JUDGMENT R.K. Gulati, J.
1. The assessee, M/s. Raza Buland Sugar Company Limited, Rampur, engaged in the business of manufacture of sugar, suffered losses for the assessment years 1967-68 and 1968-69. In these two years, the assessee claimed development rebate in respect of plant and machinery installed in the previous year relevant to the assessment years in question. The Income-tax Officer negatived the claim on the solitary ground that the development rebate cannot be allowed as it had not been backed up by the creation of the necessary development rebate reserve in the books of the assessee as contemplated by Sub-section (3) of Section 34 of the Income-tax Act, 1961 (hereinafter referred to as "the Act").
2. The assessee felt aggrieved and approached the Appellate Assistant Commissioner of Income-tax by filing two separate appeals--one for each of the assessment years, contending that, as the assessee had suffered losses as per its account books and there was also loss as per the assessment orders, the development rebate reserve could not be created, but the development rebate should have been quantified and carried forward to the subsequent assessment years for set off in which the assessee earned profit and created the requisite reserve. The Appellate Assistant Commissioner, however, dismissed the claim. On further appeal to the Income-tax Appellate Tribunal, ,the claim of the assessee was accepted. The Tribunal held that in a year where there was a loss, the assessee was not obliged to create development rebate reserve in its books for that year and the assessee cannot be denied the benefit of the development rebate on the ground that no such reserve had been created in the books pertaining to the relevant assessment years in question. The Tribunal, therefore, directed the Income-tax Officer that the development rebate for the years in question be quantified for carrying forward and set off in a subsequent year of profit notwithstanding the fact that no reserve had been created in these years.
3. At the instance of the Revenue, the Income-tax Appellate Tribunal has referred the following two common questions of law for the opinion of this court under Section 256(1) of the Act :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee cannot be denied the benefit of carry forward of development rebate for the assessment years 1967-68 and 1968-69 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in directing the Income-tax Officer to determine the development rebate and to carry forward the rebate for set off in a subsequent year of profit for the assessment years 1967-68 and 1968-69 ?"
4. The material provision with which we are concerned for the purposes of this reference arc contained in Sections 33 and 34(3)(a) of the Act.
5. Section 33(1)(a) makes the provision for the deduction of development rebate in respect of a new ship or new machinery or plant, subject to fulfilment of certain conditions and permits a deduction, subject to Section 34, amongst other things, in respect of the previous year in which the ship was acquired or new machinery or plant was installed or, if it is first put to use in the immediately succeeding previous year, then, in respect of that previous year.
6. Sub-section (2) of Section 33, inter alia, provides that the sum to be allowed by way of development rebate for a particular assessment year shall be only such amount as is sufficient to reduce the total income as referred to therein to nil and further makes provision that the balance unabsorbed development rebate, if any, is to be allowed in the same way in the following year or years but no portion of the unabsorbed rebate is to be carried forward for more than eight years immediately succeeding the relevant assessment year.
7. Section 34(3)(a) of the Act as it stood at the material time, before its amendment by the Finance Act, 1990, when the appeals came to be decided giving rise to this reference, inter alia, provided that the deduction of development rebate envisaged under Section 33 shall not be allowed unless an amount equal to 75 per cent. of the development rebate to be actually allowed is debited to the profit and loss account of the relevant previous year and credited to the reserve account to be utilised by the assessee during a period of eight years next following for the purposes of the business of the undertaking other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any assets outside India. Section 34(3)(a) of the Act, as it stood earlier to its amendment by the Finance Act, 1990, contained an Explanation attached to it.
8. A survey of the provisions referred to above would show that, subject to the fulfilment of the necessary requirements, the allowability of the development rebate is not confined to the year of acquisition/installation of the plant or machinery, but can be carried forward and allowed for a period of eight years immediately succeeding the assessment year in respect of which the claim could be made.
