JUDGMENT
Leila Seth, J.
1. The assessed, M/s. National Industrial Corporation Ltd., New Delhi, is a private limited company dealing in alcohol. The assessment year under reference is 1964-65, and the relevant previous year is the financial year ending 31st march, 1964.
2. In the course of the assessment, the assessed claimed a development rebate under s. 34(3)(a) of the Income-tax Act, 1961 (in short “the Act”). This rebate was claimed as the assessed had installed fermentation tanks valued at Rs. 1,40,000. However, in the original profit and loss account drawn up for the year ending 31st March, 1964, no appropriation had been made for development re-enter reserve relating to those items. But after the accounts were audited in November, 1964, and placed before the general body of the shareholders it was resolved by them the such a provision should be made in the accounts of the year ending 31st March, 1964, itself. The auditor thereafter advised that it was not was not necessary to draw up a fresh balance-sheet to implement this and the necessary appropriation and adjustment could be indicated in the balance-sheet for the year ending 31st March, 1965. Accordingly, in the accounts for the year ending 31st March, 1965, the Opening balance for the development rebate reserve is shown as modified and a note to that effect is recorded by the auditor. Despite this, the ITO did not consider the assessed’s claim of Rs. 28,100 for development rebate.
3. The assessed being aggrieved, appealed to the AAC who by his order dated 11th April, 1969, confirmed the disallowance.
4. On further appeal to the income-tax Appellate Tribunal, the assessed produced the balance-sheet for the relevant period along with the auditor’s report and a copy of the ledger account wherein a provision for the development rebate had be made, The directors’ report in respect of the succeeding financial year in which it was specifically stated that the provisions for development rebate had been made “in the account for the previous year itself” was also shown. On the basis of this material and evidence, the Tribunal, while remanding the case by its order dated 18th November, 1970, observed :
“As the facts are not clear, we think it would be reasonable and fair to send the case back to the Appellate Assistant Commissioner to reconcile this conflict of opinion and ascertain the correct facts. If a provision had already been made in the accounts either in that year or in the next year, we see no good reason as to why the assessed should be deprived of the benefit of development rebate provided, of course, the other particulars are furnished”.
5. When the matter came before the AAC, he did not agree with the assessed’s contention that all that the Tribunal had desired was a verification of the facts. He once again examined the matter and came to the conclusion that the assessed was not entitled to the allowance of development rebate. This he did by his order dated 27th November, 1972.
6. The assessed appealed to the income-tax Appellate Tribunal. The Tribunal noticed that the only point in issue was whether the assessed had substantially complied with the requirements “of section 34(3)(a) by debiting 75 per cent. of the development rebate to the profit and loss account of the relevant previous year and making a corresponding credit to a reserve account”. The Tribunal considered the circumstances and allowed the appeal. It held that as the assessed was a company and the accounts did not become final until they were passed by the general body of shareholders in December, 1964, the non-provision of the development rebate reserve prior to that date was not material. Since the shareholders decided that the sum be appropriated to the development rebate reserve, the accounts stood amended accordingly. It must, therefore, be held that the development rebate reserve was created at the end of the year. The mere fact that the assessed did not revise the balance-sheet for the year ending 31st March, 1964, and that too on the advice of the auditor, “did not detract from the efficacy or validity of the decision of the shareholders to create the development rebate reserve and to read the accounts of the company on that footing”. The decision of the Supreme Court in Indian Overseas bank Ltd. v. CIT [1970] 77 ITR 512 and of the madras High Court in CIT v. Veeraswami Nainar [1965] 55 ITR 35, were held to be not relevant as they pertained to different situations.
7. The Revenue, being dissatisfied with the decision, moved for a reference. As a result, the following question of law has been referred for our opinion :
“Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the assessed was entitled to development rebate under the provisions of section 34(3)(a) of the Income-tax Act, 1961 ?”
8. Mr. G. C. Lalwani appearing for the Commissioner of Income-tax, contended that the development rebate deduction could not be allowed unless the amount had been debited to the profit and loss account and credited to a reserve account before the accounts were closed.
