ITA 44/2003 BEFORE THE HON’BLE MR. JUSTICE RANJAN GOGOI THE HON’BLE MR. JUSTICE B. K. SHARMA JUDGMENT & ORDER Ranjan Gogoi, J. 1. This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act) against the order dated 17.4.2002 passed by the learned Income Tax Appellate Tribunal, Guwahati in Income Tax Appeal No.315(Gau) of 1995 has been admitted on the following two substantial questions of law:- (i) Whether, on the facts and in the circumstances of the case, the Tribuna l was justified and correct in law in holding that the adjustment of Rs.27,94,27 5/- made by the assessing Officer declining the claim of investment allowance is not in order? (ii) Whether, on the facts and in the circumstances of the case, the Tribunal was justified and correct in law in holding that the adjustment under Section 3 2A of the Income Tax Act, 1961 while processing the return under Section 143(1)( a) of the Act is outside the scope of the said provision? 2. The facts that will be required to be noticed for the purpose of adjudic ation of the questions framed may now be stated. For the assessment year 1990-91 the respondent assessee filed its return showing a total loss of Rs.83,82,590/- . The Assessing Officer who scrutinized the return under the provisions of Secti on 143(1)(a) of the Act (as then in force) did not allow the claim of investment allowance on the ground that the required preconditions under Section 32A of th e Act were not fulfilled. Accordingly the amount claimed i.e. Rs.27,94,275/- was adjusted and the total loss was worked out as Rs.55,88,315/-. Additional tax of Rs.3,01,782/- was levied by the Assessing Officer. 3. The assessee preferred a rectification petition under Section 154 of the Act which was rejected by order dated 12.11.92 of the Assessing Officer. The as sessee thereafter filed an appeal before the learned Commissioner of Income Tax (Appeals). The said authority by order dated 22.3.95 dismissed the appeal by hol ding that the investment allowance claimed by the assessee was rightly adjusted since the assessee had failed to create the requisite reserve as required under the Act. 4. Aggrieved by the order of the learned Commissioner of Income Tax (Appeal s) dated 22.3.95 the assessee filed a further appeal before the learned Income T ax Appellate Tribunal, Guwahati Bench (hereinafter referred as the Tribunal). Th e learned Tribunal by its order dated 17.4.2002 allowed the appeal of the assess ee reversing the orders of the authorities below. Aggrieved, this appeal has bee n filed by the Revenue wherein the two substantial questions of law, as already noticed, had been framed by this Court at the time of admission of the appeal. 5. The relevant provisions of Section 32A with regard to investment allowan ce (as it then existed) may be reproduced herein below for a better understandin g of the questions that this Court has been called upon to answer in the present appeal. 32A. Investment allowance. (1) In respect of a ship or an aircraft or machinery or plant specified in s ub-section (2), which is owned by the assessee and is wholly used for the purpos es of the business carried on by him, there shall, in accordance with and subjec t to the provisions of this section, be allowed a deduction, in respect of the p revious year in which the ship or aircraft was acquired or the machinery or plan t was installed or, if the ship, aircraft, machinery or plant is first put to us e in the immediately succeeding previous year, then, in respect of that previous year, of a sum by way of investment allowance equal to twenty-five per cent of the actual cost of the ship, aircraft, machinery or plant to the assessee. [Provided that in respect of a ship or an aircraft or machinery or plant specifi ed in sub-section (8B), this sub-section shall have effect as if for the words twenty-five per cent. , the words twenty per cent had been substituted : [Provided further that] no deduction shall be allowed under this section in resp ect of - (a) any machinery or plant installed in any office premises or any residenti al accommodation, including any accommodation in the nature of a guest-house; (b) any office appliances or road transport vehicles; (c) any ship, machinery or plant in respect of which the deduction by way of development rebate is allowable under section 33; and (d) any machinery or plant, the whole or the actual cost of which is allowed as a deduction (whether by way of depreciation or other-wise) in computing the income chargeable under the head Profits and gains of business or profession o f any one previous year. [Explanation. - For the purposes of this sub-section, actual cost mean s the actual cost of the ship, aircraft, machinery or plant to the assessee as r educed by that part of such cost which has been met out of the amount released t o the assessee under sub-section (6) of Section 32AB.] (2) &. &.. &.. (a) & & (b) & &. (c) & & (3) Where the total income of the assessee assessable for the assess ment year relevant to the previous year in which the ship or aircraft was acquir ed or the machinery or plant was installed, or, as the case may be, the immediat ely succeeding previous year [the total income for this purpose being computed a fter deduction of the allowances under section 33 and section 33-A, but without making any deduction under sub-section (1) of this section or any deduction unde r Chapter VI-A] is nil or is less than the full amount of the investment allowan ce, -- (i) the sum to be allowed by way of investment allowance for