9. The question for consideration is whether where the total income computed before allowing development rebate is nil, or is a minus figure, there is any obligation on the assessee to create statutory development rebate reserve in the year of installation of the plant or machinery, or the year of first use, as the case may be, if no development rebate was to be actually allowed in that year, or whether in such a situation, the requisite development rebate reserve could be created, without impairing the claim for allowance, in the course of subsequent years, so long as it is created during the period of eight years from the year of acquisition or installation in which the assessee earned income.
10. The case of the Department is that before an assessee could ask for determination of the allowance on account of development rebate, it is obligatory that the development rebate reserve should be created in the account books of the assessee in the previous year relevant to the assessment year in which the plant or machinery was installed, irrespective of there being no profits and the assessee having suffered losses. As admittedly, this had not been done in the instant case, Shri Bharatji Agarwal, learned senior standing counsel for the Department, urged that the Income-tax Appellate Tribunal was not right in directing the Income-tax Officer, to quantify the amount of the development rebate and to carry forward the same for set off in a subsequent year of profits when the requisite reserve is created,
11. The question that we are required to consider is not res Integra and had been the subject-matter of consideration before the Supreme Court in Shri Shubhlaxmi Mills Ltd. v. Addl. CIT [1989] 177 ITR 193. The Supreme Court examined the legal position in the light of the provisions of Sections 33 and 34 of the Act and particularly, in the light of the Explanation attached to Section 34(3)(a), since deleted retrospectively by the Finance Act, 1990, and held that in order to claim the deduction on account of development rebate, it is obligatory on the assessee to create the reserve in the year of installation of the plant or machinery, etc., or in the immediately succeeding year when it is first put to use, even when there is no total income in that year. It was pointed out 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 up, and failing that, the rebate under Section 33(1) cannot be allowed. As a sequel to the above, once it is found that the development rebate cannot be allowed in the year of installation, etc., it cannot be allowed to be carried forward in any subsequent year.
12. If the matter had stood there, in the presence of the Supreme Court decision, we would have had no hesitation in saying that the view taken by the Income-tax Appellate Tribunal was erroneous. However, after the decision of the Supreme Court in Shri Shubhlaxmi Mills Ltd. [1989] 177 ITR 193, the Legislature decided to intervene with a view to redress the hardship of taxpayers and adopting a pragmatic approach, if we may say so, amended Section 34(3)(a) by Section 11 of the Finance Act, 1990, to secure that the condition of creation of the reserve even in a year of loss or insufficiency of profit will not be a mandatory requirement in making the claim for allowance of development rebate." By the amendment in question a material change in the law applicable to the case was brought about, inasmuch as in Clause (a) of Sub-section (3) of Section 34, the words "any previous year in respect of which the deduction is to be allowed under Sub-section (2) of that Section or any earlier previous year (being a previous year not earlier than the year in which the ship was acquired or the machinery or plant was installed or the ship, machinery or plant was first put to use) " were substituted for the words "the relevant previous year" and the Explanation to Clause (a) was omitted with full retrospective effect from April 1, 1962, that is the date from which the Income-tax Act, 1961, was enforced.
13. It cannot perhaps be disputed that where pending a reference under Section 256 of the Act, the law is amended with retrospective effect, it is the duty of the High Court to apply the law as amended and answer the reference in accordance with the amendment unless the question referred by the Tribunal is not couched in terms of sufficient amplitude to cover an enquiry into the question in the light of the amendment. By taking notice of the law which has been substituted for- the original provision, the High Court is giving effect to the legislative intent and does no more than what must be deemed to be necessarily implicit in the question referred. If authority is needed, we may refer to a decision of the Supreme Court in CIT v. Straw Products Ltd. [1966] 60 ITR 156. There is nothing in the case in hand which may compel us to apply the law which since the date of reference made by the Tribunal has been superseded by the Legislature, and not to apply the amended provisions which have been introduced on the statute book with full retrospective effect. Further, in order to answer the question referred to us, no further investigation of fact is necessary. Learned standing counsel was unable to dispute the proposition that the amended provisions of Section 34(3)(a) are to be taken into consideration while returning the answer to the questions referred to this court.
