B.J. Divan, C.J.In this case, at the instance of the revenue, the following two questions have been referred to us by the Appellate Tribunal:

(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

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in directing that the income tax Officer should determine the development rebate and such development rebate should be allowed to be carried forward and set off when profits are available and if, in that year, the assessee fulfils the necessary requirements for such allowance like creation of adequate reserve

2. In order to understand the rival contentions and in order to read the remarks in the different decided cases on the point of development rebate in their proper perspective, it is necessary to refer to the historical background of development rebate. Prior to April 1, 1955, under the Indian income tax Act, 1922 (hereinafter referred to "the Act of 1922"), there was no provision for development rebate. The Finance Act, 1955, introduced with effect from April 1, 1955, clause (vib) in section 10(2) of the Act of 1922 and made provision for development rebate. Under the scheme of section 10(2) provision was made for different types of allowances which were permitted in the computation of income from business and under newly added section 10(2)(vib), in respect of machinery or plant being new, which had been installed after the 31st day of March, 1954, and which was wholly used for the purposes of the business carried on by the assessee, a sum by way of development rebate in respect of the year of installation equivalent to twenty-five per cent. of the actual cost of such machinery or plant to the assessee was to be allowed as a deduction in the computation of the income from business for that particular year. The proviso to section 10(2)(vib) required that no allowance for development rebate could be made unless the particulars prescribed for the purpose of clause (vi), that is, for depreciation allowance, had been furnished by the assessee in respect of such machinery or plant. It may be noted that this was the only provision which came into effect from April 1, 1955. There was no provision in section 10(2)(vib) as originally enacted in 1955 for carry forward or for any setting up of reserve. This provision continued till 1958 when the Finance Act, 1958, substituted with effect from April 1, 1958, an entirely new clause for the clause as it existed from April 1, 1955, onwards. The new clause 10(2)(vib) provided for development rebate not only in respect of new machinery or plant but also in respect of new ship acquired after the 31st day of March, 1954. The percentage of development rebate was forty per cent. in the case of a new ship if purchased after the 31st day of December, 1957, and in the case of a ship acquired before the 1st day of January, 1958, and in the case of any machinery or plant, twenty-five per cent. of the actual cost of the ship or machinery or plant to the assessee. Under the new clause (vib) of section 10(2), Explanation 1 was added by which it was provided that where the total income of the assessee for the year of acquisition or installation (the total income for this purpose being computed without making any allowance for development rebate) was nil or was less than the full amount of the development rebate, calculated at the rate applicable thereto under clause (vib), the sum to be allowed by way of development rebate for that year under clause (vib) was to be only such amount as was sufficient to reduce the said total income to nil; and the amount of the development rebate, to the extent to which it had not been allowed as aforesaid, was to be carried forward to the following year, and the development rebate to be allowed for the following year was to be such amount as was sufficient to reduce the total income of the assessee for that year, computed in the manner aforesaid, to nil, and the balance of the development rebate, if any, still outstanding was to be carried forward to the following year and so on, so, however, that no portion of the development rebate was to be carried forward for more than eight years. By Explanation 2, it was provided that where in any year development rebate was to be allowed in accordance with the provisions of Explanation 1, in respect of ships acquired or machinery or plant installed in more than one year, the development rebate was to be allowed as provided thereunder. We are not concerned with the provisions of that Explanation in the course of this judgment. The proviso to section 10(2)(vib) laid down that no allowance under clause (vib) was to be made unless, (a) the particulars prescribed for the purpose of clause (vi), that is, for depreciation allowance, had been furnished by the assessee in respect of the ship or machinery or plant; and (b) except where the assessee was a company being a licensee within the meaning of the Electricity (Supply) Act, 1948, or where the ship had been acquired or the machinery or plant had been installed before the 1st day of January, 1958, an amount equal to seventy-five per cent. of the development rebate to be actually allowed was debited to the profit and loss account of the relevant previous year and credited to a reserve account to be utilised by him during a period of ten years, next following for the purpose of the business of the undertaking, except-(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, and, moreover, if any such ship, machinery or plant was sold or otherwise transferred by the assessee to any person other than the Government at any time before the expiry of ten years from the end of the year in which it was acquired or installed, any allowance made under clause (vib) was to be deemed to have been wrongly allowed for the purpose of the Act. In 1961 certain further changes were made in section 10(2)(vib) with effect from 1st April, 1960, by the Taxation Laws (Amendment) Act, 1960. It was provided by this amendment that no allowance under clause (vib) was to be made in respect of any machinery or plant which consisted of office appliances or road transport vehicles. When the income tax Act, 1961, was enacted the provisions of section 10(2)(vib) were divided between two sections, namely, section 33 and section 34. Section 33 of the new Act provided by sub-section (1) what was originally provided for by clause (vib). Sub-section (2) of section 33 is equivalent to Explanation 1 to clause (vib). Explanation to sub-section (2) of section 33 is equivalent to Explanation 2 to clause (vib) of section 10(2). Sub-section (3) of section 33 provides for development rebate where a scheme of amalgamation had been brought into force and a company under such scheme of amalgamation is sold or otherwise transferred to the company formed in pursuance of the predecessors amalgamation with that company, any ship, machinery or plant in respect of which development rebate has been allowed to the predecessor under sub-section (1) of section 33 is also transferred. We are not concerned in the course of this judgment with the provisions of sub-section (2). Sub-section (4) of section 33 provides for the succession of a firm by a company in the business carried on by the firm and as a result of such succession the firm sells or otherwise transfers to the company any ship, machinery or plant, which is the subject-matter of development rebate, allowed to the firm. Section 34 is on the same terms as the proviso to section 10(2)(vib) and it lays down conditions for depreciation allowance and development rebate. Provisions as to development rebate are to be found in section 34(1) and section 34(2). It may be pointed out that under the income tax Act, 1961, the carry forward can be permitted for a period of eight years only immediately succeeding the assessment year in which the ship was acquired and the machinery or plant was installed or immediately preceding the previous year, as the case might be, and in the same manner it was provided that the reserve which was set up for the purpose of getting benefit of the allowance of development rebate should be utilised by the assessee during the period of eight years next following but, in other respects, the restrictions remain as they were u/s 10(2)(vib) of the 1922 Act. Section 34(3)(b) of the Act of 1961 provides that if any ship, machinery or plant is sold or otherwise transferred by the assessee to any person at any time before the expiry of eight years from the end of the previous year in which it was acquired or installed, any allowance made for development rebate u/s 33 or under the corresponding provisions of the Indian income tax Act, 1922, in respect of that ship, machinery or plant shall be deemed to have been wrongly made for the purposes of the Act of 1961, and the provisions of sub-section (5) of section 155 regarding rectification shall apply accordingly. In 1966, by the Finance Act, 1966, an Explanation was added; section 9 of the Finance Act, 1966, provided that the following Explanation shall be, and shall be deemed always to have been, inserted, in section 34, namely:

Explanation.--For the removal of doubts, it is hereby declared that the deduction referred to in section 33 shall not be denied by reason only that the amount debited 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 previous year (as arrived at without making the debit aforesaid) in accordance with the profit and loss account.

3. Since the Explanation has been added with retrospective effect, it will have to be read as if it had been originally enacted in the income tax Act, 1961, right from the beginning and as if the entire section with the Explanation had been in force with effect from April 1, 1962.

4. The provisions of section 10(2)(vib) of the 1922 Act as they were in force between 1956 and 1958 came up for consideration before a Division Bench of this court in Commissioner of Income Tax, Gujarat Vs. Saurashtra Wire-healds Manufacturing Co. Pte. Ltd., and, there, in the light of the provisions of section 10(2)(vib) as they were in force between 1956 and 1958, this court observed:

The development rebate is not to be spread over and cannot be spread over a number of years as in the case of additional depreciation u/s 10(2)(via). The learned Advocate-General is, therefore, right when he contends that the decisions of the Bombay and the Madras High Courts dealing with the question of additional depreciation u/s 10(2)(via) cannot help the court in interpreting the words of section 10(2)(vib). He is also right when he contends that the court should interpret the words occurring in section 10(2)(vib) purely looking at the fact that that clause deals with development rebate which is payable only once and that too in respect of the year of installation.

5. It was also observed:

Development rebate has to be paid once and for all, and that too in the year of installation.