that assessment year under sub-section (1) shall be only such amount as is sufficient to reduce the said total income to nil; and (ii) the amount of the investment allowance, to the extent to which it has no t been allowed as aforesaid, shall be carried forward to the following assessmen t year, and the investment allowance to be allowed for the following assessment year shall be such amount as is sufficient to reduce the total income of the ass essee assessable for that assessment year, computed in the manner aforesaid, to nil, and the balance of the investment allowance, if any, still outstanding shal l be carried forward to the following assessment year and so on, so, however, th at no portion of the investment allowance shall be carried forward for more than eight assessment years immediately succeeding the assessment year relevant to t he previous year in which the ship or aircraft was acquired or the machinery or plant was installed or, as the case may be, the immediately succeeding previous year. Explanation.-Where for any assessment year, investment allowance is to be allowe d in accordance with the provisions of this sub-section in respect of any ship o r aircraft acquired or any machinery or plant installed in more than one previou s year, and the total income of the assessee assessable for that assessment year [the total income for this purpose being computed after deduction of the allowa nces under this section 33 and section 33-A, but without making any deduction un der sub-section (1) of this section or any deduction under Chapter VI-A] is less than the aggregate of the amounts due to be allowed in respect of the assets af oresaid for that assessment year, the following procedure shall be followed, na mely :- (a) the allowance under clause (ii) shall be made before any allowance under clause (i) is made; and (b) where an allowance has to be made under clause (ii) in respect of amount s carried forward from more than one assessment year, the amount carried forward from an earlier assessment year shall be allowed before any amount carried forw ard from a later assessment year. (4) The deduction under sub-section (1) shall be allowed only if the followi ng conditions are fulfilled, namely :- (i) the particulars prescribed in this behalf have been furnished by the ass essee in respect of the ship or aircraft or machinery or plant; (ii) an amount equal to seventy-five percent of the investment allowance to b e actually allowed is debited to the profit and loss account of [any previous ye ar in respect of which the deduction is to be allowed under sub-section (3) or a ny earlier previous year (being, previous year not earlier than the year in whic h the ship or aircraft was acquired or the machinery or plant was installed or t he ship, aircraft, machinery or plant was first put to use)] and credited to a reserve account (to be called the Investment Allowance Reserve Account ) to be utilized - (a) for the purposes of acquiring, before the expiry of a period of ten year s next following the previous year in which the ship or aircraft was acquired or the machinery or plant was installed, a new ship or a new aircraft or new machi nery or plant [other than machinery or plant of the nature referred to in claus es (a), (b) and (d) of [the second proviso] to sub-section (1) for the purposes of the business of the undertaking; and (b) until the acquisition of a new ship or a new aircraft or new machinery o r plant as aforesaid, for the purposes of the business of the undertaking other than for distribution by way of dividends or profits or for remittance outside I ndia as profits or for the creation of any asset outside India : Provided that this clause shall have effect in respect of a ship as if for the w ord seventy-five , the word fifty had been substituted. Explanation. -- &. &. &. 6. A reading of the provisions of Section 32A of the Act as quoted above in dicates that in respect of a ship or an aircraft or machinery or plant as specif ied in sub-section (2) which is owned by the assessee and used by the assessee f or the purposes of his business a deduction equal to twenty-five per cent of the actual cost of the ship, aircraft, machinery or plant is to be allowed in accor dance with and subject to the provisions of Section 32A in respect of the previo us year in which the ship or aircraft was acquired or the machinery or plant was installed or if the ship, aircraft, machinery or plant is first put to use in t he immediately succeeding previous year, then, in respect of that previous year. Under sub-section (3) of Section 32A if the total income of the assessee for th e assessment year relevant to the previous year as mentioned in sub-section (1) of section 32A is nil or is less than the full amount of the investment allowanc e allowable the amount to be allowed for that particular assessment year shall b e only such amount as is sufficient to reduce the said total income to nil and t he amount of investment allowance to the extent to which it has not been allowed shall be carried forward to the following assessment year. Sub-section (3)(ii) further contemplates that the outstanding investment allowance, if any, is to be carried forward in the same manner to the next assessment year/years subject to a maximum of eight assessment years succeeding the first assessment year in whi ch part of the investment allowance may have been allowed. Under Section (4) of Section 32A deduction on account of investment allowance under sub-section (1) i s to be allowed only if, inter alia, an amount equal to seventy-five per cent of the investment allowance to be actually allowed to an assessee is debited to th e profit and loss account of any previous year in respect of which the deduction is to be allowed under sub-section (3) or any earlier previous year (being, pre vious year not earlier than the year in which the ship or aircraft was acquired or the machinery or plant was installed or the ship, aircraft, machinery or plan t was first put to use. The amount debited in the profit and loss account as af oresaid is thereafter to be credited to a reserve account called the investment allowance reserve account. 