P.D. Desai, J.
1. The petitioner is a public limited company and it runs a textile mill at Ahmedabad. The respondent is the Income-tax Officer having jurisdiction to asses the petitioner-company under the Income-tax Act, 1961 (hereinafter referred to as 'the Act').
2. During the course of proceedings for assessment to income-tax for assessment year 1964-65, the corresponding previous year being calendar year 1963, the petitioner-company was given an allowance in the sum of Rs. 49,354 by way of development rebate under section 33 on account of its having purchased certain machinery during the relevant previous year. The allowance was made since the petitioner-company fulfilled the conditions laid down in section 34 and more particularly the condition prescribed in section 34(3)(a) which requires that a certain percentage of the amount allowed as development rebate must be credited to a reserve account to be utilised by the assessee during the period of eight years next following for the purposes of the business of the undertaking other than those specified therein. It might be stated here that the period of eight years aforesaid expired in the present case on December 31, 1971.
3. Some time in the middle of 1972, while making up the accounts for the calendar year 1971, the petitioner-company transferred to the general reserve an amount of Rs. 93,171, which was the total amount then standing to the credit of the development rebate reserve. The transfer was made effective from the last day of the calendar year 1971, that is, from December 31, 1971. Be it noted that some time in the middle of 1971, that is, prior to the merger of the development rebate reserve with the general reserve, the petitioner-company had declared dividend for the period January 1 to December 31, 1970, and an amount of Rs. 2,05,544 was drawn from the general reserve, which before the merger stood at Rs. 24,72,141, and it was utilised in the payment of dividend.
4. On April 14, 1975, the respondent issued a notice, exhibit B, to the petitioner-company stating that there was a mistake apparent from the recorded of the assessment proceedings for the assessment year 1964-65 and that the assessment order for that year was required to be amended. The notice proceeded to state that the mistake was that development rebate of Rs. 49,354 was wrongly allowed during the assessment proceedings for the said assessment year. The notice called upon the petitioner to show cause why the power of rectification should not be exercised on the facts and in the circumstances of the case. It appears that, after receipt of the notice aforesaid, a representative of the chartered accountants of the petitioner-company met the respondent and he was informed that, as the amount standing to the credit of the development rebate reserve was transferred to the general reserve before the completion of eight years, the provisions of section 34(3)(a) were violated giving jurisdiction to the respondent to act under section 155(5) of the Act. After the said meeting, the chartered accountants of the petitioner-company addressed a letter dated May 10, 1975, exhibit C, to the respondent pointing out that none of the conditions prescribed in section 34 was violated and that provisions of section 155(5) were not attracted in the facts and circumstances of the case. There was some correspondence exchanged between the parties thereafter which is not relevant for the purpose of the decision of the case. Ultimately, the respondent made an order dated December 27, 1975, exhibit F, amending the order of assessment for the assessment year 1965-65 and recomputing the total income of the said assessment year by adding back the amount of Rs. 49,354 which was originally allowed as development rebate. The material part of the said order reads as under :
'From the above it would appear that the amount of Rs. 93,171 which includes Rs. 66,621 relating to the current year 1963 has been transferred from the statutory development rebate reserve to general reserve and the payment of dividend for current year 1970 out of the general reserve can be considered as utilised within the period of 8 years within the meaning of section 155(5)(ii) of the Income-tax Act and the development rebate originally allowed shall be deemed to have been wrongly allowed. Accordingly, the development rebate of Rs. 49,354 allowed during the assessment year 1964-65 is withdrawn and the total income is computed as under : Rs.Total income as per order under section 154, 9, 34, 577Add: Development rebate withdrawn as discussedin the order. 49,354---------9,83,931'
It is this order which is challenged in the present petition.
5. The order was assailed on behalf of the assessee on the ground that the respondent had no jurisdiction to amend the order of assessment in respect of the assessment year 1964-65 by exercising the powers of rectification because the conditions precedent for the exercise of such power were not satisfied in the present case. In this connection it was urged : (i) that the dividend in question was paid out of the general reserve in the middle of 1971, that is, much prior to the decision to merge the development rebate reserve with the general reserve was taken in the middle of 1972 and before the actual merger was made effective on and from December 31, 1971, and that, therefore, having regard to the sequence of events, no part of the amount credited in the development rebate reserve in the previous year relevant to the assessment year 1965-65 was in fact utilised by the assessee during the period of eight years next following for the purpose of distribution by way of dividend; and (ii) that, in any case, an amount of Rs. 24,72,141, which was lying in the general reserve in the calendar year 1971, was sufficient to meet the liability for payment of dividend in the sum of Rs. 2,05,544 even without the addition of the sum of Rs. 93,171, which was transferred from the development rebate reserve, and that it could not, therefore, be said that the amount credited to the development rebate reserve in the calendar year 1963 was utilised for the purpose of distribution by way of dividend within the period of eight years in violation of the conditioned prescribed in section 34(3)(a).