9. In order to appreciate the point in issue it is necessary to set out the relevant provisions.
10. Section 34(3)(a) of the Act reads :
“(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 allowance is debited to the profit and loses account of the relevant previous year and credited to a reserve account to be utilised by the assessed 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.”
11. On a plain reading of the provision, there can be no dispute with the proposition that the deduction will not be allowed unless 75 percent. of the development rebate to be actually allowed is debited to the profit and loss account and credited to the reserve account. The query is, has this to be done before the finalization of the account ? And if so, has this been done in the present case ?
12. The question of the time within which the development rebate reserve has to be created has been considered in many cases. In Indian Overseas bank Ltd. [1970] 77 ITR 512, the Supreme Court, while dealing with the question of development rebate reserve under the prov. (b) to s. 10(2) (vib) of the Indian I.T. Act, 1922, has held that the grate of the rebate is a concession subject to the fulfillment of the conditions prescribed, and the creation of a separate development rebate reserve fund is essential. Approving of the decision in Veeraswami Nainar [1965] 55 ITR 35 (Mad), it notes (p. 514) :
“The entries in the account books required by the proviso are not an idle formality. The assessed being obliged to credit the reserve fund for a specific purpose, he cannot draw upon the same for purposes other than those of the business and that amount cannot be distributed by way of dividend.”
13. In Addl. CIT v. Shri Subhlaxmi Mills Ltd. [1975] 100 ITR 188, the Gujarat High Court has held that the development rebate reserve can be created merely by a book entry. But the necessary debit entry for purposes of creation of the reserve and the corresponding credit entry for the reserve account must be done before the profit and loss account is finally closed. If this is not done, then the condition for getting the benefit of development rebate will not be satisfied. The Gujarat High Court has followed this view in three of its subsequent decisions, in Addl. CIT v. Nagardas Bechardas & Bros. Pvt. Ltd. [1976] 104 ITR 123 and CIT v. Mihir Textiles Ltd. [1976] 104 ITR 167 while dealing with a reserve created which fell short of the required amount, and in Keshavlal Vithaldas v. CIT [1976] 105 ITR 601.
14. In R. Venkatasubramaniam v. CIT [1973] 91 ITR 220, the Madras High Court has followed its decision in Veeraswami Nainar [1965] 55 ITR 35 (Mad) and of the Supreme Court in Indian Overseas Bank Ltd. [1970] 77 ITR 512. At p. 222 (of 91 ITR) Ramaswamy J., speaking for the court, has observed :
“A reading of this provision makes it clear that the debiting of the profit and loss account and crediting of the development rebate reserve account should be at the time when the profit and loss account is made of finalised. It may be that the assessed could amend or correct his accounts before he submits the return to the Income-tax officer but that is not to say that the assessed could readjust the accounts for the purpose of claiming development rebate at any time he chooses. Section 10(2)(vib) being a concession or an exemption, subject to the fulfillment of the conditions under the proviso, the conditions will have to be strictly complied with before the benefit under that section could be claimed.”
15. However, there is a catena of case taking a more liberal view and permit the reserve to be created so long as there are proceedings pending before the ITO, for example, even after filing a return but while filing a revised return : CIT v. Narula Cold Storage & Ice Factory [1976] 104 ITR 148 (Orissa); before completion of the assessment : CIT v. Sardar Singh Sachdeva [1972] 86 ITR 387 (P&H), CIT v. Modi Spinning & Weaving Mills Co. Ltd. and Tata Iron & Steel Co. Ltd. v. N. C. Upadhyaya [1974] 96 ITR 1 (Bom) or even rectification proceedings : Addl. CIT v. Saran Engineering Co. Ltd. [1978] 115 ITR 270 (All).
16. But in the present case the assessed has taken such steps as it considered necessary for the creation of the reserve even before the filing of the return and long before the assessment Proceedings were taken up by the ITO. It is, therefore, unnecessary to go into this controversy for the purposes of the present case. As such, we proceed to examine the matter on the footing that the reserve contemplated by s. 34(3)(a) must be created before the profit and loss account of the relevant year is finalised by the assessed. The question is whether in the present case this has been done.
