Civil Appeal No 47 N T of 1975
From the Judgment and Order dated 3101974 of t he Gujarat High Court in IT Reference No 30 of 1973
Bishambar Lal for the Appellant
VS Desai B Rao and Ms A Subhashini for the Responden t MB Lal for the Intervener
NP 88 The Judgment of the Court was delivered by PATHAK CJ
This appeal by certificate granted by t he High Court of Gujarat is directed against the judgment of the High Court on the following questions referred to it by the Appellate Tribunal 1
Whether on the facts and in the circumstances of the case the Tribunal was fight in holding that the asse s see cannot be denied the benefit of carry forward of deve l opment rebate 2
Whether on the facts and in the circumstances of the case the Tribunal was justified in directing that t he Income tax Officer should determine the development reba te and such development rebate should be allowed to be carri ed forward and set off when profits are available and if in that year the assessee fulfils the necessary requiremen ts for such allowance like creation of adequate reserve The assessee is a limited Company
It has a textile mi ll at Cambay in the State of Gujarat
For the assessment ye ar 1962 63 the previous year being the calendar year 1961 t he assessee claimed that a sum of Rs 126233 should be a l lowed as development rebate under section 33 of the Income t ax Act 1961
The Income tax Officer rejected the claim on t he ground that the assessee had not created a reserve as co n templated by sub section
3 of section 34 of the Income tax Ac t 1961
The Appellate Assistant Commissioner of Income T ax dismissed the appeal filed by the assessee
In second appe al the claim by the assessee found favour with the Income T ax Appellate Tribunal
At the instance of the Revenue t he questions set forth earlier were referred to the High Cou rt for its opinion
The High Court has answered the questio ns in favour of the Revenue and against the assessee
It h as held that the assessee had failed to comply with the cond i tions of sub section
3 of section 34 of the Act
In this appeal by the assessee it is urged that the vi ew taken by the High Court is erroneous and that it is n ot necessary that a reserve should be created in the previo us year during which the machinery or plant was installed
Sub section
1 of section 33 provides that development rebate m ay be claimed as a deduction in respect of a new machinery or plant installed 89 after 31 March 1954 which is owned by the assessee and is wholly used for the purposes of the business carried on by him and that the allowance of the deduction is subject to the provisions of section 34
a of sub section
3 of section 34 provides that the deduction referred to in section 33 shall n ot be allowed unless an amount equal to 75 per cent of t he development rebate to be actually allowed is debited to t he profit and loss account of the relevant previous year a nd credited to a reserve account to be utilised by the assess ee during a period of eight years next following for the pu r poses of the business of the undertaking other than f or distribution by way of dividends or profits or for remi t tance outside India as profits or for the creation of a ny asset outside India
The Finance Act 1966 added an Explan a tion to this clause
The Explanation declared that t he deduction referred to in section 33 could not be denied by reas on only that the amount debited to the profit and loss accou nt of the relevant previous year and credited to the aforesa id reserve account exceeded the amount of the profit of su ch previous year as arrived at without making the depos it aforesaid in accordance with the profit and loss accoun t
The Explanation was inserted with retrospective effect fr om the commencement of the Act
Before the Explanation w as enacted a difference of opinion had existed between the Hi gh Courts on the question whether the statute required t he creation of a reserve in the previous year in which the n ew machinery or plant was installed when the amount of t he profit of that previous year was either nil or insufficie nt for the purposes of enabling the creation of such reserv e
It is not necessary to refer to these cases for it see ms clear to us that the Explanation which applied to t he assessment year under consideration before us removes t he doubt altogether
What is contemplated is the creation of a Reserve Fund in the relevant previous year irrespective of the result of the profit and loss account disclosed by t he books of the assessee
Mere book entries will suffice f or creating such a Reserve Fund
The debit entries and t he entries relating to the Reserve Fund have to be made befo re the profit and loss account is finally drawn up
That is a condition for securing the benefit of development rebate a nd if that condition is not satisfied we fail to see how t he deduction on account of development rebate can be claimed at all
Learned counsel for the assessee relies on West Laikdi hi Coal Co Ltd Calcutta vs Commissioner of Income tax We st Bengal 11 and Commissioner of Income ta x Delhi Central vs Modi Spinning  Weaving Mills Co Ltd 
 Those were cases decided under the prov i sions of the Indian Income tax Act 1922 and there was no Explanation such as we have before us
Re 90 ference was made to the decision of this Court in Indi an Overseas Bank Ltd vs Commissioner of Income tax Madra s In that case however the question w as whether the creation of a reserve in compliance with section 17 of the Banking Companies Act constituted sufficient compl i ance with the requirements of proviso b to section 102 vi b of the Indian Income tax Act 1922
Reference has also be en made to Additional Commissioner of Income tax vs Vishnu I n dustrial Enterprise We do not find it possible to agree with the view taken by the Allahabad Hi gh Court in that case that the development reserve need not be created in the relevant previous year during which the n ew machinery or plant is installed and that a profit must ha ve been earned during the previous year to permit the creati on of a reserve fund