6. So far as the provisions of section 10(2)(vib) as they were in force after 1958 were concerned, the first decision in point of time is of the Madras High Court in Commissioner of Income Tax, Madras Vs. P. Veeraswami Nainar Bus owner and the mill owner Ginjee and Others, . There the Division Bench of the Madras High Court was dealing with a case where during the relevant year of installation the assessee had incurred loss in respect of the business. The assessee had not in his accounts debited 75 per cent. of the amount claimed by way of development rebate to the profit and loss account and the question arose whether the reserve could be created subsequently, that is, after the year of installation was over. In that particular case, the Appellate Tribunal had directed the income tax Officer to compute the development rebate on the assessee producing his books before him containing the reserve entries. Dealing with these facts, the Madras High Court observed at page 40:

It will follow that in order that an assessee can claim an allowance by way of development rebate u/s 10(2)(vib) he should comply with the conditions contained in the proviso thereto as otherwise, under the express terms of that proviso, he would not be entitled to the allowance. Where he fails to satisfy the conditions requisite for obtaining the allowance, it will not be for the court to embark upon what the general object of the exemption was, and whether the conditions imposed were of a theoretical or technical nature, which, in the interests of justice, should be dispensed with. We are, therefore, of opinion that the assessee, not having set apart in his accounts 75 per cent. of the amount claimable as development rebate, could not claim the benefit of section 10(2)(vib) of the Act.

7. The Madras High Court also expressed the opinion that it would not be open to the Tribunal to give a direction to the assessee, who had not made the necessary book entries by the time he produced his accounts before the income tax Officer, that he should be allowed to rewrite them by making the requisite entries. The Madras High Court also observed that the entries in the account books required by the proviso to section 10(2)(vib) were not an idle formality. The assessee 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 if the assessee were a company for example, that amount could not be distributed by way of dividend. It is also clear from the terms of the proviso to. section 10(2)(vib) that the reserve should be made at the time of making up the profit and loss account.

8. In Indian Overseas Bank Ltd., Madras Vs. Commissioner of Income Tax, Madras, , the Madras High Court followed its earlier decision in Commissioner of Income Tax, Madras Vs. P. Veeraswami Nainar Bus owner and the mill owner Ginjee and Others, . The assessee-company which was a banking company claimed development rebate and contended that it had set apart a sum of Rs. 6 lakhs during the assessment year out of its net profits which not only satisfied the requirements of section 17 of the Banking Companies Act but also the requisites of section 10(2)(vib) of the Indian income tax Act, 1922. The Madras High Court held that the assessee when setting apart a sum of Rs. 6 lakhs had not expressed the purpose for doing so, the conditions prescribed by clause (b) to the proviso to section 10(2)(vib) were not complied with and development rebate was not allowable. It was pointed out that the requirement of clause (b) to the proviso to section 10(2)(vib) was not a mere formality but was intended to enable the revenue to trace the fund debited as part of the development rebate in the profit and loss account and credited to the reserve account. Unless this condition was complied with, development rebate could not be claimed.

9. Against this decision of the Madras High Court the matter was carried in appeal and the decision of the Supreme Court is in The Indian Overseas Bank Ltd. Vs. The Commissioner of Income Tax, Madras, . The decision of the Madras High Court was affirmed by the Supreme Court and the earlier decision in Veeraswami Nainars case (supra) was approved. At page 514, Hegde J., delivering the judgment of the Supreme Court, observed that the creation of the reserve contemplated by clause (b) to the proviso to section 10(2)(vib) is a condition precedent for obtaining the allowance of development rebate. On the same page, he further observed: "the reserve contemplated by the second proviso to section 10(2)(vib) of the income tax Act is an independent reserve. The amount to be transferred to that reserve is debited before the profit and loss account is made up. That amount is required to be credited to a reserve account to be utilised by the assessee during a period of ten years for the purpose of the business of the undertaking". He further pointed out:

As observed by the Madras High Court in Veeraswami Nainars case (supra), the object of the legislature in allowing a development of the assessees business from out of the reserve fund is apparent from the terms of the proviso. The entries in the account books required by the proviso are not an idle formality. The assessee 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. It is also clear from the terms of the proviso that the transfer to the reserve fund should be made at the time of making up the profit and loss account.

