COMMISSIONER OF INCOME TAX vs DAVY ASHMORE INDIA LTD. (NOW TATA ASHMORE LTD).

SUHAS CHANDRA SEN, J. :

Mr. Sukumar Bhattacharjee, Advocate appearing on behalf of the assessee has submitted that the name of the assessee company has been changed from Davy Ashmore India Ltd. to Tata Ashmore Ltd. Let the change be recorded.

The Tribunal has referred the following question of law to this Court under s. 256(1) of the IT Act, 1961 :

"Whether, on the facts and in the circumstances of the case and having regard to the Supreme Court decision in the case of The Indian Overseas Bank Ltd. Vs. The Commissioner of Income Tax, Madras, , the Tribunal was justified in law in holding that investment allowance under s. 32A of the IT Act should be allowed to the assessee although the provisions of s. 32A(4)(ii) of the IT Act were not complied with ?"

The assessment year involved is 1977-78 for which the relevant period of account is the year ended on 31st March, 1976.

The Tribunal has found the following facts :

"The reference relates to the point about non-allowance of investment allowance under s. 32A of the Act. The assessee was eligible for investment allowance under s. 32A of the Act. The assessee did not make specific reserve as required under s. 32A (4) of the Act. According to s. 32A (4) (ii) the deduction under the above section could not be allowed unless an amount equal to 75 per cent of investment allowance to be actually allowed was debited to the profit and loss account of the previous year and credited to investment allowance reserve account.

The assessee came in appeal before the CIT(A) and took the additional ground by which it took objection against the non-allowance of investment allowance. The ground of the assessee was accepted. The assessee relying on CBDT Circular No. 305 dt 12th June, 1981, read with Circular No. 249, dt. 11th July, 19979, urged that simply because the reserve was not created in the earlier year, the denial of investment allowance was not proper. The assessee had a genuine difficulty and, accordingly, the investment allowance should been allowed to the assessee. The CIT(A) did not accept the argument of the assessee."

On appeal by the assessee before the Tribunal, the Tribunal concluded the matter as hereunder :

"The assessee claimed deduction under s. 32A of the Act. The assessee has fulfilled all the conditions which were required for the deduction under s. 32A of the Act. However, the only objection had been taken by the ITO that the assessee did not create reserve as required under s. 32A(1) of the Act. The assessee was required according to s. 32A(4)(ii) to create a reserve of 75 per cent of the total amount by debiting it in the Profit & Loss account and creating the investment allowance reserve amount. The first submission is that reserve of Rs. 3 lakhs was created in the account. It was unclassified reserve and, therefore, this reserve may be treated as a reserve created under s. 32A(1) and alternative argument of the assessee was that inadvertently the reserve was not created and in view of the circular stated above, the assessees claim amy be allowed when the reserve had been created on 15th July, 1981.

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Under the above circumstances, even if that position is not acceptable to the ITO, the claim of the assessee could not be denied when the reserve had been created by the assessee on 15th July, 1981 in view of the above circular. Therefore, the ITO is directed to allow investment allowance to the assessee."

Sec. 32A(1) provides for investment allowance as under :

"An assessee can claim deduction in respect of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed or if the ship, aircraft, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of the previous year, of a sum by way of investment allowance equal to 25 per cent of the actual cost of the ship, aircraft, machinery or plant to the assessee."

Therefore, the assessee can claim deduction only in the previous year in which the plant or machinery was acquired or immediately succeeding the previous year if the plant or machinery was first put to use in such year. The allowance can be granted only if the conditions laid down in sub-s. (4) were fulfilled. Sub-s. (4) of s. 32A is under :

(4) The deduction under sub-s. (1) shall be allowed only if the following conditions are fulfilled, namely :

(i) The particulars prescribed in this behalf have been furnished by the assessee in respect of the ship or aircraft or machinery or plant;

(ii) An amount equal to seventy-five per cent of the investment allowance to be actually allowed is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the Investment Allowance Reserve Account) to be utilised -

(a) for the purpose of accruing, before the expiry of a period of ten years next following the previous year in which the ship or aircraft was acquired or the machinery or plant was installed, a new ship or a new aircraft or new machinery or plant (other than machinery or plant of the nature referred to in cls. (a), (b) and (c) of the proviso sub-s. (1) for the purposes of the business of the undertaking; and

(b) until the acquisition of a new ship of a new aircraft or new machinery or plant as aforesaid, for the purposes of the business of the undertaking other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India;

Provided that this clause shall have effect in respect of a ship as if for the word seventy five the word fifty has been substituted."

