The development rebate reserve has to be created only in the year in which development rebate was actually allowed against the adequate profits and need not be created in the year in which the assets were installed but there was no profit to absorb the development rebate.

( 1 ) THIS reference under Section 256, Sub-clause (1), of the I. T. Act, is being disposed of by this order. It was initiated by the Commissioner of income-tax and arose out of the Tribunals order in Income-tax Appeals Nos. 1502 and 1503 (Allahabad) of 1972-73. The following two questions have been referred to this court : " (1) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the assessees claim for development rebate in respect of assets installed up to september 30, 1968, was rightly considered by the Appellate Assistant Commissioner in the assessment year 1970-71, even though this claim had been rejected by the Income-tax Officer in the assessment order for 1969-70 and the grounds raised by the assessee had been treated as irrelevant by the Appellate Assistant Commissioner while disposing of the appeal for that year? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in upholding the Appellate Assistant Commissioners order allowing the assessees claim of development rebate of Rs. 5,52,247 in the assessment years 1970-71 and 1971-72?"

( 2 ) THE facts as gathered from the statement of the case briefly stated are that assessee is a company running a Five Star Hotel known as Clark Shiraz at Agra. The assessment years under consideration are assessment years 1970-71 and 1971-72. The respective accounting years ended on September 30, 1969, and September 30, 1970. The dispute relates to the assessees claim for development rebate on plant and machinery installed up to September 30, 1968. ( 3 ) IT appears that the assessee-company was incorporated in 1961. It suffered losses in the initial years of its business and for the first time made some profit in the accounting year ending on september 30, 1968, which was the previous year for assessment year 1969-70. The assessee claimed development rebate in respect of the various items of plant and machinery acquired by it up to September 30, 1968, for the first time in assessment year 1969-70. The total claim was for rs. 5,53,400 out of which Rs. 3,89,993 were claimed in the assessment year 1969-70. The balance amount of Rs. 1,63,407 was claimed in assessment year 1970-71.

( 4 ) THE assessee also created a development rebate reserve of Rs. 2,25,000 in assessment year 1969-70. Reserve of Rs. 2,15,600 was created in the assessment year 1970-71.

( 5 ) THE ITO rejected the assessees claim for development rebate while completing the assessment for 1969-70 on the reasoning :

1. The development rebate reserve created by the assessee was less than the statutory amount. According to the ITO the amount of development rebate which could have been allowed to the assessee was Rs. 3,35,587. The reserve should, therefore, have been of Rs. 2,51,690, being 75% of this amount. The reserve of Rs. 2,25,000 created by the assessee was thus insufficient.

2. The development rebate reserve created by the assessee had been utilised for declaration of dividends. The assessee had declared dividends of Rs. 1,05,389 on its preference shares in the shareholders meeting held on March 28, 1969. The profit and loss appropriation account for this year, however, showed that after set off of the past losses the company had profits of Rs. 11,001 only. This showed that the dividend had been declared out of development rebate reserve of Rs. 2,25,000 created by the assessee in that year. The assessee had thus violated the provisions of section 34 (3) (a) (i) of the I. T. Act.

( 6 ) ASSESSEEs claim of development rebate was accordingly rejected and assessment was completed on a total income of Rs. 25,026 after set off of the past losses.

( 7 ) ASSESSEE went up in appeal to the AAC challenging the findings of the ITO.

( 8 ) PENDING this appeal, the assessee pointed out to the AAC that its appeals for the assessment years 1966-67 to 1968-69 were pending before him. If relief of more than Rs. 26,026 was allowed in those appeal