7. The provisions of sub-section (4)(ii) shown in italics above were amende d by the Finance Act, 1990 with retrospective effect from 1.4.1976. Prior to the amendment the words appearing in sub-section (4)(ii) in place of the words in i talics were - the previous year in respect of which the deduction is to be allo wed. 8. The provisions relating to investment allowance as contained in Section 32A of the Act are perimateria with the provisions contained in Section 33 of th e Act which deals with development rebate. The conditions on fulfillment of whic h development rebate is to be allowed are dealt with separately by Section 34 of the Act whereas the conditions subject to which investment allowance under Sect ion 32A is to be allowed are dealt with by sub-section (4) of Section 32A itself . The only difference with regard to the provisions dealing with the conditions subject to which investment allowance and development rebate is to be allowed is that under Section 34 (3) there was an Explanation to the following effect whic h was amended by the Finance Act of 1990 with retrospective effect from 1.4.1962 : Explanation.-For the removal of doubts, it is hereby declared that the deductio n referred to in section 33 shall not be denied by reason only that the amount d ebited 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 previ ous year (as arrived at without making the debit aforesaid) in accordance with t he profit and loss account. 9. The amendments in Section 32A in respect of investment allowance and Sec tion 34 in respect of development rebate, as noticed above, are a sequel to a ju dgment of the Apex Court in Shri Shubhalaxmi Mills Ltd. vs. Additional Commissio ner of Income Tax, Gujarat, reported in (1989) 177 ITR 193. In the aforesaid ca se the Supreme Court had the occasion to examine the provisions of Section 33 an d 34 of the Act as it existed prior to the amendment as well as the Explanation to Section 34(3)(a), extracted above, which has since been deleted by the Financ e Act, 1990 with retrospective effect from 1.4.1962. After noticing the aforesa id provisions of the Act, the Apex Court held that in order to claim a deduction on account of development rebate it is obligatory for the assessee to create a reserve in the year of installation of the plant or machinery or in the immediat ely succeeding year when it is first put to use, even in a situation where there is no total income in that year. In this regard, it was held by the Apex Court that mere book entries will suffice for creating such a reserve fund which ought to be made before the profit and loss account is finally drawn. It was the furt her view of the Apex Court in Shri Shubhalaxmi Mills Ltd. (supra) that unless th e assessee acts in the said manner development rebate under Section 33(1) of the Act cannot be allowed. Naturally, if development rebate cannot be allowed no qu estion of carrying forward the same to any subsequent year could arise. 10. Following the aforesaid decision of the Apex Court the Union Legislature decided to intervene and amend section 32A and 34 to ensure that the condition of creation of a reserve fund even in a year of loss or insufficient profit will not be mandatory in respect of both development rebate and investment allowance . The amendment proposed covered section 32A also though the decision of the Sup reme Court in Shri Shubhalaxmi Mills Ltd. (supra) was with regard to development rebate as the underlying principles governing development rebate were the same as in the case of grant of investment allowance. The relevant clauses of the mem orandum explaining the provisions in the Finance Bill, 1990 seeking to amend sec tion 32A(4) and Section 34(3)(a) of the Act and the object and scope of the amen dment may be usefully extracted herein below : Modification of conditions for grant of development rebate and investment allow ance. 18. The provisions of section 33 read with section 34 of the Income Tax Act, relating to development rebate, provide for deduction of a percentage of the ac tual cost of a ship acquired or machinery or plant installed. One of the conditi ons for the deduction is that an amount equal to 75 per cent of the amount of de velopment rebate to be actually allowed is debited to the profit and loss accoun t of the relevant previous year and credited to a reserve account. 18.1 In the context that appropriation to a reserve presupposes existence of sufficient profits and it should suffice if the required amount is so appropriat ed before the deduction by way of development rebate came to be allowed, the Cen tral Board of Direct Taxes through a circular clarified that the requirement of creation of reserve will be considered to have been satisfied if the accumulated reserves in respect of the said machinery or plant upto the year or years of ac tual deductions is equal to seventy five percent of the amount of development re bate to be actually allowed. This means that in a year when profits are insuffic ient or there are no profits, the creation of reserve was not mandatory. 