R.N. Misra, J.
1. Defendants 1 and 2, who are the Certificate Officer and the State of Orissa represented by the Collector of Ganjam, are the appellants in this appeal against a reversing judgment of the learned Additional Subordinate Judge, Berhampur, in a suit for declaration that the certificate proceedings for recovery of arrears of sales tax dues which are being pressed by defendant No. 1 are illegal and not : in conformity with the provisions of the Madras Revenue Recovery Act, 1859 and for further relief for permanent injunction.
2. As it appears, the plaintiff, one Rama-deen defendant No. 3 and another Giridharilal Malu, not a party to the present suit, were partners of a firm known as Reedkaran Rarnadin which was registered firm under the Indian Partnership Act, 1932. The firm came to be dissolved with effect from 15-5-56. Defendant No. 3 had undertaken to pay up the liability of sales tax and other public dues upto the date of dissolution. Bulk of the amount of sales tax as demanded have been paid, but the outstanding amount. of Rs. 18,277-50 remained due for which certificate proceedings have been taken. Objections were raised before the Certificate Officer on various counts, but they were overruled and the properties were threatened to be sold. Steps were taken in appeal and revision under the said Act, but they proved futile. Ultimately the suit was filed.
3. The other defences taken in the suit may not be necessary to be indicated and it may be sufficient to state that one of the defences was want of notice under Section 80, Civil P. C. In paragraph 13 of the plaint it was stated :
'The notice under Section 80, Civil P. C. is not necessary as the public officers concerned have been informed of the several illegalities and irregularities etc., and were approached with prayers not to perform the sale. As the sale is proceeding on 25-8-1963 and no time is left to protect the plaintiff's rights the public officers cannot claim the statutory period of two months.....'
In paragraph 3 of the written statement by the two public officers it was contended :
'The plaintiff, before the institution of the suit has not served on the defendants the notice as required under Section 80, Civil P. C. and the contention advanced in para. 13 of the plaint that such notice is not necessary is untenable. The suit instituted without such notice is not maintainable in law.'
Issue No. 2 was framed in the suit to the following effect :--
'Is the suit instituted without notice under Section 80, Civil P. C. and not maintainable?'
4. The trial court disposed of the matter against the defendants holding,
'The learned advocate for the plaintiff has relied upon a decision reported in AIR 1960 Pat 530 wherein his Lordship has clearly observed that a notice Under Section 80, Civil P. C. is not necessary for any future act. That in the instant case the suit has been filed only for a future act of sale. Therefore, I hold that even though the suit was filed only one day after sending of notice Under Section 80 Civil P. C. the suit is maintainable and it is proper and valid and that even such a suit can be filed without any notice under Section 80, Civil P. C.'.
Before the Learned Appellate Judge this matter was further canvassed and he negatived the dets. Therefore, the development rebate was allowed to be carried forward. Actually on the expectation of a profit, the petitioner created a development rebate reserve of Rs. 3 crores, which was, however, written back.
(9) For A.Y. 1969-70, the development rebate was determined at Rs. 5,39,78,223. For that year the petitioner had created development rebate reserve of Rs. 12 crores. There was sufficient profit during this year. In computing the total income the ITO allowed to the petitioner development rebate to the extent of Rs. 8,37,53,014 covering the development rebate determined for A.Y. 1968-69 and A.Y. 1969-70 only. Development rebate for A.Ys. 1965-66, 1966-67 and 1967-68 aggregating to Rs. 27,13,62,131 was not allowed by the ITO on the ground that during these years the petitioner had not created any development rebate reserve. This was obviously due to a new stand taken by the ITO that in order to claim development rebate, the development rebate reserve must be created during the year in which new machinery and plant was installed or put to use irrespective of whether there were or there were no assessed profits during that year.
(10) For A.Y. 1970-71, in the assessment order dated 24th January, 1973, the ITO determined development rebate allowable to the petitioner for that year at Rs. 1,27,90,906. The petitioner created further development rebate reserve of over Rs. 14 crores. The development rebate reserve was actually allowed for that year and not for the years 1965-66, 1966-67 and 1967-68 for which years it aggregated to Rs. 27,13,62,131.
