JUDGMENT
B.S. Dhillon, J.
1. Brief facts giving rise to this reference are that the assessee, M/s. Leader Engineering Works, is a registered firm carrying on business in the manufacture of pipe fittings, etc. For the assessment year 1964-65, relevant to the accounting period ending 31st December, 1963, the assessee claimed development rebate amounting to Rs. 82,542. For this purpose, the assessee created a development rebate reserve of Rs. 61,906. The assessee’s claim for development rebate was accepted in that assessment year.
2. Later on, it came to the notice of the ITO that the development rebate reserve amounting to Rs. 61,906, which was created during the accounting period ending 31st December, 1963, was distributed by way of profits and credited to the capital accounts of the partners during the accounting period ending 31st December, 1971, i.e., before the expiry of 8 years. Consequently, the ITO came to the conclusion that the assessee infringed the provisions of Section 34(3)(a) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), and hence the development rebate allowed to the assessee during the assessment year 1964-65 was to be withdrawn in view of the provisions of Section 34(3)(a) read with Section 155(5) of the Act. A requisite notice was issued for rectifying this mistake. The plea of the assessee that the development rebate reserve remained intact for 8 years was not accepted by the ITO. On appeal, the AAC upheld the finding of the ITO. Second appeal by the assessee before the Income-tax Appellate Tribunal (hereinafter referred to as “the Tribunal”) was also dismissed. On a reference application, the Tribunal has referred the following question of law to this court for its opinion :
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee contravened the provisions of Section 34(3)(a) of the Income-tax Act, 1961, resulting in the withdrawal of the development rebate already allowed under Section 155(5) of the Income-tax Act, 1961, for the assessment year 1964-65 ?”
3. After hearing the learned counsel for the parties, we are of the opinion that the question of law referred to us has to be replied in the affirmative, i.e., in favour of the revenue and against the assessee. It cannot be disputed that the development rebate reserve was to be kept intact up to 31st December, 1971, in view of the provisions of Section 34(3)(a) read with Section 155(5) of the Act. It cannot also be disputed that for getting the benefit in
question, a separate development rebate reserve has to be created by the assessee. It has so been authoritatively held by their Lordships of the Supreme Court in Indian Overseas Bank Ltd. v. CIT [1970] 77 ITR 512. As regards the factual position, the Tribunal found as a fact that the entries regarding the transfer of the development rebate reserve to the capital account of the partners were made on 31st December, 1971, and the plea that the said entries were made on a later date, was negatived. That being so, the development rebate reserve was not kept intact for the full period of 8 years, which is required under the statutory provisions referred to in the earlier part of the order. Thus, no fault can be found with the order of the income-tax authorities sought to be impugned.
4. The other contention of the learned counsel for the assessee, that the transfer from the development rebate reserve to the capital account of the partners, does not amount to utilisation of the development rebate reserve for the purpose of distribution of profits as contemplated under Section 34(3)(a) of the Act, is equally untenable. We agree with the findings of the Tribunal that once the development rebate reserve account is debited and the capital account of the partners are credited, the identity of the reserve account totally disappears from the books of account and the partners are free to withdraw the same for their own personal purposes. The learned counsel for the assessee has placed reliance on a decision of the Gujarat High Court in Vikram Mills Ltd. v. ITO [1976] 105 ITR 423 in support of his contention. In that case, the effect of making entries in the accounts of the firm regarding the transfer of the amount from the development rebate reserve to the capital account of the partners of the firm was not at all considered from its true perspective. In our considered opinion, the observations made therein that even if there was any breach of the implied conditions of Section 34(3)(a) of the Act, the breach was technical and venial, is not sustainable in the eye of law. The taxation laws are technical and if the statute provides for a particular contingency, the same has to be fulfilled, except, of course, in a case where the statute is directory and not mandatory. The provisions of Section 34(3)(a) read with Section 155(5) of the Act, in our view, are mandatory and the breach of these provisions cannot be overlooked by observing that the breach was technical or venial. We respectfully are not in agreement with the view taken by their Lordships of the Gujarat High Court in Vikram Mitts’ case [1976] 105 ITR 423 and in our view the moment the entries were made in the account books of the firm transferring the money lying in the development rebate reserve to the capital account of the partners of the firm, the development rebate reserve became non-existent, which is in violation of the condition imposed by Section 34(3)(a) read with Section 155(5) of the Act, and thus the assessee is not entitled to the benefit as has been rightly held by the Tribunal.
5. For the reasons recorded above, we answer the question referred to us in the affirmative, i.e., in favour of the revenue and against the assessee. However, there will be no order as to costs.
