Gopalan Nambiyar, C.J.
1. At the instance of the revenue, the Income-tax Appellate Tribunal, Cochin Bench, has referred the following question of law for our determination :
' Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in law in holding that the Income-tax Officer is not justified in withdrawing the development rebate granted to the assessee '
2. The assessee, Malayalam Plantations Ltd., Cochin, is a limited company, owning a number of estates in Kerala. The company is registered in London and the shareholders and the board of directors are in London. That is why it is known as the sterling company. As it was receiving income from plantations and from other activities in India, it is assessable in India as well, in respect of such profits. The assessment years relevant for the purposes of these references are 1965-66 and 1966-67. The company had installed machineries in the course of the accounting years relevant to the assessment years 1958-59 to 1966-67. On these materials, it claimed development rebate. The eligibility of the claim is governed by Section 34(3) of the I.T. Act, which reads thus :
' 34. Conditions for depreciation allowance and development rebate--...
(3) (a) The deduction referred to in Section 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 profit and loss, account 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 :
Provided that this clause shall not apply where the assessee is a company, being a licensee within the meaning of the Electricity (Supply) Act, 1948 (54 of 1948), or where the ship has been acquired or the machinery or plant has been installed before the 1st day of January, 1958 :
Provided further that where a ship has been acquired after the 28th day of February, 1966, this clause shall have effect in respect of such ship as if for the words ' seventy-five ', the word ' fifty ' has been substituted.
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 theamount of the profit of such previous year (as arrived at without making the debit aforesaid) in accordance with the profit and loss account......... '
3. The section insists on the assessee creating a development rebate reserve equal to 75 per cent. of the development rebate to be actually allowed, by debiting to the profit and loss account of the relevant accounting year and crediting to a reserve account, to be utilised by the assessee during a period of eight years next following, for the purpose of the business other than for distribution of dividends or for remittance outside India. It is enough to notice at this stage that utilisation of the reserve for the prohibited purposes of distribution of dividends or remittance outside India disqualify the assessee from the benefit of the development rebate. The assessee in this case had income from cultivation and manufacture of tea. That income was partly agricultural and partly non-agricultural. Rule 8 of the I.T. Rules, 1962, had application to the case. Under that rule, 40% of the income derived from the sale of tea grown and manufactured by a seller in India is to be deemed to be liable to income-tax.
4. The statement of the case has given the following table which shows the reserves created under Section 34(3), the development rebate available without applying the provisions of Rule 8, 75% of such development rebate, and 75% of the development rebate after applying the provisions of Rule 8. The said table is as follows :
' Assessment Year
Reserve actually created
Development rebate(full amount shown in the computation of income)and not 40%
75% of thefull amount of development rebate
75% of40% of total development rebate being what is actuallyallowed under the Act
(1)
(2)
(3)
(4)
(5)
1959-60
11,850
13,304
9,978
3,991
1960-61
13,500
18,194
13,645
5,458
1961-62
5,500
7,697
5,773
2,309
1962-63
6,500
8,459
6,344
2,538
1963-64
5,800
7,440
5,580
2,232
1964-65
8,750
11,623
8,717
3,487
1965-66
18,200
24,245
18,184
7,274
1966-67
17,000
22,460
16,845
6,738
87,100
1,13,422
85,066
34,027'
5. From the table it will be seen that the total reserves actually created in the books from the assessment year 1959-60 to the assessment year 1966-67 is 87,100. The total reserves from 1958-59 to 1966-67 was 87,750. For the assessment year 1965-66, the ITO had allowed the development rebate of 24,245 (before applying Rule 8). The assessee should create 75% of the development rebate, that is, only 18,184. It only created a development reserve of 18,200. The balance-sheet for the year had added this amount to the development rebate reserve already shown for the earlier year.
6. For the assessment year 1966-67, the development rebate allowed was 22,460. The assessee had created a reserve of 17,000. The Tribunal commented that these figures would establish that the development rebate reserve created by the company was on the high side of 75% required under the statute. This is after proceeding on the assumption that 100% of the income is taxable and Rule 8 does not apply. But the assessee being a tea company and only 40% of the income from the business being taxable to Central income-tax, the development rebate reserve need be only 75% of the taxable income, i.e., 75% of 40%. As the assessee had created reserves on 100% of the income, it was the Tribunal's view that there was no deficiency in respect of development reserves.
7. The ITO withdrew the development rebate allowed to the assessee for 1966-67, For 1965-66, he substituted a development rebate of only Rs. 78,221 as against Rs. 2 lakhs odd originally allowed. On appeal to the AAC that officer found that it had not been established that the development rebate had been utilised for distribution of dividends which was prohibited under Section 34(3) of the Act. He also found that the assessee had created development rebate for all the years from 1959-60 to 1966-67, very much in excess of what is actually required. It was his finding that the development rebate reserve was more than what was required by the terms of the section.
8. The department appealed to the Tribunal. Agreeing with the AAC, the Tribunal found that the reserve required for all these years was only 45,222, whereas there was in existence a reserve even after appropriation, of 55,064. The contention of the department that the excess of the earlier year was not available for the subsequent year was found to be against facts. The Tribunal also adverted to the columns in para. 3 and found that in every year there was an excess of development reserve. The Tribunal, therefore, held that the withdrawal of this excess would not offend the provisions of Section 34(3) and it was only the excess portion of the reserve which was found unnecessary that had been siphoned off. In such circumstances, it was of the view that nothing had been established to disentitle the assessee to the benefit of development rebate. The Tribunaldismissed the department's appeal. The Tribunal agreed with the AAC that while the reserves for all these years was only 45,222, there was in existence a reserve of 55,064. The Tribunal was of the view that in every year there was an excess of development reserve and the excess had been syphoned off only in the accounting year which ended on March 31, 1967. It is not as if the assessee had utilised the excess of one year to compensate the deficiency for any subsequent year. As there was an excess of reserve created in all these years there was no question of such excess being utilised in subsequent years.
9. In view of the clear finding of the Tribunal as above, we think nothing has been made out to show a contravention of Section 34(3) which would justify action under Section 155(5) of the Act. The view taken by the Tribunal was correct.
10. We answer the question referred in the affirmative, that is, in favour of the assessee and against the revenue. There will be no order as to costs.