10. During the pendency of the case of The Indian Overseas Bank Ltd. Vs. The Commissioner of Income Tax, Madras, before the Supreme Court, the Madras High Court considered the matter in Radhika Mills Ltd. Vs. Commissioner of Income Tax, . The Madras High Court in this case observed at page 666 of the report:

In our opinion, the scheme of clause (vib), therefore, comes to this. For each year of installation of machinery, the assessee will in or along with his return make a claim for development rebate with the necessary and relevant particulars furnished at least before completion of the assessment. The actual allowance of the claim will depend upon compliance with the requisites of clauses (a) and (b) of the proviso as already explained by us. If in the assessment year relevant to the year of installation, the total assessed income of the assessee from all heads is nil, the assessee cannot naturally be expected to have created an actual reserve equivalent to 75 per cent. of the development rebate to be allowed. He is not penalised for his inability but, in such an event, the development rebate to be allowed will have to be, provided he has furnished the necessary particulars before completion of assessment, computed by the revenue and carried forward to the following year so that it may first, as a priority item, be to the extent possible and warranted by the actual reserve set apart in that year, set off against his total assessed income of such year It should be noted that such allowance in each year, as indicated by us, can only be made with reference to and to the extent warranted by the actual reserve created and the balance of the rebate to the extent not covered by the reserve because the assessed total income is nil or inadequate, should be carried forward to the next year. The carrying forward of development rebate is however not permitted only by mere book entries debiting it to the profit and loss account and crediting it to a reserve account of the relevant previous year. Such an entry can be expected to be made and should be made only when there is income available to the assessee as per the assessment results out of which the reserve could to any extent be made.

11. Thus, according to this decision of the Madras High Court in Radhika Mills Ltd.s case (supra), in order to earn the benefit of the development rebate it would be sufficient for the assessee to make the necessary entries creating the reserve contemplated by clause (b) of the proviso to section 10(2)(vib) in any subsequent year within the statutory period of eight to ten years, as the case might be, if he had out of his income created the reserve to the extent of 75 per cent. of the development rebate actually allowed.

12. The same view was also taken by the Calcutta High Court in West Laikdihi Coal Co. Ltd. Vs. Commissioner of Income Tax, . It was held that an assessee was not obliged to create a reserve fund in any year, if he has no taxable income in that year, for the purpose of carrying forward the development rebate to the following years. Sankar Prasad Mitra J., delivering the judgment of the Division Bench of the Calcutta High Court, has observed at page 508:

The provisions relating to development rebate in clause (vib) of section 10(2), it appears, were introduced for giving incentives to businessmen to develop their business. It is not, strictly speaking, an expenditure which is allowed as a deduction for purposes of assessment of income tax. The development rebate cannot be treated by the assessee as part of its income or profit for all purposes. Restrictions have been imposed on an assessees right to deal with or dispose of the development rebate. For a period of ten years the assessee cannot utilise the reserve account that has to be created either for distribution by way of dividends or profits or for remittances outside India as profits or for the creation of any asset outside India. Against this background we have to examine the provisions of clause (vib) to see whether the reserve account must be created in the year of installation of the plant or machinery irrespective of whether the assessee has an assessable income in that year. If an assessee has to create a reserve account in the year of installation, though in that year the assessee does not earn any profit, the assessee may have to resort to borrowings for creation of the reserve in order to be entitled to development rebate at some future date. That obviously could not have been the intention of the legislature. The whole object of clause (vib) would fail if creation of the reserve account were insisted on in the year of installation of the plant or machinery whether or not the assessee had the funds to create such an account. Section 10(2)(vib) does not intend to impose a burden on the assessee, but tries to give him relief or to confer benefits on him to encourage him to build up his business.

13. It was further observed at page 509:

In other words, by clause (b) of the first proviso, the assessee is required to set apart an amount equal to seventy-five per cent. of the development rebate that would be allowed to him in a particular year of assessment as a reserve which has to be shown in the profit and loss account of the assessee before that account is finally drawn up or closed. In this third part of the section the use of two expressions no allowance and actually allowed bring out clearly, in our opinion, what the legislature intended to convey.

The position, therefore, is that clause (b) of the first proviso to section 10(2)(vib) imposes two conditions. The first condition is that the assessee must debit his profit and loss account of the relevant year by an amount equivalent to seventy-five per cent. of the development rebate to be actually allowed in that year and credit the same to a reserve account. The second condition is that the assessee can utilise this reserve account only for the purpose specified in the statute. The expression actually allowed has to be construed in the context of the provisions made in Explanation 1 to section 10(2)(vib).

