Satish Chandra, C.J.

1. MESSRS. Vishnu Industrial Enterprises (Private) Ltd., Kanpur, the assessee, suffered losses in the assessment years 1967-68 and 1968-69. It, however, claimed development rebate in respect of plant and machinery installed in those years. The ITO repelled the claim on the view that the assessee had not debited the profit and loss account, nor created the development reserve. The Supreme Court decision in Indian Overseas Bank Ltd. v. CIT [1970] 77 ITR 512 applied and no development rebate was allowable.

2. ON appeal, it was held that since there was no profit, development reserve could not be created, but the development rebate should have been calculated and allowed in a succeeding year in which the assessee earned profits and created the requisite reserve. The ITO was directed to determine the development rebate admissible to the assessee.

The ITO appealed. The Tribunal affirmed the view of the AAC.

3. AT the instance of the Commissioner, the Tribunal has referred for our opinion the following question of law :

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in upholding the direction given by the Appellate Assistant Commissioner to the Income-tax Officer to determine the development rebate admissible to the assessee for the years 1967-68 and 1968-69, when admittedly in those years the assessee had suffered losses and had not created the statutory reserve and carry forward the same and allow it in the years in which there are profits and when reserve is created ?"

4. THE material provisions are Sections 33 and 34(3)(a) of the I.T. Act, 1961. Section 33(1)(a) allows a deduction, subject to Section 34, in respect of the previous year in which the ship or machinery or plant was installed, a sum by way of development rebate as specified in Clause (b). Clause (b) provides rates for different kinds of ship, machinery or plant. The ship, machinery or plant should be owned by the assessee and be wholly used for purposes of business carried on by him.

Section 34(3)(a) lays down certain conditions subject to which the deduction referred to in Section 33 is allowed :

(a) Seventy-five per cent. of the development rebate to be actually allowed should be debited to the profit and loss account of the relevant previous year;

(b) this amount is to be credited to a reserve account;

(c) the reserve account is to be utilised by the assessee during the next eight years for purposes of the business, other than--(i) for distribution by way of dividends or profits ; (ii) for remittance outside India as profits or for creation of any asset outside India.

5. THE Explanation to this provision says :

"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."

6. IN Indian Overseas Bank Ltd. v. CIT [1970] 77 ITR 512, the Supreme Court had to consider a case where the assessee had earned sufficient profits but yet had not debited the profit and loss account with the amount allowable as development rebate. It had also not created the development reserve. The Supreme Court held that creation of a reserve under Section 10(2)(vi)(b) of the Act of 1922 (which was the predecessor of Sections 33 and 34(3)(a) of of the present Act) is independent of other reserves which are to be created, for instance, under Section 17 of the Banking Companies Act. The 75 per cent. of the amount is to be debited to the profit and loss account before finalising it. The transfer of the amount to the reserve account is to be made at the time of making up of the profit and loss account. Creation of the reserve account is not an idle formality. It is