The assessee in the relevant year of account ended on 31st March, 1976 did not create any investment allowance reserve as required by the Act. The contention of the assessee is that a general reserve was created. But the general reserve is not the same thing as an investment allowance reserve. The assessee is free to spend the money standing to the credit of the general reserve as and when he likes and for whatever purpose he likes. Investment allowance reserve cannot be utilised except for the specific purpose laid down in the statute and also in the manner laid down in the statute.

Mr. Bhattacharjee has argued that the nomenclature is not very important. That may be so. But Reserves can only be created by the shareholders at the annual general meeting. When the accounts are placed at the annual general meeting, it is for the shareholder to decide what is to be done with the surplus profits of the company. A general reserve may be created or the surplus may be taken as provision for a specified purpose or a specific reserve can be created for a specific contingency. All these decisions have to be taken at the annual general meeting. If the shareholders decided to create a general reserve, it is not open to the assessee now to contend that this reserve should be treated as investment allowance reserve.

It was argued that the reserve which was created in 1981 was due to an obvious mistake. Later on the mistake was rectified. I am unable to uphold the contention that the reserve created by shareholder at the annual general meeting can be rectified by the company subsequently and the reserve can be turned into a different type of reserve by any post facto act. Without expressing any final opinion on this aspect of the matter, it may be pointed that even this step for changing the nomenclature of the reserve was taken on 21st March, 1980 and the requisite reserve was created on 15th July, 1981. The relevant year in this case is the year ended on 31st March 1977. Under the Act, reserve has to be created by debiting the Profit & Loss Account of the relevant year. Any subsequent creation of reserve or debiting of the Profit & Loss Account of any other years account will not fulfill the condition laid down in s. 32A(4). The reserve has to be created in the year in which the deduction has been claimed by debiting the Profit & Loss Account of the relevant previous year.

The Supreme Court in the case of Shri Shubhlaxmi Mills Limited Vs. Additional Commissioner of Income Tax, Gujarat, pointed out that in order to claim deduction on account of development rebate under s. 33(1) of the IT Act, it was obligatory that the debit entries in the Profit & Loss Account and the credit entries in reserve account should be made in the relevant previous year in which the machinery or plant was installed or first put to use. That was the condition for securing the benefit of development rebate and if the condition was not satisfied the development rebate could not be claimed at all. This Principle laid down by the Supreme Court will apply to the facts of this case.

Reference may also be made to an earlier judgment of the Supreme Court in the case of The Indian Overseas Bank Ltd. Vs. The Commissioner of Income Tax, Madras, where the Supreme Court held that assessee was not entitled to claim development rebate because the grant of the rebate was a concession subject to the fulfilment of the conditions prescribed under the proviso. The creation of a reserve fund under s. 17 of the Banking Companies Act was not sufficient compliance with the requirement, even though the amount so carried to the reserve fund might be large enough to cover both the requirements. Special concession has been granted by the provisions of s. 32A. It is for the assessee to fulfill the conditions to avail the benefit of this section. If the assessee failed to fulfill the conditions the assessee will not be entitled to claim the concession. The conditions cannot be relaxed to enable the assessee to make the claim. The assessee must strictly comply with the requirements of law in order to get the benefit of law.

Our attention was drawn by Mr. Bhattacharjee to two circulars issued by the CBDT. The first one is the circular dt. 11th July, 1979 (No. 259) and the second circular is dt. 12th June, 1981 (No. 305) relating to investment allowance. It was pointed out by Mr. Bhattacharjee that there was some confusion in respect of these two circulars. The intention of the CBDT was to grant allowance even though the reserves were not created at the time when the relief was claimed. Our attention was drawn to para 3 of the Circular No. 259 dt. 11th July, 1979 on the subject of allowance of development rebate in which it was stated as follows :

"3. After considering various aspects of the matter, the Board have decided that the requirements of the provisions of s. 33 and s. 34(3) (a) of the Act will be considered to have been satisfied if the accumulated reserve in respect of the said machinery or plant upto 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 conditions 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."

The first part of this paragraph of the circular clearly states that Board had decided that the requirements of the provisions of s. 33 and s. 34(3) (a) of the Act would be considered to have satisfied if the accumulated reserve in respect of the said machinery or plant upto 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 upto 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 CBDT had decided that the conditions 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. Mr. Bhattacharjees contention is that this reserve can be created. The reserve amy 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 Sri Subhalaxmi Mills Ltd. vs. Addl. CIT (supra) had referred to the circulars issued by the CBDT on 4th October, 1965 and 13th January, 1976 and observed "We have carefully considered the circulars and we do not think that the circulars affect the true position of law". In our view, the position of law is quite clear and the circular have not changed the law in any way. The creation of reserve was mandatory and was precondition 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 if deduction under s. 32A of the Act.

In that view of the matter, the question is answered in the negative and in favour of the Revenue.

There will be no order as to costs.

BHAGABATI PRASAD BANERJI, J. :

I agree.