Satish Chandra, C.J.
1. Messrs. Vishnu Industrial Enterprises (Private) Ltd., Kanpur, the assessee, suffered losses in the assessment years 1967-68 and 1968-69. It, however, claimed development rebate in respect of plant and machinery installed in those years. The ITO repelled the claim on the view that the assessee had not debited the profit and loss account, nor created the development reserve. The Supreme Court decision in Indian Overseas Bank Ltd. v. CIT : [1970]77ITR512(SC) applied and no development rebate was allowable.
2. On appeal, it was held that since there was no profit, development reserve could not be created, but the development rebate should have been calculated and allowed in a succeeding year in which the assessee earned profits and created the requisite reserve. The ITO was directed to determine the development rebate admissible to the assessee.
3. The ITO appealed. The Tribunal affirmed the view of the AAC.
4. At the instance of the Commissioner, the Tribunal has referred for our opinion the following question of law :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in upholding the direction given by the Appellate Assistant Commissioner to the Income-tax Officer to determine the development rebate admissible to the assessee for the years 1967-68 and 1968-69, when admittedly in those years the assessee had suffered losses and had not created the statutory reserve and carry forward the same and allow it in the years in which there are profits and when reserve is created ?'
5. The material provisions are Sections 33 and 34(3)(a) of the I.T. Act, 1961. Section 33(1)(a) allows a deduction, subject to Section 34, in respect of the previous year in which the ship or machinery or plant was installed, a sum by way of development rebate as specified in Clause (b). Clause (b) provides rates for different kinds of ship, machinery or plant. The ship, machinery or plant should be owned by the assessee and be wholly used for purposes of business carried on by him.
6. Section 34(3)(a) lays down certain conditions subject to which the deduction referred to in Section 33 is allowed :
(a) Seventy-five per cent. of the development rebate to be actually allowed should be debited to the profit and loss account of the relevant previous year;
(b) this amount is to be credited to a reserve account;
(c) the reserve account is to be utilised by the assessee during the next eight years for purposes of the business, other than--(i) for distribution by way of dividends or profits ; (ii) for remittance outside India as profits or for creation of any asset outside India.
7. The Explanation to this provision says :
'Explanation.--For the removal of doubts, it is hereby declared that the deduction referred to in Section 33 shall not be denied by reason only that the amount debited to the profit and loss account of the relevant previous year and credited to the reserve account aforesaid exceeds the amount of the profit of such previous year (as arrived at without making the debit aforesaid) in accordance with the profit and loss account.'
8. In Indian Overseas Bank Ltd. v. CIT : [1970]77ITR512(SC) , the Supreme Court had to consider a case where the assessee had earned sufficient profits but yet had not debited the profit and loss account with the amount allowable as development rebate. It had also not created the development reserve. The Supreme Court held that creation of a reserve under Section 10(2)(vi)(b) of the Act of 1922 (which was the predecessor of Sections 33 and 34(3)(a) of of the present Act) is independent of other reserves which are to be created, for instance, under Section 17 of the Banking Companies Act. The 75 per cent. of the amount is to be debited to the profit and loss account before finalising it. The transfer of the amount to the reserve account is to be made at the time of making up of the profit and loss account. Creation of the reserve account is not an idle formality. It is meant to enable the ITO to trace it and to see to its proper utilisation for business purposes and not for prohibited purposes.
9. The Tribunal has, in our opinion, rightly observed that the Supreme Court, while deciding that case, was not at all concerned with the question as to the time or the year in which the reserve is to be created.
10. Section 32 of the Act grants depreciation allowance. The development rebate under Section 33 is allowed over and above the recoupment of the total cost of plant and machinery by way of depreciation allowance. Section 34(3)(a) permits the use of this reserve for purposes of the business of the undertaking, other than distribution by way of dividends or profits or for remittance outside India as profits, etc.
11. The allowance obviously was given to provide incentive for industrial expansion. It is allowable only once. It has no connection with depreciation allowance, which is an yearly feature. This rebate is not an expenditure allowance. It is actual money and not notional relief from taxation to be utilised for the development of the business in the next eight years.
12. There is no express provision that the reserve must be created in the year for which the rebate is to be determined. The reserve can be createdonly if profits are earned ; else it will be forcing the assessee to create a reserve out of its capital or by borrowings, either of which events will defeat the object of enabling the company to accumulate funds to be used for its development.
13. Sub- Section (2) of Section 33 clarifies the position. Under it if the total income of the assessee for the year in which machinery or plant, etc., was acquired or installed is nil or is less than the full amount of the development rebate allowable-
(1) the sum to be allowed shall be only such amount as is sufficient to reduce the said total income to nil; and
(2) The amount of the development rebate, to the extent to which it has not been allowed as aforesaid, shall be carried forward to the following assessment year, and development rebate to be allowed for the following assessment year shall be such amount as is sufficient to reduce the total income of the assessee assessable for that assessment year, to nil, and the balance of the development rebate, if any, still outstanding shall be carried forward for a total period of eight years.
14. This provision shows that the allowability of the development rebate is not confined to the first year. It can be carried forward and allowed against income accruing in succeeding seven years.
15. Sub-section (2) contemplates a case where the assessable income is nil and even then rebate is to be carried forward. There is no reason why the rebate be not carried forward in case of loss. Of course, it cannot be carried forward for more than eight years in all.
16. The allowable development rebate is to be calculated in relation to the cost. That information is available in the very first year. There is no difficulty in the ITO doing the requisite calculation and determining the allowable amount of development rebate. The adjustment is to take place as and when assessable income is available.
