Madras H.C : Where there was no deliberate contravention of the provisions, the ITO 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.

Counsel Appeared

S.V. Subramaniam & C.V. Rajan, for the Revenue : Mrs. Aparna Nandakumar, for the Assessee

JUDGMENT

Janarthanam, J.:

The assessee, Sri Venkatesa Mills Ltd., Coimbatore, is a limited company. The assessee claimed investment allowance of Rs. 16,609 for the asst. yr. 1978-79 relatable to the previous year, viz., the calendar year 1977.

2. For the earlier two years, the assessee had claimed development rebate to the extent of Rs. 4,11,623. It was found that the development reserve was not adequate and the assessee had not complied with an opportunity given by the ITO to make good the shortfall in the accounts for the calendar year 1977.

3. The assessee had explained before the ITO that the accounts of the calendar year 1977 had already been audited and approved by the general body and stated that the assessee was making good the amount in the accounts for the next succeeding year. This was not found acceptable to the ITO. The CIT(A) felt that though the assessee was helpless to modify the completed accounts for the calendar year 1977, in view of the provisions of the Companies Act, there was no alternative to the disallowance in view of the fact that the statutory requirement was not satisfied.

4. The assessee appealed to the Tribunal. It claimed that even the fact that the deficit was made good only in the later year need not stand in the way of the allowance, in view of the executive instructions contained in the circular given in (1976) 102 ITR (St) 90. The instruction given in cl. (c) of Para 1 of Circular No. 189 dt. 30th Jan., 1976, reads as under : “(c) Where there was no deliberate contravention of the provisions, the ITO 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.” The circular was found by the Tribunal to merely reiterate the earlier instruction issued in 1965. The Tribunal was of the view that the creation of the reserve in the accounts of the current year was, therefore, good enough and the claim of the assessee for development rebate and investment allowance required to be considered in the light of this. Before the Tribunal the assessee also sought to raise additional grounds which were by way of supporting the original grounds of appeal with reference to the further fact that the assessee had also been able to hold an extraordinary general meeting on 15th Nov., 1980, and had amended the accounts for the year 1977 to provide the necessary reserve. Because the meeting was held only on 15th Nov., 1980, the assessee could not bring this fact at an earlier stage. The Tribunal admitted this fact for this reason.

5. The assessee contended before the Tribunal that there was no absolute prohibition against amending closed accounts and that the assessee had followed the necessary and requisite procedure under the Companies Act to overcome even the technical objections raised by the authorities below for allowing the claim of the assessee.

6. The Tribunal held that the assessee would be entitled for consideration of its claim on the merits, in view of the circular issued on 14th Oct., 1965, reiterated by a later circular on 30th Jan., 1976 and the further fact that even the accounts of the relevant year, viz., the calendar year 1977, have been reopened and further provisions made. The Tribunal, however, sent back the matter to the ITO for determining the quantum of development rebate and the investment allowance either past or current, for being reckoned, with reference to the reserves created in the calendar year 1977 at the extraordinary general meeting held on 15th Nov., 1980, and/or in the subsequent year, in the light of the Board’s circular referred to earlier in its order.

7. From the above statement of facts, the following two questions were referred under s. 256(2) of the IT Act, 1961, to this Court for its opinion for the asst. yr. 1978-79 : “1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that since the assessee had reopened the accounts for the accounting year 1977, relevant for the asst. yr. 1978-79 and provided therein the requisite reserve, the assessee would be eligible for allowance of development rebate and the investment allowance ? 2. Whether, on the facts and in the circumstances of the case, the amendment of the accounts after the regular assessment was over, can be taken into account for purposes of allowance of development rebate and investment allowance ?” The pivotal issue arising for consideration under the two questions of law, as stated above, is as to whether it is permissible for the assessee to claim the allowance of development rebate and investment allowance, even though the necessary and requisite reserve had not been created in the accounting year by way of amendment of the accounts after the regular assessment was over. There is no pale of controversy that necessary and requisite reserve for development rebate and investment allowance had not been made by the assessee in the accounting year 1977. There is also no dispute that the necessary and requisite reserve relatable to such claims were made subsequently after the assessments were over by way of amending the accounts relatable to the year 1977 by a resolution adopted in the general body meeting held on 15th Nov., 1980. Mr. S.V. Subramaniam, learned senior counsel representing the Revenue, placing reliance on the decision in the case of Addl. CIT vs. South India Carbonic Gas Industries Ltd. 1977 CTR (Mad) 450 : (1977) 109 ITR 700 (Mad) : TC 28R.526, contended that in view of the clear language of s. 34(3)(a) of the IT Act, 1961, any amendment of the accounts or creation of the reserve subsequent to the assessment order will not be of any avail, where the necessary reserve was not properly, validly and legally created at the time when the officer disposed of the matter and no change made subsequently will have the effect of rendering the assessment order erroneous so as to enable the appellate authority to interfere with that order on that ground and hence the order of the Tribunal was not correct.