14. In Indian Oil Corporation Ltd. Vs. S. Rajagopalan, Income Tax Officer, Companies Circle II(1), Bombay and Others, , a Division Bench of the Bombay High Court consisting of Nain and Kania JJ. has also taken the same view as the Madras High Court in Radhika Mills case (supra) and the Calcutta High Court in West Laikdihi Coal Co. Ltd.s case (supra). The same arguments which appealed to the Madras and the Calcutta High Courts in the case above referred to also appealed to the Division Bench of the Bombay High Court, namely, that an assessee could not be expected to create a reserve by borrowing money or when its total income was nil or if in the year of installation the assessee had incurred a loss. At page 250 of the report, Nain J., delivering the judgment of the High Court, observed:

We are of the view that if in the assessment year relevant to the year of installation or use the total assessed income of the assessee is nil, the assessee cannot naturally be expected to have credited an actual and non-illusory reserve equivalent to 75% of the development rebate to be allowed and that such reserve can only be made out of assessed profits. There can be no obligation on the part of the assessee to create a reserve as a condition merely for carrying over the development rebate without it being actually allowed to him by setting off the rebate against the assessed profits. We are unable to accept the contention of the respondents that the assessee must create the reserve in the year of installation or use of the plant or machinery, irrespective of any profits, as a condition precedent to the actual allowance of development rebate in the subsequent years in which there are assessed profits. If this contention is accepted, the assessee may have to resort to borrowing for creation of the reserve in order to be entitled to development rebate at some future date. In such event what he will be utilising for the purpose of his business u/s 34(3)(a) will be the loan and not the amount of the development rebate. There will also be no question of distributing an illusory fund by way of dividend or profits or for remitting it outside India as would be created if a mere book entry were made.

15. With respect to the learned judges of the Madras High Court who decided the Radhika Mills case (supra) and the learned judges of the Calcutta and the Bombay High Court who decided the other two cases referred to above, it may be pointed out that after the enactment of the Explanation with retrospective effect in section 34(3)(a), it is clear that the legislature itself contemplates that the reserve mentioned in section 34(3)(a) has to be created merely by a book entry and not with reference to the actual fund to back up the reserve. By virtue of the Explanation the deduction referred to in section 33 is not to be denied by reason only that the amount debited to the profit and loss account of the relevant previous year and credited to the reserve account exceeds the amount of the profit of such previous year as shown in the profit and loss account. Therefore, irrespective of what is the result of the profit and loss account as shown by the books of the company the reserve fund contemplated by section 34(3)(a) can, according to the intention of the legislature, be created merely by book entries, that is, by debiting the amount of the reserve to the profit and loss account of the relevant previous year and crediting the amount to the reserve account. It must be emphasised that what the Explanation requires is not the profit as shown at the end of the assessment but the profit as shown in accordance with the profit and loss account in the books of account of the company. In our opinion, therefore, the very basis of the argument which appealed to the learned judges of the Madras High Court in Radhika Mills case (supra) and the learned judges of the Calcutta High Court in West Laikdihi Coal Company Ltd.s case (supra) and the learned judges of the Bombay High Court in Indian Oil Corporation Ltd. Vs. S. Rajagopalan, Income Tax Officer, Companies Circle II(1), Bombay and Others, , disappears when one considers the Explanation to section 34(3)(a). It is thus clear that what the legislature contemplates and calls upon the assessee to do is creation of a reserve by debiting the profit and loss account of the assessee and crediting to the reserve account the appropriate amount. If this is not done, the development rebate cannot be allowed.

16. It must be pointed out at this stage that u/s 33(1) the development rebate is to be allowed subject to the provisions of section 34 and it should be allowed as a deduction in the computation of profits of business while assessing the income of the previous year in which the ship was acquired or the machinery or plant was installed. u/s 28 profits and gains of any business or profession have to be computed in accordance with the provisions contained in sections 30 to 63 and hence section 33 which provides for deduction by way of development rebate is a deduction while computing the assessable income of the particular previous year in the course of which the ship was acquired or the machinery or plant was installed. The actual relevant portion of section 33(1) may at this stage be reproduced:

33. Development rebate. -(1) In respect of a...new machinery or plant...installed after the 31st day of March, 1954, which is owned by the assessee and is wholly used for the purposes of the business carried on by him, a sum by way of development rebate, equivalent to...twenty-five per cent...of the actual cost of the machinery or plant...shall, subject to the provisions of section 34, be allowed as a deduction in respect of the previous year in which...the machinery or plant was installed.