6. It appears to us that there is substance in the contention advanced on behalf of the petitioner-company. Under section 28, clause (i), the profits and gains of any business profession, which was carried on by the assessee at any time during the previous year, are chargeable to income-tax under the head 'Profits and gains of business or profession'. Section 29 provides that the income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43A. section 33, which is one of the sections mentioned in section 29, deals with the allowance of a sum by way of development rebate and as it stood at the relevant time, that is, when the allowance was made in this case in the course of the assessment proceedings for the assessment year 1964-65, it provided that in respect of a new ship acquired or new machinery or plant (other than office appliances or road transport vehicles) installed after March 31, 1954, which is owned by the assessee and is wholly used for the purposes or the business carried on by him, a sum by way of development rebate, calculated in accordance with the formula therein set out, shall, subject to the provisions of section 34, be allowed as 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. The relevant part of section 34, which is material for the purpose of the present case, reads and always read as under :
'34(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 the 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;........'
There are two provisos and one Explanation to clause (a) which are not relevant for the present case and they need not be set out. Section 154 confers power upon different authorities for rectification of mistake and it, inter alia, provides that with a view to rectifying any mistake apparent from the record, the Income-tax Officer may amend any order of assessment passed by him. Sub-section (7) of section 154 prescribes the period of limitation for the exercise of power under the said section and it provides that save as otherwise provided in section 155 or sub-section (4) of section 186 no amendment under the said section shall be made after the expiry of four years from the date of the order sought to be amended. The next provision to which reference may be made is sub-section (5) of section 155, the relevant part of which reads as under :
'(5) Where an allowance by way of development rebate has been made wholly or partly to an assessee in respect of a ship, machinery or plant installed after December 31, 1957, in any assessment year under section 33 or under the corresponding provisions of Indian Income-tax Act of 1922 (XI of 1922) and subsequently - ......
(ii) at any time before the expiry of the eight years referred to in sub-section (3) of section 34, the assessee utilises the amount credited to the reserve account under clause (a) of that sub-section -
(a) for distribution by way of dividends or profits; or
(b) for remittance outside India as profits or for the creation of any asset outside India; or
(c) for any other purpose which is not a purpose of the business of the undertaking; the development rebate originally allowed shall be deemed to have been wrongly allowed, and the Income-tax Officer may, notwithstanding anything contained in this Act, recompute the total income of the assessee for the relevant previous year and make the necessary amendment; and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) of that section being reckoned from the end of the previous year in which the sale or transfer took place or the money was so utilised.'
Now, it is clear on a combined reading of the relevant statutory provisions that while computing the business income of an assessee for any assessment year, an allowance by way of development rebate has to be made in respect, inter alia, of new machinery installed by the assessee in the relevant previous year provided certain conditions are satisfied. One of such conditions is that seventy-five per cent. of the amount to be actually allowed as development rebate should be debited to the profit and loss account of the relevant previous year and credited to a reserve account and the sum credited in such reserve might be utilised by the assessee during a period of seceding eight years for the purposes of the business of the under taking other than distribution by way of dividends, etc. In Indian Overseas Bank Ltd. v. Commissioner of Income-tax, the Supreme Court held, in the context of the corresponding provision of the Indian Income-tax Act, 1922 (proviso (b) to Explanation 2 to section 10(2) (vib)) that 'the creation of the reserve contemplated by this provision is a condition precedent for obtaining the allowance of development rebate' which cannot be drawn upon for purposes other than those of the business and the amount credited therein cannot be distributed by way of dividend for the specified period. What happens, however, if the amount credited in such special reserve is utilised by the assessee in the course of the undertaking or for such purposes of business which are excluded by section 34(3)(a) The answer is provided by section 155(5) which enacts that in such a case the development rebate originally allowed shall be deemed to have been wrongly allowed and the Income-tax Officer may recompute the total income of an assessee for the relevant previous year and make the necessary amendment in the assessment order of the corresponding assessment year. It has to be borne in mind, however, that unless any of the conditions laid down in section 34 (3)(a) is contravened, section 155(5) would not be attracted and the deeming provision contained therein would not come into operation and the Income-tax Officer would have no power to rectify the mistake and amend the order of assessment. Let us now proceed to consider the case in hand in the light of these statutory provisions.