10. On the other hand, Mrs. Aparna Nandakumar, learned counsel appearing for the assessee, would strike a discordant note to the submission, as projected by the said senior counsel, representing the Revenue, seeking support from the decision of the apex Court in the case of CIT vs. Modi Spinning and Weaving Mills Co. Ltd. (1990) 90 CTR (SC) 58 : (1991) 187 ITR 51 (SC) : TC 28R.511. The tenability or otherwise of the rival submissions of either learned counsel may now fall into the arena of discussion. In the case of Addl. CIT vs. South India Carbonic Gas Industries Ltd. (supra), the two questions which were referred for the opinion of this Court, were as under : “1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in directing the ITO to allow development rebate of Rs. 23,678 on gas cylinders for the asst. yr. 1968-69 ? 2. Whether the Tribunal is correct in holding that subsequent correction of the company’s accounts would meet the requirement of the statutory provision for the asst. yr. 1968-69 ?” The discussion entered into by the Division Bench in answering the questions so posed for consideration, available in the relevant paragraphs at pp 702 to 705, is relevant and the same runs as under : “Sec. 33 of the Act provides for allowance of development rebate. Sub-s. (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 s. 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 cl. (b). Sec. 34(3)(a) of the Act provides : ‘The deduction referred to in s. 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 P&L a/c 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 s. 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 under s. 33. Consequently, at the time when the ITO 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 s. 34(3)(a) of the Act.

13. 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 29th April, 1968, had not created a reserve as contemplated by s. 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 AAC 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 ITO that the annual general meeting of the company for the next year held on 26th April, 1969, ratified the amendments made by the board of directors on 23rd July, 1968, by enhancing the amount of reserve to meet the statutoryrequirement. 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 s. 154 and s. 254(2) of the Act for coming to the conclusion that when the annual general meeting of the company on 26th April, 1969, ratified the action of the board of directors on 23rd July, 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 under 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 P&L a/c 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 26th April, 1969, had ratified the action taken by the board of directors on 23rd July, 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 29th April, 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 s. 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 ITO considered 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 ITO considers the claim of the assessee, the ITO 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 ITO 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 ITO and enable the assessee to claim the rebate in full before the appellate authority. As already indicated by us, from the clear language of s. 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 ITO will not be of any avail so long as the necessary reserve was not properly, validly and legally created at the time when the ITO disposed of the matter and that no change made subsequently will have the effect of rendering the order of the ITO 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. . .”

14. In the case of Modi Spinning and Weaving Mills Co. Ltd. (supra), the appeal before the Supreme Court was directed against the judgment dt. 13th March, 1972, made by a Division Bench of the Allahabad High Court in IT Ref. No. 457 of 1968 deciding the following question of law in favour of the assessee and against the Revenue : “Whether, on the facts and in the circumstances of the case, the assessee can be said to have complied with the provisions of proviso (b) to s. 10(2)(vib) of the Indian IT Act, 1922, and was, therefore, entitled to allowance of development rebate on the plant and machinery installed after 1st Jan., 1958 ?” The detailed facts, which led to the framing of the question and the answer given had not at all been narrated.

