at a tangent, when it proceeded to apply the principles of the CPC as well as Section 154 and Section 254(2) of the Act for
coming to the conclusion that when the annual general meeting of the company on : April 26, 1969, ratified the action of the board of directors on
July 23, 1968, such ratification had the effect of amending the accounts of the company for the relevant previous year from the year beginning. As
a matter of fact, from one point of view such an exercise on the part of the Tribunal is totally irrelevant for the purpose of considering the question
that arose for decision before the Tribunal.
It is not in dispute before us that u/s 210 of the Companies Act, the board of directors have to lay before the annual general meeting of the
company the balance-sheet and the profit and loss account of the company and the company has to adopt the same and that once the company at
its annual general meeting adopts the accounts of the company, the adoption becomes final and that cannot be tampered with or altered or
modified by the board of directors. As a matter of fact, that the board of directors cannot modify such accounts is not in dispute before us and all
that was contended before us was that the company at the subsequent annual general meeting held on April 26, 1969, had ratified the action taken
by the board of directors on July 23, 1968, and that the effect of such ratification was that the company had amended its accounts from the very
beginning, namely, when it originally adopted the accounts on April 29, 1968. We are unable to accept this argument, at any rate, for the purpose
of the claim for development rebate. We are clearly of the opinion that having regard to the language of Section 34(3)(a) of the Act, the necessary
reserve as contemplated by the statute should have been created at least by the time when the Income Tax Officer considered the claim of the
assessee and disposed of the same. We are not considering any question as to at what anterior point of time such an amendment or change or such
creation of reserve should have been made for the purpose of claiming the development rebate. Once the necessary reserve has not been created
by the time the Income Tax Officer considers the claim of the assessee, the Income Tax Officer will have no power to grant the development
rebate and his order rejecting the claim will be fully in accordance with law and the validity of such an order cannot be challenged on the basis of
any subsequent attempt on the part of the assessee to comply with the requirements of the statute. We may mention that though several decisions
of different High Courts which examined this provision, were cited before us, not one of them is of any assistance for deciding this particular
question which we are called upon to decide in this reference, namely, when the necessary reserve had not been validly and legally created at the
time when the Income Tax Officer passed the assessment order, whether any subsequent amendment of the accounts under which necessary
reserve was created could affect the order already passed by the Income Tax Officer and enable the assessee to claim the rebate in full before the
appellate authority. As already indicated by us, from the clear language of Section 34(3)(a) of the Act, we are of the opinion that any amendment
of the accounts or creation of the reserve subsequent to the order of the Income Tax Officer will not be of any avail so long as the necessary
reserve was not properly, validly and legally created at the time when the Income Tax Officer disposed of the matter and that no change made
subsequently will have the effect of rendering the order of the Income Tax Officer erroneous so as to enable the appellate authority to interfere with
that order on that ground. In view of this conclusion of ours, as a result of the construction of the relevant statutory provisions, it is needless to refer
to the various decisions cited before us.
Under these circumstances, we answer the questions referred to us in the negative and against the assessee. There will be no order as to costs.