17. Under the scheme of section 10(2)(vib) of the 1922 Act, supervening conditions regarding the creation of the reserve and the furnishing of the particulars were prescribed by the proviso to section 10(2)(vib). Under the scheme of the Act of 1961, since the conditions are laid down in section 34, the same object as was achieved by the proviso to section 10(2)(vib) of the 1922 Act is achieved by using the words "subject to the provisions of section 34" in section 33(1). Therefore, before any development rebate can be allowed as a deduction in computing the business income of the assessee, the conditions laid down in section 34 must be satisfied. These requirements are not a mere idle formality as the decision of the Madras High Court in Commissioner of Income Tax, Madras Vs. P. Veeraswami Nainar Bus owner and the mill owner Ginjee and Others, and approved by the Supreme Court in Indian Overseas Bank Ltd.s case (supra) states. Therefore, this requirement must be met first and then only the development rebate can be allowed as a deduction in respect of the previous year.

18. The learned Advocate-General for the assessee before us has contended that the provisions for carry forward as set out in sub-section (2) of section 33 do not require the assessee to create the reserve contemplated by section 34(3)(a) in the year of installation but a reserve can be created in any subsequent year so long as it is done within a period of eight years from the previous year in which the machinery or plant was installed. He contends that if the total income of the assessee so far as the relevant previous year in which the machinery or plant was installed was nil, there is no question of any development rebate being allowed to him and, there fore, there is no question of his creating a reserve. This contention of the learned Advocate-General cannot be accepted because what section 34(3)(a) contemplates is debiting to the profit and loss account of the relevant previous year and crediting to a reserve account to be utilised by the assessee during the period of eight years next following for the purpose of business the particular amount contemplated by section 34(3)(a). The words used in section 34(3)(a) are "amount equal to seventy-five per cent. of the development rebate to be actually allowed " and a great deal of emphasis is placed on the words "actually allowed" by the learned Advocate-General. He contends that if the income of the assessee on a computation of profit and loss account is nil or the profit and loss account without taking into consideration the development rebate shows a loss, there is no question of any deduction by way of development rebate being allowed in the previous year in which machinery or plant was installed and so long as the reserve is created out of profits during the period of eight years immediately succeeding the previous year in which the machinery was installed, the requirements of section 33 and section 34 would be fully satisfied. The legislature does not contemplate, as shown by the Explanation to section 34(3)(a), that the reserve should be created out of any surplus profits or should be backed up by any actual amount. The Explanation does contemplate that the reserve can be created even when the profit and loss account does not justify the creation of the reserve. It does not indicate any profits out of which the reserve can be created nor does it indicate that only sufficient profits would justify the creation of this particular reserve account. To that extent the legislature does contemplate that the reserve for the purposes of the development rebate will be what is referred to in some of the decided cases as an illusory reserve or reserve not backed by any funds set apart for the purposes of the reserve.

19. The learned Advocate-General emphasised that most of the assessees who are likely to seek benefit of the development rebate are going to be limited companies and under the Companies Act, the balance-sheet of the company must show the correct financial affairs of the company. Under the Companies Act it is not open to the company to create an illusory reserve and to show as if it possesses the reserve whereas in fact there are no actual funds to back up that particular reserve. He said that it would create complications for limited companies if the provisions of sections 33 and 34 of the income tax Act, 1961, are so interpreted as to require an assessee to create even an illusory reserve for the purpose of claiming the benefit of section 33, that is, of the development rebate.

20. In our opinion, it is not possible to accept this contention of the learned Advocate-General. If the legislature in section 34(3)(a) does contemplate creation of a reserve merely by book entry, that is, by debiting the profit and loss account and crediting the reserve account with the appropriate amount, it cannot be said that the companies would be transgressing the law if they were to specifically mention in the balance-sheet that the development rebate reserve is as contemplated by the provisions of the income tax Act, 1961, and thereby putting all those on guard regarding the true nature of that particular reserve.