15. The judgment of the Division Bench of the Allahabad High Court, IT Ref. No. 457 of 1968, had, however, been reported as CIT vs. Modi Spinning and Weaving Mills Co. Ltd. (1973) 89 ITR 304 (All) : TC 28R.513, wherein the detailed facts relatable to the question raised had been referred to. In regard to the question so raised, the facts are these : “The plant and machinery were purchased and installed between 1st Jan., 1958, and 30th April, 1958, but when the accounts were closed and the P&L a/c was drawn up at the end of the accounting year the assessee did not debit in the P&L a/c a sum equal to 75 per cent of the development rebate to be actually allowed and did not credit that sum to a reserve account for being utilised by the assessee for the purposes of the business of the undertaking for the period of ten years next following. In other words, there was no attempt at that time to fulfil the conditions set out in proviso (v) to s. 10(2)(vib), compliance of which was necessary before the development rebate could be allowed. Subsequently, on 27th Feb., 1960, the assessee passed the following resolution in a general meeting : ‘Resolved that in order to enable the company to secure exemption from income- tax on Rs. 2,00,000 being the amount of development rebate allowable to it on installation of the new plant and machinery during the period from 1st Jan., 1958, to 30th April, 1958, development rebate reserve be created as required by law to the tune of Rs. 1,50,000 by debit to the P&L a/c and that a sum of Rs. 4,50,000 be transferred from the general reserve to the P&L a/c instead of a sum of Rs. 3,00,000 as in the balance sheet as on 30th April, 1958. Consequent on this, the directors’ report, the P&L a/c and the balance sheet for that year as approved by the company in its general meeting held on 28th Jan., 1959, be amended so as to read as per Annexure “A” to this resolution.’ Appropriate entries were made in the books of account in accordance with the resolution.” The discussion in answering the question so raised is available at the relevant paragraphs in pp 310 and 311 and it gets reflected as under : “Now, as to the period during which the entries required by proviso (b) to s. 10(2)(vib) must be made, no statutory provision prescribing such period has been placed before us. All that the law requires is that a development reserve be created in compliance with proviso (b), and there is nothing in the object for which the reserve is created from which a definite period for such compliance can be inferred. In our opinion, a company may make the necessary entries for the purpose of complying with proviso (b) to s. 10(2)(vib) at any time before the return of income is filed under the IT Act. Even if the entries are made thereafter, during the pendency of the assessment proceedings, the ITO may take them into consideration. As regards the observations of the Supreme Court in Indian Overseas Bank Ltd.’s case (supra) we are unable to infer from them that the P&L a/c originally prepared and passed by a company cannot be subsequently amended by it, and that the ITO has no power to allow development rebate if the entries are made after the filing of the original return of income. The Revenue relies upon Surat Textile Mills Ltd.’ vs. CIT (1971) 80 ITR 1 (Guj), where the Gujarat High Court appears to have taken the view that compliance with proviso (b) to s. 10(2)(vib) cannot be effected after the P&L a/c has once been made up and that subsequent entries debiting the P&L a/c and crediting the development reserve can be of no avail. With great respect to the learned Judges, who delivered that judgment, we are unable to agree with the view taken by them. The learned Judges have supported their decision by reference to the observations of the Madras High Court in Veeraswami Nainar (1965) 55 ITR 35 (Mad) and Indian Overseas Bank Ltd. (1967) 63 ITR 733 (Mad) as well as of the Supreme Court (1970) 77 ITR 572 (SC), in the appeal from the latter decision. But, we have been unable to read those observations in the same light. Apart from this we may point out that the learned Judges of the Gujarat High Court found that the debit was made to the P&L a/c for the year 1961 instead of that for the year 1960 which was the appropriate year. Accordingly, we hold that the assessee must be taken to have complied with the provisions of proviso (b) to s. 10(2)(vib) of the Indian IT Act, 1922, and it was, therefore, entitled to the allowance of development rebate on the plant and machinery installed after 1st Jan., 1958. The first question referred is answered in the affirmative.”

16. In the appeal, the judgment of the Allahabad High Court was left untouched by the Supreme Court and the appeal failed.

17. Pertinent it is to note at this juncture that proviso (b) to s. 10(2)(vib) of the Indian IT Act, 1922, and s. 34(3)(a) of the IT Act, 1961, are provisions in pari materia.

18. The crux of the distinction between South India Carbonic Gas Industries (supra) and Modi Spinning and Weaving Mills Co. Ltd. (supra) is this : In the case of South India Carbonic Gas Industries (supra), the amendment of the accounts took place after the passing of the order of assessment. A Division Bench of this Court, in such a situation, expressed the view that the necessary reserve as contemplated by the statute should have been created at least by the time, when the ITO considered the claim of the assessee and disposed of the same and if the reserve is created subsequent to the passing of the order of assessment, the assessee will be ineligible for claiming such rebate. Whereas in the case of Modi Spinning and Weaving Mills Co. Ltd. (supra), the modification of the accounts took place before the order of assessment had been passed by the AO and, consequently, the rebate as claimed by the assessee was given.

19. In the instant case, as already adverted to, the modification of the accounts took place long subsequent to the passing of the order of assessment by the AO. In such a situation, to contend that the ratio laid down in the case of Modi Spinning and Weaving Mills Co. Ltd. (supra), is applicable on all fours to the facts of the instant case cannot be expected to commend acceptance at our hands. But, the decision of a Division Bench of this Court in the case of South India Carbonic Gas Industries (supra), is applicable on all fours to the facts of the instant case and in that view of the matter, the assessee is not eligible to claim the rebate and therefore it is, both the questions as set out above, have to be necessarily answered against the assessee and in favour of the Revenue and both the questions are accordingly answered.

20. In fine, the tax case is thus disposed of. There shall, however, be no order as to costs, on the facts and in the circumstances of the case.

[Citation: 235 ITR 665]