We think that the Explanation is clea r and that there can be no doubt that it envisages the cre a tion of a Reserve Fund notwithstanding that there is no profit or insufficient profit from which such reserve may be provided
To contemplate otherwise would be to negate t he entire scheme incorporated in section 33 read with section 34 of t he Act
For the same reason we are unable to affirm the vi ew taken by the Allahabad High Court in Commissioner of Income tax vs UP Hotel and Restaurants Ltd 1984 1 Our attention has been drawn by the learned couns el for the assessee to Dodballapur Spinning Mills Ltd vs Commissioner of Income tax Karnataka 2 and Anr 1980 1 where reference has been made to a circular issued by the Central Board of Direct Taxes dated 14th October 19 65 and to a subsequent circular dated 30 January 1976
We ha ve carefully considered the matter and we do not think that t he circulars affect the true position in law
On behalf of the assessee reliance was placed on Indi an Oil Corporation Ltd vs section Rajagopalan Income tax Office r Companies Circle II 1 Bombay and others 41 where the Bombay High Court has held that there was no obligation on the assessee to create a reserve in the ye ar of installation if there was no taxable income in the rel e vant year
Some of the submissions addressed in that ca se may be set forth in detail
A powerful argument was a d dressed by learned counsel for the assessee and it w as pointed out that the expression shall be allowed in clau se a of sub section
1 of section 33 indicated that the developme nt rebate is to be assessed and thereupon it becomes allowabl e and that sub section
2 of section 33 which provides for the allo w ance of development rebate mentions that the sum to be allowed by way of development rebate for the assessme nt year shall be only such amount as shall be sufficient to reduce the total assessable income to nil and the amount of development rebate to the extent to which 91 it has not been allowed shall be carried forward to t he following assessment years for eight subsequent year section Reference was also made to the distinction between t he expressions to be allowed and actually allowed used in the relevant provisions
It was also argued that the util i sation by the assessee of the development rebate reserve f or the purposes of the business of the undertaking contemplat ed the existence of an actual fund which could be utilised f or the purposes of the business and that an illusory deb it entry in the profit and loss account and an illusory cred it entry in the development rebate reserve account were n ot contemplated
The High Court accepted the submission a nd concluded that it was not mandatory that the necessary deb it and credit entries must be made in the assessment ye ar following the year of installation in which the developme nt rebate is determined under section 33
Having considered t he matter at some length in the present case it seems to us clear that in order to claim the deduction on account of development rebate under sub section
1 of section 33 it is obligat o ry that the debit entries in the profit and loss account a nd the credit entry in a reserve account should be made in t he relevant previous year in which the machinery or plant is installed or first put to use
The development rebate co n templated by sub section
1 of section 33 cannot be allowed as a deduction unless a reserve account has been created in t he previous year in which the installation or first use occur section Any doubt in so reading the provisions because of a want or insufficiency of profit in such previous year has be en removed by the Explanation to clause a of sub section
3 of section 34
The significance of the words actually allowed in clause a of sub section
3 of section 34 has been considered by t he High Court in the judgment under appeal and we are in entire agreement with the view taken by the High Court in that  regard
A number of other cases have also been placed before us by learned counsel for the assessee but as they deal wi th the point on the basis of considerations substantially t he same as have been referred to in the cases mentioned earl i er we think it unnecessary to deal with them specifically 
Upon the aforesaid considerations we hold that the Hi gh Court is right in answering the questions in favour of t he Revenue and against the assessee
In the result the appeal is dismissed but there is no ord er as to costs
HLC Appeal di s missed


Summary:
The petitioners who were building contractors in the State of Punjab were assessed to tax by the sales tax authorities on the supply of materials in construction works treating it as a sale acting under the provisions of the East Punjab General Sales Tax Act 1948
The petitioners challenged the legality of the assessment proceedings on the grounds inter alia that the legislature of the Province of Punjab had under Entry 48 in List II of Sch
I ll to the Government of India Act 1935 no power to impose tax on the supply of materials in construction works as there was no sale in fact or in law of those materials and that the provisions of the Act which sought to do it were ultra vires
The assessing authorities contended that on a true construction of the building contract entered into by petitioners with the Government it comprised a distinct agreement for the sale of materials and particularly relied on r 33 of printed General Conditions of Contracts issued by the Government  Held that there was no sale as such of the materials used in the constructions by the petitioners and that no tax could be levied thereon
439 Rule 33 which provides that the materials brought to the site shall become the property of the Government but that when the works are finally completed the surplus materials shall revert and become the property of the contractor has for its object that materials of the right sort are used in the construction and has not the effect of converting what is a lump sum contract for construction of buildings into a contract for the sale of materials used therein
State of Madras vs Gannnon Dunkerley  Co Madras Lid
   followed
Tripp vs Armitage  and Reid vs Macbeth