30. On 18th January, 1973, the respondent No. 1 served on the petitioner four rectification notices under Section 154 of the I.T. Act, all dated 11th January, 1973, proposing to rectify the assessments for A.Ys. 1962-63, 1965-66, 1966-67 and 1967-68, during which years the petitioner was allowed to carry forward the unabsorbed development rebate and no development rebate reserve was created as there were no profits. On 31st January, 1973, the respondent No. 1 served on the petitioner two undated rectification notices under Section 154 accompanied by letter of 24th January, 1973, proposing to rectify the assessments for A.Ys. 1968-69 and 1969-70, on the ground that the computation made under Rule 19A(3) of the I.T. Rules of the Capital employed by the petitioner in each of its new industrial undertakings was incorrect. The petitioner complains that the last two notices have been served on it because respondent No. 1now takes the view that in computing the capital employed in an industrial undertaking belonging to the petitioner (the petitioner owns 4 industrial undertakings), the assets of each undertaking are to be taken separately and from the assets of each undertaking the total liability of all the 4 undertakings of the petitioner is to be deducted in order to arrive at the capital employed in each industrial undertaking of the petitioner. The present petition has been filed challenging the validity of these six rectification notices.'
31. After a perusal of Sections 33 and 34 of the I.T. Act, 1961, it was held at p. 253 :
'That statute envisages allowance of the development rebate in instalments over a number of years depending on the assessable income of an assessec. The words 'relevant previous year' refer not to the year of the installation of the new machinery or plant, but to the year or years in which either the whole or a part of the development rebate is actually allowed. The assessee would create a reserve fund out of the development rebate to be actually allowed to him, in any particular year, and not by incurring loans or otherwise and utilise the reserve account for a period of 10 (now 8) years for the purpose of the business of the assessee's undertakings only. The Calcutta High Court held that an assessee is not obliged to create a reserve fund in any year if he had no taxable income in that year for the purpose of carrying forward development rebate to the following years. It followed the judgment of the Madras High Court in Radhika Mills Ltd. v. CIT : [1969]74ITR661(Mad) .
We agree with the judgments of the Madras and the Calcutta High Courts referred to by us hereinabove when they lay down that an assessee is not obliged to create development rebate reserve if there was no taxable income in the relevant years for the purpose of enabling him to carry forward the development rebate to the following years. In our opinion, the petitioner before us was not obliged to create a reserve in order to be eligible for allowance of development rebate if there was no taxable income in the relevant years according to its assessment.'
32. In Radhika Mills Ltd. v. CIT : [1969]74ITR661(Mad) , it was observed (headnote) :
'The allowance of development rebate is always in respect of the year of installation and, apart from creation of the requisite reserve, depends on and goes to reduce the available total income of that year or the following previous years. If there is no such total income or it is a loss, there can be no allowance of rebate but it is to be carried forward tothe following year. Total income in this regard means the income aggregated from all heads and before deduction of development rebate and as assessed. No development rebate can actually be allowed unless the two conditions in the first part of the proviso to Explanation 2 to Section 10(2)(vib) are satisfied. Regarding the first condition, though it does not appear as to when the particulars should be furnished, they should be furnished at least before the assessment for the year in respect of which the claim for the allowance is made is completed. Regarding the second condition, it will not be sufficient compliance with the condition if no reserve is actually created to the extent required and mere book entries without actual reserve will not suffice. Debiting in the profit and loss account and crediting in the reserve account is not theoretical but on the basis of actual reserve created. The basis of the actual reserve created is the total profits as per the completed assessment and not book profits where there are book profits but the total income as per completed assessment is nil or the assessment results in a loss. The entries as required by the condition are a sine qua non and are not an idle formality for it is only then that it will be possible to keep track of the development rebate reserve for enforcing the particular inhibitions against its user. Previous creation of the reserve is not a condition to making the claim for rebate unlike actual allowance of it. Before completion of the assessment and as and when the development rebate to be actually allowed against the requisite reserve to be made in the light of the particulars furnished and claim made is ascertained by the officer, he will have to give a reasonable opportunity and time to the assessee to set apart an amount equal to 75 per cent. of the amount proposed to be allowed and then debit the same to the profit and loss account and credit the same to the reserve account.
