Law:

Section:

Section 34, read with sections 32 and 33, of the income-tax act, 1961-Development rebate-Conditions for allowance of-Whether in a case where assessee-company is unable to create requisite development rebate reserve in the year of installation of machinery and plant because of net loss, it could carry forward such development rebate and claim it in a subsequent year when it actually creates development rebate reserve-Held, yes Words and phrases-Expression 'allowed' occurring in section 33(2)(ii ) and the expression 'relevant previous year' occurring in section 34(3)(a) of the income-tax act, 1961. Facts The assessee-company, though entitled to certain development rebate for the assessment year 1966-67 (accounting period ending on 30-4-1965), had suffered a net loss and was, therefore, unable to create the development rebate reserve contemplated in section 34(3)(a) and for that reason the ITO disallowed its claim for development rebate. In the next assessment year 1967-68, the assessee earned positive income and created a development rebate reserve, but the ITO refused to carry forward the development rebate disallowed in the preceding year. On appeal, the AAC allowed the assessee's claim for carrying forward unabsorbed development rebate from the earlier year. On appeal by the revenue, the Tribunal upheld the AAC's orders. On reference: Held It is well settled that the creation of the reserve contemplated by the statutory provisions is a condition precedent for obtaining the allowance of development rebate. However, the main issue to be decided is whether the reserve contemplated under section 34(3)(a) must be created in the year of acquisition or installation or whether it can be created in any of the subsequent eight years. The legislative intent in granting development rebate and imposing restrictions on its user is clear that the assessee should use part of its profits for development purposes. This could be done only when profits have been earned by the assessee. The statute does not contemplate an illusory debit entry in the profit and loss account and a corresponding illusory credit entry in the development rebate reserve because it would be incapable of…

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