21. However, the real question that we have to deal with is whether purely by way of interpretation of sections 33 and 34 it can be said that the reserve contemplated by section 34(3)(a) must be created in the year of installation or whether it can be created in the course of any subsequent year so long as it is created during the period of eight years from the year of installation. In our opinion the answer to this question is to be found in section 33(1) which provides that the development rebate is to be allowed as a deduction in respect of the previous year in which the ship was acquired or new machinery or plant installed and that too subject to the provisions of section 34. The provisions of section 34 are not a mere idle formality and they must be complied with if the benefit of the development rebate is to be availed of by an assessee. Section 33(1) read with section 34 provides that before the amount of twenty-five per cent. or forty per cent. or appropriate percentage can be allowed as a deduction in computing the assessable income of the relevant previous year, it is essential that the reserve of an amount equal to seventy-five per cent. of the development rebate to be actually allowed should be created by debiting the profit and loss account of the relevant previous year and crediting the same to a reserve account. As pointed out by the Madras High Court in Commissioner of Income Tax, Madras Vs. P. Veeraswami Nainar Bus owner and the mill owner Ginjee and Others, the debiting of the profit and loss account must be done before the profit and loss account is closed, that is, entries should be made regarding the reserve at the time of making up the profit and loss account. The words used in section 33(1) are "allowed as a deduction" and u/s 34(3)(a) the deduction by way of development rebate shall not be allowed unless reserve to the extent of seventy-five per cent. of the development rebate to be actually allowed has been set apart by debiting to the profit and loss account and crediting the same to a reserve account. It is after the amount has been allowed in computing the assessable income of the previous year in which the machinery or plant was installed or the ship was acquired that the question of carrying it forward to any subsequent year would arise. It must be first allowed in the year of installation and if the total income of the relevant previous year of installation without taking into consideration the amount of the development rebate is either nil or shows a loss, the development rebate to the extent to which it has not been allowed is carried forward to the next year. The idea is that the amount as shown in the reserve can be utilised for the purpose of setting it off against such profits and the development rebate can be utilised to show the total income to be nil in case there is any positive total income. In section 33(2), clause (ii), the words are "the amount of the development rebate, to the extent to which it has not been allowed " and it is this amount to the extent to which it has not been allowed which is carried forward to the subsequent year. Therefore, before the carry forward provisions u/s 33(2) can come into play in the course of subsequent years, the question of allowance of development rebate must be taken up for consideration and to the extent to which, and the extent may be either hundred per cent. or less than hundred per cent., it has not been allowed because of the inadequacy of the total income or because the previous year of account showing a loss, the development rebate is carried forward to the next year. It is first allowed and if it has not been allowed in full, to the extent to which it has not been allowed, it can be carried forward to the next year but actual allowance of the development rebate has to be done in the year of installation of the plant or machinery or acquisition of the ship. This is the only logical meaning which can be given to the provisions of carry forward in section 33(2). It is with this idea in view that the legislature has advisedly used the words "actually allowed" in section 34(3)(a) in reference to the amount which has to be set apart to the reserve account. The legislature by using the identical words, namely, "be allowed" in section 33(1), by using the words "it has not been allowed as aforesaid" in section 33(2) and the words "to be actually allowed" in section 34(3)(a) has in this context clearly indicated that the assessee must ordinarily be allowed the benefit of development rebate as a deduction in respect of the previous year in which the ship was acquired or the machinery or plant was installed and this can be done only if the profit and loss account before it is finally made up shows the necessary debit entry for the purpose of creation of the reserve and the corresponding credit entry for the reserve account. If this is not done, the condition for getting the benefit of development rebate will not be satisfied and the development rebate cannot be allowed in view of section 34(3)(a). If the necessary reserve fund has been created by debiting the profit and loss account and crediting it to the reserve account, the question will have to be considered whether the whole of it is availed of in assessing the income of the previous year in which the ship was acquired or the machinery or plant was installed. The carry forward provisions in section 33(2) clearly indicate that the sum to be allowed by way of development rebate for the relevant assessment year under sub-section (1) shall be only such amount as is sufficient to reduce the total income to nil and to the extent to which the amount of the development rebate has not been allowed, that is, there is a surplus of development rebate, such surplus is carried forward to the following assessment year.

22. Under these circumstances, our conclusion, on a plain reading of the section, is that the reserve must be created during the year of account being the previous year in which the ship was acquired or the machinery or plant was installed. The learned Advocate-General is right when he contends in the light of the decision of the Supreme Court in Commissioner of Income Tax, Madhya Pradesh etc. Vs. Straw Products Ltd., Bhopal, , that the words "actually allowed" occurring in section 34(3)(a) must be interpreted as "actually given effect to", that is, the expression "actually allowed" connotes an idea that the allowance was actually given effect to. The way we read the expression "allowed" in section 33(1) and section 33(2) also means that the allowance is actually given effect to but it is given effect to in the manner in which we have indicated and not in the manner as has been contended on behalf of the assessee.

