Karnataka H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that for the purpose of giving set-off of development rebate relating to earlier assessment years against the profits of the asst. yr. 1974-75, such development rebate should be redetermined according to the appropriate rates applicable to a priority industry ?

Counsel Appeared

K. Srinivasan & H. Raghavendra Rao, for the Revenue : G. Sarangan, for the Assessee

S. RAJENDRA BABU, J.:

This is a reference made under s. 256(1) of the IT Act, 1961 (hereinafter referred to as ” the Act “), on the following two questions :

” (1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that for the purpose of giving set-off of development rebate relating to earlier assessment years against the profits of the asst. yr. 1974-75, such development rebate should be redetermined according to the appropriate rates applicable to a priority industry ?

(2) Whether the Tribunal was right in law in holding that even though such development rebate had been determined at lower rates in the earlier years, it should be redetermined at the higher rate applicable to a priority industry, though the time for rectification of the mistake under s. 154 has expired ? “

2. Brief facts of the case, as are available in the records, are as follows : For the asst. yr. 1974-75, the ITO accepted the claim of the assessee that it was a priority industry which was entitled to development rebate at the higher rate of 35 per cent as the industry was included at item 32 of the Fifth Schedule to the Act. The assessee had claimed development rebate at the lower rate of 25 per cent during the asst. yrs. 1970-71 and 1971-72. During the asst. yr. 1970-71, the development rebate claimed on that basis was Rs. 1,90,671 but as the profit available for adjustment was only a sum of Rs. 13,408, the rebate was partly adjusted and the balance of Rs. 1,77,263 was carried forward for the asst. yr. 1971-72. During that year also, there was a part adjustment of the rebate and the balance of Rs. 64,045 was carried forward. It was in the course of the appeal filed by the assessee for the asst. yr. 1974-75 that the claim regarding computation of the development rebate at the rate of 35 per cent of the investment applicable to a priority industry was made. The appellate authority accepted this plea of the assessee not only for the asst. yr. 1974-75 but also for the earlier years and directed the AO to recompute the development rebate at the rate of 35 per cent. The Department filed an appeal against the order of the AAC in regard to this direction. The Tribunal accepted the contention of the assessee and held that it was mandatory for the AO to allow development rebate at the appropriate rates and that as development rebate for the asst. yrs. 1970-71 and 1971-72 was required to be adjusted against the profit earned by the assessee during the period relevant to the asst. yr. 1974-75, it was obligatory on his part to compute the development rebate at the rates applicable to a priority industry. Thus, the Tribunal confirmed the order of the AAC on this point. Aggrieved by this, the Revenue sought a reference under s. 256 of the Act and the Tribunal has referred the questions referred to above to this Court for its opinion.

Sri K. Srinivasan, learned counsel for the Revenue, does not dispute that the development rebate to which the assessee was entitled during the asst. yrs. 1970-71 and 1971-72 was at the rate of 35 per cent of the value of the new plant and machinery purchased by the assessee. He also does not dispute that there has been a wrong computation at the rate of 25 per cent and also that the balance of the rebate unadjusted for want of profits and carried forward was to be adjusted during the year 1974-75 when the assessee had made sufficient profits for full adjustment. He, however, contended that inasmuch as the assessee had not sought recomputation of development rebate at the rate of 35 per cent within the period of four years prescribed for rectification under s. 154 of the Act, the claim of the assessee could not have been granted. On the other hand, Sri G. Sarangan, learned counsel appearing for the assessee, stated that it was the statutory duty of the authorities to compute the development rebate for any particular year and as long as some part of such rebate was yet to be set-off against the profits in any particular year, it was open to the authorities to recompute the same.

In order to appreciate the rival contentions, it is necessary to make a brief analysis of ss. 33 and 34 of the Act. Secs. 33 and 34 of the Act provide for the allowance of development rebate ordinarily in the previous year in which the asset is installed or in the subsequent previous year if it is brought to use in that year. However, development rebate is not a simple deduction like depreciation or other items of expenditure. Sec. 33(2) of the Act provides that if as a result of the profits being either nil or less than the amount of development rebate to which the assessee is entitled, the whole or balance of the amount which has not been actually allowed has to be carried forward to the subsequent years, but not for more than eight years. Thus, over a period of eight years,development rebate will be allowed depending upon the total income of the assessee, not necessarily in one single year. The same can be distributed over a period of eight years or less depending upon the amount of development rebate and the figures of total income of the assessee in several assessment years. Sec. 34(3), however, imposes another condition for entitlement of development rebate, that is, the assessee has to create a reserve to cover 3/4ths of the development rebate to be allowed in a given year. In view of s. 34(3)(a), it is quite sufficient if the assessee creates a reserve in respect of each of the years to cover 3/4ths of the amount of actual development rebate which is to be allowed in that year. When any amount of development rebate has to be actually set off or absorbed, then it becomes essential for the AO to determine the amount to be deducted and the balance to be carried forward for setting-off in the subsequent years up to eight years. As admittedly the adjustment of development rebate for the years 197071 and 1971- 72 had not taken place in full, it appears to us that the Tribunal was right in holding that s. 154 of the Act which provides for rectification, was not attracted to this case. In the present case, it is true that the assessee claimed development rebate at a lower rate for the asst. yrs. 1970-71 and 1971-72, but the same had not been fully absorbed for want of sufficient income till the asst. yr. 1974-75. Even if the development rebate at the higher rate of 35 per cent had been claimed by the assessee during the asst. yrs. 1970-71 and 1971-72, the position would not have been different. In fact, a higher amount would have had to be carried forward. On an analysis of the provisions of the Act regarding development rebate made by us earlier, the claim of the assessee that the exact amount of the development rebate and the rate at which it is to be allowed could be examined in any of the years in which development rebate is actually allowed subject to the assessee complying with the condition regarding creating of reserve in terms of s. 34 of the Act appears to us to be correct. However, Sri K. Srinivasan, learned counsel for the Department, placed strong reliance on the decision of this Court in CIT vs. Sree Valliappa Textiles Ltd. (1986) 57 CTR (Kar) 65 : (1987) 166 ITR 548 (Kar), and contended that the claim of development rebate should be made in the year of installation of machinery or plant and the computation made thereon cannot be meddled with, except as provided in s. 154 of the Act. The said decision explains the scheme of s. 80J and states that the said section does not require that in order to claim the benefit under it, a computation should be made only when there is profit or gain. But as far as development rebate is concerned, it could be set-off only against the income available, and to the extent available, unadjusted development rebate could be carried forward over a period of eight years. In the present case, the development rebate actually allowed for the year 1970-71 was only Rs. 13,408 to the extent of availability of the total income and the balance was carried forward and similarly for the year 197172, the sum of Rs. 64,045 towards development rebate remained unabsorbed and, therefore, whether the development rebate was claimed at a higher rate or lower rate in the earlier years was not of much materiality. The aforesaid decision rendered in the context of s. 80J, the scheme and content of which is different from ss. 33 and 34 of the Act, is not apposite to this case. Sec. 33 r/w the Fifth Schedule fixes the rate of development rebate and, therefore, it becomes the duty of the AO to compute it correctly and this could be done until the development rebate allowable for any particular year is fully adjusted. Thereafter, the mistake, if any, could be corrected only under s. 154. Hence, we have no hesitation in rejecting the contention raised by the Department.

6. We are, therefore, of the view that the Tribunal was right in its conclusion on both the questions and accordingly we answer the two questions referred for our opinion in the affirmative and against the Revenue.

[Citation : 172 ITR 168]