Carry forward of the development rebate is allowed only if the failure to create a reserve on the part of the assessee is on account of the fact that there is no income available in the assessee's hands in the relevant year out of which the requisite reserve or any part of it could actually be created.'
33. In Addl. CIT v. Vishnu Industrial Enterprises : [1980]122ITR919(All) , Messrs. Vishnu Industrial Enterprises (P.) Ltd., Kanpur, the assessee, suffered losses in the assessment years 1967-68 and 1968-69. The assessee 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. 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 inwhich the asssssee earned profits and created the requisite reserve. The ITO was directed to determine the development rebate admissible to the assessee. The ITO went up in appeal and the Tribunal affirmed the view of the AAC. The reference was initiated at the instance of the Commissioner in the following terms (p. 921) :
'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 ?'
34. After a perusal of Section 33 and 34, Sub-clause (3)(a) of the I.T. Act, 1961, and Explanation introduced in Section 34, Sub-clause (3)(a) aforesaid, it was observed at page 923 :
'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 of actual 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 full extent of the development rebate which is allowable, and which has already been determined,
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.'
35. We are in respectful agreement with these observations and find that the development rebate reserve has to be created only in the year in which development rebate was actually allowed against the adequate profits and need not be created in the year in which the assets were installed but there was no profit to absorb the development rebate. As tbe assessee had no positive income up to 1970-71, so he could get deduction for development rebate only in that year. As the income for assessment year 1969-70 had been reduced to nil the assessee could not be allowed the income rebate in that year.
36. Addl. CIT v. Vishnu Industrial Enterprises : [1980]122ITR919(All)
'The position was clarified by the Board of Direct Taxes in its Circular F. No. 10/49/65-ITA-I, dated 14th 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.'
37. 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.'
38. The reference was to the decision of the Supreme Court in Indian Overseas Bank's case : [1970]77ITR512(SC) .
39. In Navnit Lal C. Javeri v. K.K. Sen, AAC : [1965]56ITR198(SC) and in Ellerman 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.'
40. The Tribunal has upheld the findings of the AAC in this case. It had been found that the assessee did not violate the provisions of Section 34(3)(a) while declaring the dividend of Rs. 1,05,389 on March 28, 1969, in the general meeting of shareholders when the dividend had been declared by the directors on March 27, 1968, and the amount had already been distributed on September 6, 1968, prior to the creation of development rebate reserve of Rs. 2,25,000. This is a finding of fact and is binding on us as the Tribunal is a final fact-finding authority. It is not open for us to disturb this finding of fact. In view of what has been stated above we uphold the finding of the Tribunal on the point that the question as to whether the assessee had or had not complied with the conditions laid down in Section 34(3)(a) of the I,T. Act, 1961, had to be considered for the first time for the assessment year 1970-71. The total reserve created by the assessee up to the assessment year 1970-71 in respect of the income acquired and brought into use up to September 30, 1968, amounted to Rs. 4,15,000 which was more than the statutory amount. The profit earned by the assessee up to September 30, 1968, being the end of accounting year 1970-71, was also more than enough for covering the declaration of dividend of Rs. 1,05,389 and hence it could not, therefore, be held that any part of the development rebate reserve was utilised by the assessee for payment of dividends.
41. Since the income of the assessee for the assessment year 1969-70 had been reduced to nil the assessee was not entitled to get any development rebate in 1969-70 and was consequently under no obligation to create any reserve in that year. Rejection of appeals of the assessee against the assessment orders of the ITO for 1969-70 did not come in the way of the assessee's claim for development rebate in respect of the assets installed up to September 30, 1968, for the assessment year 1970-71.
42. The Tribunal was correct in upholding the AAC's order allowing the assessee's claim for an allowance of the development rebate on machinery and plant installed up to September 30, 1968. This claim amounted to Rs. 5,52,247 for the assessment years 1970-71 and 1971-72.
43. We, therefore, answer both the questions referred to us in the affirmative, in favour of assessee and against the Department. The assessee will be entitled to costs which are assessed at Rs. 250.
44. Let this opinion and answers be transmitted to the Tribunal under the signature of the Registrar and the seal of the court.