17. Section 34(3)(a) opens--'The deduction referred to in Section 33 shall not be allowed unless.....' This provision comes into play at the time ofactual allowance of the rebate. The conditions precedent should be complied with at that time. Before an assessee claims the deduction, he should create a reserve by debiting the profit and loss account and crediting the reserve account with the requisite amount of money. This can be done only in the year in which profits are earned. The scheme of carrying forward unabsorbed development rebate postulated by Sub-section (2) of Section 33 can be achieved only if it is permissible to create reserve by making the requisite entries to the extent the income is able to absorb the rebate. The full reserve may not be created in a single year ; depending on the available income it may take more than one year to create the reserve to the fullextent of the development rebate which is allowable, and which has already been determined.
18. The proper procedure is that the amount of the development rebate ought to be determined in the first year. Its actual adjustment will be dependent on the availability of income. In the case of loss, the determination has to be done in the first year; the adjustments are to be actually made in subsequent years where profits are available.
19. The position was clarified by the Board of Direct Taxes in its Circular F. No. 10/49/65-ITA-I, dated I4th October, 1965, which, inter alia, explained the position regarding the creation of statutory reserve for allowance of development rebate, as follows (See [1976] 102 ITR 90:
'(a) In the case of certain industrial undertakings, particularly those in which there is Government participation either by way of capital, loan or guarantee, and where there are certain obligations of law or agreement about maintenance of reserve for development purposes, the development rebate reserve may be treated as included in the said reserve though not specifically created as a development rebate reserve.
(b) In a case where the total income computed before allowing the development rebate is a loss, there was no legal obligation to create any statutory reserve in that year, as no development rebate would actually be allowed in that year.
(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.'
20. The Board issued Circular No. 189, dated 30th January, 1976 (See [1976] 102 ITR 91, saying in para. 5 thereof thus :
'The Board have re-examined the issues involved and are of the view that except the clarification given in part (a) of para. 1 above, which stands superseded by the aforesaid decision of the Supreme Court, the clarifications given in parts (b) and (c) of para, 1 above hold good.'
21. The reference was to the decision of the Supreme Court in Indian Overseas Bank's case [1970] 77 ITR 5.
22. In Navnit Lal C. Javeri v. K. K. Sen : [1965]56ITR198(SC) and in Ellenman Lines Ltd. v. CIT : [1971]82ITR913(SC) , it has been held by the Supreme Court that the income-tax authorities are bound by the Board's Circular and that the same are entitled to be given effect to by the courts as well. These circulars support the view that we have taken.
23. Our view finds support in the decisions of the Calcutta High Court (West Laikdihi Coal Co. Ltd. v. CIT : [1973]87ITR501(Cal) , Bombay High Court (Indian Oil Corporation Ltd. v. S. Rajagopalan, ITO : [1973]92ITR241(Bom) and Tata Iron & Steel Co. Ltd. v. N. C. Upadhyaya : [1974]96ITR1(Bom) , Orissa High Court (CIT v. Narula Cold Storage & Ice Factory : [1976]104ITR148(Orissa) ) and Madras High Court (Radhika Mills Ltd. v. CIT : [1969]74ITR661(Mad) ). With respect, we are unable to agree with the contrary view taken by the Gujarat High Court (Surat Textile Mills Ltd. v. CIT [197l] 80 ITR 1 and Addl. CIT v. Sri Subhlaxmi Mills [1975] 100 ITR 188). It was emphasised by their Lordships of the Gujarat High Court that allowing rebate in subsequent years would mean that the user of the reserve can be prolonged to sixteen years. If available income accrues to the assessee only in the eighth year then he would be entitled to utilise the reserve during the next eight years. This would happen in an extreme case, where the assessee continues to suffer losses for seven years in succession. The legislative intent in granting the development rebate was to permit the assessee to use of part of its profits for development purposes. This could be done only after profits have been earned. If profits accrue for the first time in the eighth year, there is nothing unconscionable in the utilisation taking place in the next seven years. But Section 33(2) makes it clear that the development rebate cannot be carried forward for more than eight years after the installation of the machinery or plant.
24. By the Finance Act of 1966, the Explanation was added to Section 34(3)(a) with retrospective effect. It was clarificatory. It stated that the development rebate shall not be denied only because the amount debited to the profit and loss account and credited to the reserve account exceeds the amount of profit available.
25. Learned counsel for the department, relying on the decision of the Gujarat High Court in Addl. CIT v. Shri Subhlaxmi Mills [1975] 100 ITR 188, contended that the legislature intended that the reserve should be created irrespective of the surplus profit being available or not.
26. In our opinion, the intention behind the enactment of the Explanation was just the contrary. Even where an assessee creates a reserve when sufficient profits are not available the rebate is not to be denied. That does not mean that the entire rebate is to be allowed. That will be contrary to the scheme of carry forward of unabsorbed rebate provided in sub- Section (2) of Section 33. The Explanation intends that this irregularity be overlooked and the rebate allowed to the extent of available profits. In other words, Parliament indicated that artificial debiting and creation of reserve was not proper. It did not contemplate an idle formality of creation of an illusory reserve.
27. We, therefore, answer the question referred to us in the affirmative, in favour of the assessee and against the department. The assessee will be entitled to costs, which are assessed at Rs. 200.
28. Let this opinion and answer be transmitted to the Tribunal under the signature of the Registrar and the seal of the court.