Allahabad High Court
Commissioner Of Income-Tax vs Hemantpat Singhania (H.U.F.) on 22 November, 1990
Equivalent citations: [1991]188ITR618(ALL)
Author: B.P. Jeevan Reddy
Bench: B.P. Jeevan Reddy
JUDGMENT B.P. Jeevan Reddy, C.J.
1. Under Section 256(2) of the Income-tax Act, 1961, the Tribunal has stated the following question :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that the transfer of development rebate reserve to the capital account did not amount to distribution of profits within the meaning of Section 34(3)(a) of the Act ?"
2. The assessee is a Hindu undivided family. The assessment year concerned is 1967-68. For this assessment year, the assessee claimed development rebate of Rs. 42,178. He created a development rebate reserve as required by Section 33 read with Section 34(3)(a) of the Act. The development rebate was, accordingly, allowed. However, in the course of the assessment proceedings for the assessment year 1972-73, the Income-tax Officer found that the development rebate reserve of Rs. 42,178 created during the previous year relevant to the assessment year 1967-68 has been transferred to the capital account within a period of eight years from the creation of such reserve. The Income-tax Officer was of the opinion that such transfer amounts to violation of the condition prescribed in Section 34(3)(a) and, accordingly, he rectified the assessment for the assessment year 1967-68 by passing an order under Section 154 of the Income-tax Act. The appeal preferred by the assessee was dismissed by the Appellate Assistant Commissioner whereupon the assessee went to the Tribunal by way of further appeal. The Tribunal held that the transfer of development rebate reserve to capital account does not amount to violation of any of the conditions prescribed in Section 34(3)(a) and, therefore, the Income-tax Officer was wrong in rectifying the assessment for the year 1967-68. Thereupon, the Revenue has applied for and obtained this reference.
3. Clause (a) of Sub-section (3) of Section 34 reads as follows :
"(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 [ any previous year in respect of which the deduction is to be allowed under subsection (2) of that section or any earlier previous year (being a previous year not earlier than the year in which the ship was acquired or the machinery or plant was installed or the ship, machinery or plant was first put to use)] 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 first 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' had been substituted."
4. The words within brackets were substituted for the words "the relevant previous year" by the Finance Act, 1990, with retrospective effect from April 1, 1962. However, counsel for both the parties stated before us that this amendment has no relevance on the question at issue. Another circumstance to be noticed is that the Explanation to Clause (a) was deleted by the Finance Act, 1990, with retrospective effect from April 1, 1962. The Explanation, though not strictly relevant for our purposes, may be set out for the purpose of completeness too ;
"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."
5. A reading of Clause (a) shows that the development rebate provided by Section 33 shall not be allowed unless an amount equal to 75 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 the development rebate reserve account. The said reserve fund can be utilised during the period of eight years next following for the purpose of the business of undertaking. However, the said reserve fund cannot be utilised for two purposes within the said period of eight years, namely, (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.
6. The simple question here is whether the transfer of development rebate reserve to the capital account within a period of eight years of the creation of the reserve violates any of the conditions prescribed by the clause. It may be noted that the said amount can be utilised for the purpose of the business of the undertaking but not for the two specified purposes. In this case, the transfer to the capital account is for the purpose of the business of the undertaking but it does not fall within any of the two prescribed prohibited situations. If so, there is no violation and the assessment for the assessment year 1967-68 could not have been rectified by the Income-tax Officer under Section 154.
7. The learned standing counsel for the Revenue relied upon a decision of the Punjab and Haryana High Court in Leader Engineering Works v. CIT [ 1980] 124 ITR 44 but that was a case where the reserve amount was distributed by way of profits to the partners of the assessee-firm and credited to the capital account of the partners. Thus there was a clear violation of the provisions of Clause (a) in that case.
8. It is then argued that, in the case of an Hindu undivided family there is no distinction between the capital account and revenue account and. that both are the same and, therefore, the transfer to capital account in truth . and in fact cannot but be described as distribution by way of profits. It is argued that, in the case of a Hindu undivided family, there is no distribu tion by way of dividends nor any distribution of profits as such, but that whatever amount is available in whatever account is the property of the Hindu undivided family. The fact cannot be denied that, even in the case of a Hindu undivided family, there is a distinction between capital account and revenue account. If so, the transfer of the amount to the capital account cannot be treated as distribution or disbursement by way of profit.
We may also point out that this aspect was not specifically argued before the Income tax Officer though the Income-tax Officer had referred to this aspect.
9. Reference is also made to the decisions of the Supreme Court in Indian Overseas Bank Ltd. v. CIT [1970] 77 ITR 512 and Shri Shubhlaxmi Mills Ltd, v. Addl. CIT [1989] 177 ITR 193 but those decisions only say that for availing of the benefit of Section 33, the assessee must strictly comply with the requirements of Section 33 and Section 34(3)(a).
10. For the above reasons, the question referred is answered in the affirmative, i.e., in favour of the assessee and against the Revenue. No costs.