17. We have, therefore, to examine whether the development rebate reserve has been created before finally making up the accounts. The facts are not in dispute. The tanks were installed in the relevant year and had been utilized for the whole year. The assessed closed the account books for the accounting year 1963-64 and these were duly audited in November, 1964. No development rebate reserve had been created. However, when the accounts were placed before the general body of shareholders of the assessed at there annual general meeting on 30th December, 1964, they resolved and directed that the development rebate reserve be created. This was done. In the balance-sheet for the succeeding accounting year 1964-65, the auditor’s observation in Note 8 of his report is clear; an adjustment of Rs. 28,100 for development rebate has been made “in the previous year accounts itself as per shareholders’ resolution passed in the same annual general meeting held on 30th December, 1964”.
18. It would, therefore, appear to us that what we have to consider is the effect of the resolution of the general body of shareholders on the accounts. If the general body resolution is the final word with regard to the accounts, then it must be construed that in fact the development rebate reserve has created in the relevant year.
19. Under s. 210 of the Companies Act, 1956, the board of directors of a company are required to lay before the company the balance-sheet and profit and loss account for that period at the annual general meeting. The balance-sheet is a formal arrangement of facts and figures in an intelligible manner indicating therein the total value of assets and liabilities on a particular date. Its function is to endeavor “to show the share capital, reserves (distinguishing those which are available for distribution as dividends from those not regarded as so available) and liabilities of the company at the date at which it is prepared, and the manner in which the total monies representing them are distributed over the several types of assets”.
20. The responsibility for preparing the annual accounts and the balance-sheet and laying it before the annual general meeting is placed on the directors, the members of the company not being in a position to personally direct the business. The balance-sheet and profit and loss account have to be approved and authenticated in terms of s. 215 by the directors and submitted to the auditor. The auditor is the representative of the shareholders and owes no duty to the management. If any confidential or other report is made by him to the management it must be attached to the balance-sheet. The report of the board of directors is also to be annexed.
21. Section 216 of the Companies Act requires that the profit and loss account be annexed to the balance-sheet as also the auditor’s report including the auditor’s separate, special or supplementary report.
22. These documents are to be made available to the shareholders not less that twenty-one days before the date of the meeting as per s. 219. It is only after the balance-sheet and the profit and loss account have been laid before the company at the annual general meeting that they are to be filed with the Registrar under s. 220. Section 220(2) provides that if an annual general meeting of a company before which a balance-sheet is laid as aforesaid does not adopt the balance-sheet, a statement of that fact and of the reasons therefore shall be annexed to the balance-sheet and to the copies thereof required to be filed before the Registrar. Section 205 is also pertinent which provides for the payment of dividend out of profit. Though an interim dividend may be paid by the board of directors at their discretion, a final dividend can be declared and paid only after the balance-sheet and profit and loss account are presented to the shareholders at the annual general meeting and approved by it.
23. It is, therefore, clear from the above provisions that it is only after these accounts have been placed before and considered by the general body of shareholders that they are finally accepted/adopted. It is only thereafter that a final dividend can be declared. It is only then that a true and fair view of the company’s affairs is available. It would, therefore, be correct to conclude that the balance-sheet and accounts of a company are in a sense finalised only after the seal of approval of the shareholders is obtained.
24. Taking this factor into consideration we have to see whether in fact a development rebate reserve had been created in the relevant year of account. It would appear so to us that the resolution of the shareholders clearly directed this to be done. The auditors indicate that this has been done. The accounts are adjusted accordingly. The next year’s balance-sheet and opening balance of accounts indicate this. However, the assessed does not draw up a fresh balance-sheet for the relevant year (on the advice of the auditors that this is not necessary) as the appropriations and adjustments have been made. There is no delay in complying with the specific directions of the members given while considering the accounts. As such, in the facts and circumstances of this case, we are clear that the development rebate reserve has been created before the finalisation of the accounts.
25. For the reasons outlined above, we answer the question in the affirmative and in favor of the assessed.