23. We may point out that in R. Venkatasubramaniam and Others Vs. Commissioner of Income Tax, , a Division Bench of the Madras High Court consisting of Ramanujam and Ramaswami JJ. held that the debiting of the profit and loss account and crediting to the development rebate reserve account should be made at the time when the profit and loss account is made or finalised. It may be that the assessee could amend or correct his accounts before he submits the return to the officer but that is not to say that the assessee could readjust the accounts for the purpose of claiming development rebate at any time he chose. The Division Bench held that section 10(2)(vib) of the 1922 Act being a concession or exemption, subject to the fulfilment of the conditions under the proviso, the conditions will have to be strictly complied with before the benefit under that section could be allowed.

24. In Surat Textile Mills Ltd. Vs. Commissioner of Income Tax, Gujarat II, , a Division Bench of this High Court has held that under clause (b) of the proviso to section 10(2)(vib) of the 1922 Act, the amount to be transferred to the reserve contemplated by that clause must be debited before the profit and loss account is made up and, secondly, the transfer to the reserve fund should be made at the time of making up of the profit and loss account. We agree with that conclusion because that conclusion follows from the decision of the Supreme Court in The Indian Overseas Bank Ltd. Vs. The Commissioner of Income Tax, Madras, and the earlier decision in Commissioner of Income Tax, Madras Vs. P. Veeraswami Nainar Bus owner and the mill owner Ginjee and Others, .

25. In this connection it may be pointed out that the legislature has followed a consistent scheme of making a provision of eight years for three purposes in the context of development rebate. In the first instance, u/s 33(2) the development rebate can be carried forward for a period of eight years from the end of the previous year in which the machinery or plant was installed or the ship was acquired. u/s 34(3)(a) the reserve has to be utilised during a period of eight years following the end of the previous year in which the machinery or the plant was installed or the ship was acquired and u/s 34(3)(b) if the ship, machinery or plant is sold or otherwise transferred before the expiry of eight years from the end of the previous year in which it was acquired or installed, it shall be deemed that the development rebate has been wrongly allowed in the past. If the contention on behalf of the assessee were to be accepted, this consistent scheme of eight years from the end of the previous year would be completely disrupted and the reserve in a conceivable case may have to be carried forward and set apart for a period of sixteen years from the year of installation of the plant or machinery or acquisition of the ship. In a conceivable case the assessee concerned may not get any profit for seven years after installation and only in the eighth year he may acquire sufficient profits for the creation of the reserve and then the reserve itself having to be set apart for a period of eight years from the date of its creation, it would mean that a total of sixteen years must expire before the reserve is finally exhausted or brought to an end. The legislature must be attributed a common scheme when it has provided a period of eight years for the three purposes in connection with the development rebate and this is a further ground in support of the conclusion that we have reached on an interpretation of section 33(1) read with section 34(3)(a).

26. Our conclusion, therefore, is that, with utmost respect to the learned judges of the Madras High Court who decided the Radhika Mills case (supra), of the Calcutta High Court who decided West Laikdihi Coal Company Ltd.s case (supra) and of the Bombay High Court who decided the case in Indian Oil Corporation Ltd. Vs. S. Rajagopalan, Income Tax Officer, Companies Circle II(1), Bombay and Others, , we are unable to agree with the conclusions reached by them. In our opinion, the only possible conclusion that can be drawn by a process of interpretation and that too attributing a grammatical meaning to the words used, is that the reserve contemplated by section 34(3)(a) must be created before finally making up the profit and loss account of the relevant previous year in which the machinery or plant was installed or the ship was acquired. If it is not so created by debiting the profit and loss account and crediting the necessary amount to a reserve account, the benefit of the development rebate by way of deduction from the income cannot be allowed and once it is found that it cannot be allowed in the relevant previous year, in the year of assessment relevant for the previous year in which the machinery or plant was installed or the ship was acquired, it cannot be allowed to be carried forward in any subsequent year.

27. We, therefore, answer the question referred to us as follows:

Question No. (1): In the negative and against the assessee.

Question No. (2): In the negative and against the assessee.

28. The assessee shall pay the costs of this reference to the Commissioner. After the above judgment was delivered, the learned Advocate-General on behalf of the assessee applies u/s 261 of the income tax Act, 1961, for a certificate that this is a fit case for appeal to the Supreme Court. In view of the conflict of decisions which we have indicated in the course of this judgment, in our opinion, this is a fit case for appeal and hence the certificate is granted.