7. The statutory requirement with regard to the creation of a separate reserve was duly satisfied in the instant case by transferring there requisite amount to a special reserve while making up the profit and loss account of the calendar year 1963, which was the relevant previous year, and the allowance of development rebate was. Therefore, rightly made in the assessment year 1964-65. The revenue contends, however, that in view of the fact that the said special reserve was merged with the general reserve with effect from December 31, 1971, that is, on the last day of the prescribed period of eight years, and it was during the course of that year that dividend was paid out of the general reserve for the calendar year 1971, the amount credited to the special reserve must be taken to have been utilised in contravention of the provisions of section 34(3)(a). We are unable to agree. In the first place, as rightly contended by the petitioner-company, the dividend was already declare and paid out of the general reserve much prior to the date on which the decision to merge the development rebate reserve with the general reserve was taken by the petitioner-company. The dividend was paid some time in the middle of 1971 where as the decision to merge the development rebate reserve with the general reserve was taken in the middle of 1972 and them eager was actually made with effect from December 31, 1971. In the next place, the amount standing to the credit of the general reserve, namely Rs. 24,72,141, according to the last balance-sheet of the company for there relevant year, was sufficient to meet the liability for payment of dividend for the calendar year 1970 since the amount of dividend did not exceed Rs. 2,05,544. The petitioner-company was not enabled to declare and pay dividend out of the general reserve on account of the merger of the development rebate reserve with the general reserve but despite it. For both these reasons, therefore, it would not be possible to hold that the petitioner-company had utilised the amount credited to there serve account created under section 34(3)(a) for distribution by way of dividend within a period of eight years, and, therefore, the condition precedent for the exercise of power under section 154 read with section 155(5) was not satisfied and the respondent had no power, authority or jurisdiction to recompute the total income of the assessee for assessment year 1964-65 and to make necessary amendment in the assessment order of that year by adding back the amount of development rebate allowed in that assessment year.
8. Mr. K. H. Kaji, learned advocate appearing on behalf of the revenue, however, sought to support the impugned order on a totally different ground. He urged that the requirement of law was that the separate development rebate reserve created under section 34(3)(a) was required to be kept intact for a period of eight years and that such reserve could not be merged with the general reserve at any time during the course of the specified period of eight years and that since that was not done in the present case and the said reserve was merged with the general reserve on the last day of the period of eight years, the respondent was authorised to act under section 154 read with section 155(5) and to amend the order of assessment. We are unable to accede to this submission. In the first place, the impugned order could have been passed only if section 155(5) was attracted, for it is by virtue of the fiction therein enacted that the development rebate originally allowed could be treated as having been wrongly allowed and action could be taken to rectify them is take taking advantage of the enlarged period of limitation therein prescribed. Now, in order that the fiction can be invoked, it must be shown that the assessee has utilised the amount credited to the reserve account under section 34(3)(a) before the expiry of the period of eight years (i) for distribution by way of dividends or profits, or (ii) for remittance outside India as profits, or (iii) for the creation of any asset outside India, or (iv) for and other purpose which is not a purpose of the business of the undertaking. Section 155(5) does not expressly provide that if the special reserve, which was created under section 34(3)(a), is merged with any other reserve. The development rebate shall be straightaway deemed to have been wrongly allowed. On such a ground, therefore, the power under section 155(5) cannot be exercised. In the next place, it is true that section 34(3)(a) contemplates the creation of an independent reserve as laid down in the Indian Overseas Bank's case. However, the amount credited in the said reserve is not to be kept intact and it might be utilised by the assessee during the period of eight years next following for the purposes of the business of the undertaking other than those specified in section 34(3)(a). If the fund is so drawn upon for the stated purposes, it might be depleted and, in a given case, it might be even completely exhausted and even so the provisions of law could not be contravened thereby. The first limb of the argument of the revenue, namely, that the fund is to be kept intact till the period of eight years is completed, is thus not justified. So far as the second limb of the argument is concerned, even assuming without deciding that it is an implied condition of section 34(3)(a) that having regard to limitations placed upon the use of the amount credited to such reserve, it should be maintained as an independent reserve till the period of eight years specified in the said section is completed (and not merged with any other reserve) so that the revenue authorities could easily follow the track of the amount credited therein and ascertain as to how it was utilised, we do not think that there has been in the instant case such a contravention of that statutory requirement, if any, as to permit an action under section 154 read with section 155(5). In the present case, the requisite percentage of the amount which was allowed as development rebate was in fact kept in a separate reserve until the expiry of the period of eight years and it is not found to have been utilised during that period for any of the prohibited purposes. After the expiry of the period of eight years, a decision was taken by the petitioner-company to merge the special reserve with the general reserve with effect from the last day of the completion of the period of eight years. Even if, therefore, there was any breach of the implied condition, if any, of section 34(3)(a), the breach was technical and venial. The express provisions of section 34(3)(a) were not contravened either in substance or in form because even after the amount was merged it was not utilised for any of the prohibited purposes. Under these circumstances, the power under section 154 read with section 155(5) could not possibly have been exercised in a the instant case. It must be remembered that section 155(5) confers wide powers upon the Income-tax Officer to withdraw an allowance originally made and that for that purpose a specially enlarged period of limitation has been prescribed. Its effect and consequences upon the assessee would be considerably serious, for it might unsettle things which have since long been settled. Such discretionary power cannot but be exercise reasonably on an overall consideration of all the circumstances of the case. In our opinion, taking a reasonable view of the matter, the power of rectification could not have been validly exercised by the respondent in the present case and the order, therefore, the impugned order cannot be held to have been made in valid exercise of power.
9. In the result, the petition succeeds and is allowed. The impugned order dates December 27, 1975 (exhibit F), is declared to be invalid and unenforceable. Rule is accordingly made absolute with costs.