18.2 The Supreme Court in the case of Shri Shubhalaxmi Mills Ltd. [1989] 177 IT 193, has held that in order to claim the deduction on account of development rebate, it is obligatory that the reserve should be created in the year of acqui sition/ installation of machinery or plant, etc., even in a cases where there ar e no profits. If the decision of the Supreme Court is to be followed, then taxpa yers who have been following the Board’s circulars for many years would be place d in a very difficult situation as their assessments already completed could be reopened. Apart from this, it may run contrary to accounting principles and the assurance given by the Central Board of Direct Taxes through its circular. 18.3 Though the decision of the Supreme Court has been pronounced only with r egard to the provisions relating to development rebate, the underlying principle may apply equally to the grant of investment allowance. Accordingly, sections 3 2A and 34 have been amended to secure that the condition of creation of reserve even in a year of loss or of insufficiency of profit as laid down by the Supreme Court will not be mandatory in respect of both development rebate and investmen t allowance. It is now provided that in considering whether the condition regard ing creation of reserve is fulfilled or not, the reserve(s) created in the year in which the deduction is to be allowed and in any earlier year will be taken in to account. Of course, the earlier year will not be a year earlier than the year in which the plant, machinery is installed or put to use or the ship is acquire d. 18.4 These amendments will take effect retrospectively from 1st April, 1962, in relation to the development rebate and 1st April, 1976, in relation to the in vestment allowance and will, accordingly, apply from assessment years 1962-63 an d 1976-77, respectively and subsequent years. 11. Reading the aforesaid Memorandum there can be no manner of doubt that wi th the amendment brought about by the Finance Act, 1990 the judgment of the Supr eme Court in Shri Shubhalaxmi Mills Ltd. (supra) would cease to have any applica tion. Instead, under the provisions of section 32A(3) and (4), as amended, it is not mandatory for an assessee to create the requisite reserve in the year of in stallation of the plant and machinery if in the said year the assessee had retur ned a minus figure of income i.e. loss. The explanation to Section 34(3)(a) whic h has since been deleted by the Finance Act, 1990 with effect from 1.4.1962 was never engrafted in the provisions of Section 32A of the Act. In fact under secti on 32A(3) if the total income of an assessee is nil or is less than the full amo unt of the investment allowance claimed, investment allowance is to be allowed i n part and the outstanding amount of investment allowance is to be carried over to the next assessment years subject to a maximum of eight assessment years. Und er sub-section (4) of Section 32A as amended by the Finance Act, 1990 the debit in the profit and loss account and the corresponding credit to the reserve accou nt is required to be in respect of any previous year in respect of which deducti on is to be allowed under sub-section (3) or any earlier previous year which, ho wever, cannot be earlier than the year in which the ship or aircraft is acquired or the plant or machinery is installed or first put to use. The aforesaid posit ion brought in by the Finance Act, 1990 was in place of what had earlier existed i.e. the debit in the profit and loss account and credit to the reserve account was required to be in respect of the previous year in respect of which the ded uction is to be allowed. 12. From the above it is therefore clear that under the provisions of the Ac t the assessee is entitled to create the reserve fund within the period of eight assessment years following the installation of the plant and machinery so long it had earned profits in any of the said subsequent assessment years. Correspond ingly it was incumbent upon the Assessing Officer to determine the investment al lowance admissible to the assessee and carry forward the same to be allowed in t he year of profits subject to creation of the reserve fund in any assessment yea r within the period as stipulated by section 32A of the Act. The view that we ha ve taken would find support from a decision of the Allahabad High Court in the c ase of Commissioner of Income Tax vs. Raza Buland Sugar Co. Ltd., reported in (1 993) 202 ITR 191 which was rendered in context of the perimateria provisions of the Act dealing with development rebate. As the Assessing Officer in the presen t case had failed to so act there can be no manner of doubt that the order of th e authorities disallowing investment allowance to the assessee for the assessmen t year in question was not justified in law. The ultimate conclusion of the lear ned Tribunal reversing the view of the primary authorities, therefore, is correc t. As the very approach of the Assessing Officer was contrary to the provisions of the Act the answer to the second question raised stands self answered by our conclusions reached on the first question framed in the appeal. 13. For the aforesaid reasons we find no merit in this appeal. It is accordi ngly dismissed, however, without any order as to costs.