14. Now, adverting to the amended provision of Section 34(3)(a), a bare reading of it clearly manifests that for seeking allowance of development rebate under Section 33 of the Act, which has been made subject to Section 34, the creation of the statutory reserve is a condition precedent. The assessee is not entitled to the allowance if the requisite reserve as required by Section 34(3)(a) has not been made. Creation of the reserve is a sine qua non for the allowance. However, there is no mandatory requirement in the amended provisions to create development reserve even in the year of loss or insufficiency of profits in which the machinery or plant, etc., is installed or first put to use. The amendments effected in Section 34(3)(a) by the Finance Act, 1990, referred earlier, are significant in this respect. It is now provided that the statutory reserve may be created in any previous year in respect of which the development rebate is to be allowed, or any earlier previous year, the limitation being that the earlier year is not prior to the year in which the ship was acquired or the machinery or plant was installed, or first put to use. Section 34(3)(a) which lays down the conditions for the grant of development rebate, inter alia, provides that no deduction on account of development rebate under Section 33 of the Act shall be allowed, unless an amount equal to 75% of the development rebate to be actually allowed is debited to the profit and loss account and credited to the reserve account of any previous year in respect of which, deduction is to be allowed, or any earlier year, not being the previous year earlier than the year in which the machinery or plant is installed or first put to use, or the ship is acquired. The legislative intent in the provisions under discussion is that the requisite reserve may be made in the year or years in which, either the whole or a part of development rebate reserve is to be allowed in terms of Sub-section (2) of Section 33 of the Act, or in any earlier previous year which is not the year earlier to the year in which the machinery or plant, etc., was installed or first put to use. An assessee is not obliged to create the reserve in the year of installation if there is no total income (before deduction of development rebate ) in that year for the purpose of carrying forward the development rebate to the following years. It is sufficient if he creates the reserve in the subsequent years in which there is such income from which the development rebate is to be actually deducted.
15. We may notice that in the Memorandum explaining the provisions in the Finance Bill, 1990, seeking to amend Section 34(3)(a) of the Act, the object and scope of the amendment, was stated, inter alia, as under (see [1990] 182 ITR (St.) 336, 337) :
" . . . the Supreme Court in the case of Shri Shubhlaxmi Mills Limited [1989] 177 ITR 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 acquisition/installation of machinery or plant, etc., even in a case where there, are no profits. In coming to this conclusion, the Supreme Court relied principally on its interpretation of the Explanation to Section 34 referred to above. If the decision of the Supreme Court is to be followed, then taxpayers who have been following the Board's circulars for many years, would be placed 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 circulars ... It is, therefore, proposed to provide by way of an amendment that the condition of creation of reserve even in a year of loss as laid down by the Supreme Court will not be mandatory in respect of both development rebate and investment allowance . . .'
16. From the above, it is clear that the decision of the Supreme Court in Shri Shubhlaxmi Mills Ltd. [1989] 177 ITR 193 after the amendment in Section 34(3)(a) has lost its efficacy and it is of no assistance to the Revenue. The relevant provisions, as they now stand, leave no manner of doubt that the reserve may be created in any previous year in respect of which the development rebate is to be allowed. There is no mandatory requirement to create the requisite reserve in the year of its installation, etc., if the total income is nil or inadequate to create the reserve. The Tribunal, in our opinion, committed no error of law in directing the Income-tax Officer to determine the relevant development rebate reserve admissible to the assessee for the years in question, in which the assessee had suffered losses and had not created the statutory reserve and to carry forward the same and to allow it in the year of profits, subject to the requisite reserve being created in accordance with law within the stipulated period.
17. For what has been stated above, we answer both the questions in the affirmative, in favour of the assessee and against the Revenue. The assessee shall be entitled to its costs which we assess at rupees three hundred.