S. S. CHADHA ( 1 ) THIS reference under Section 256 (1) of the Income-tax Act, 1961 (hereinafter referred to as the Act) raises the following question for the opinion of the Court "whether on the facts and in the circumstances of the case, the Tribunal was legally correct in allowing the claim of development rebate in respect of assessment year 1968-69 ?" ( 2 ) THE facts briefly are these. The assessment year under reference is 1968-69 of which the relevant previous year ended on May 31, 1967. The assessee is a private limited company doing business in building materials. The assesses installed some new machinery and plant in the accounting period relevant to the assessment years 1962-63 and 1963-64. It had, however, not created any development rebate reserve against development rebate to which it was entitled because there was a loss as per the books of the assessee. Even according to the assessments made by the Income-tax authorities, there were losses for the assessment years 1962-63, 1963-64, 1964-65, and 1965-66. For the assessment year 1966-67, there was a profit of Rs. 11,195 but even for that year, no development rebate reserve was created. For the assessment year 1967-68 income was determined at Rs. 54,842 and a reserve of Rs. 47,701 was also created. Somehow or the other, the claim of the assessse for development rebate was not allowed. For the assessment year 1968-69, that is the year under consideration, the assessee did create a reserve for Rs. 46,038 and that resulted in nil balance in the profit and loss account. The Income-tax Officer determined the net income at Rs. 60,753 but in arriying at this figure he did not allow development rebate except to the extent of Rs. 51 only. This development rebate of Rs. 51 was as per chart filed. The Income-tax Officer disallowed development rebate to the extent of Rs. 46,038. The Appellate Assistant Commissioner in appeal confirmed the disallowance on the ground that since the machinery on which the development rebate has been claimed was neither installed in the assessment year under appeal nor installed in the preceding assessment year and put to use in the assessment year under appeal, the disallowance of development rebate was considered to be in order. ( 3 ) THE assessee went in second appeal before the Income-tax Appellate Tribunal (for short called the Tribunal ). ( 3 ) THE assessee went in second appeal before the Income-tax Appellate Tribunal (for short called the Tribunal ). The Tribunal held that the Income-tax authorities were not justified in rejecting the claim of the assessee for the development rebate on the grounds relied upon by them. It was observed that no doubt ordinarily development rebate is to be allowed in the year of installation or in the succeeding year, but it is equally true that if in these years the profits were not sufficient to absorb the development rebate, the unabsorbed development rebate has to be carried forward and allowed in the subsequent year till it is completely absorbed within a period of eight years but beyond that limitation there does not appear to be any limitation for the carry forward and the absorption of the development rebate within a period of eight years. It was further observed that it was not necessary that the reserve should be created in the year of installation or in the succeeding year and it was enough if the reserve was created in the year in which the development rebate was to be actually allowed, that is to say, in the year in which there was a positive income which could absorb the development rebate. In the present case, the Tribunal further observed, there is a further complication that apart from the claim of development rebate, the unabsorbed losses of the earlier years, have been brought forward and the net result even for the assessment years 1966-67. and 1967-68 was a loss. The Tribunal gave directions to reconstruct an account of the development rebate right upto and including the assessment year 1968-69 and to allow the assessee the set off of development rebate which is allowable by reference to the reserve created by the assessee for the year 1968-69. ( 4 ) THE first main question which we have to deal in answering this reference is whether on a true construction of the provisions of Sections 33 and 34 of the Act, it can be said that the reserve contemplated by Section 34 (3) (a) must be created in the year of acquisition or installation or whether it can be created in the course of any subsequent years so long as it is created during the period of eight years from the year of acquisition or installation. For the reasons recorded in "commissioner of Income tax, Delhi V. M/s. Metal Forging (P) Ltd. " ITR 195/75 (1) the Judgement of which is announced today, we answer that question against the Revenue and in favour of the assessee. An assessee is not bound to create development rebate reserve during the year of installation of plant or machinery if there is no profit in that year and it is sufficient if the reserve is created when there are profits and the development rebate is actually allowed. ( 5 ) THE second question which is to be answered is whether the carry forward business losses would get precedence over the unabsorbed development rebate and the current years development rebate. The Tribunal in the statement of case refers to a fact that there is a further complication that : part from the claim of development rebate, the unabsorbed losses of the earlier years have been brought forward and the net result even for the assessment years 1966-67 and 1967-68 was a loss . The Tribunal has given a direction that the Income-tax Officer should construct an account of the development rehate right upto and including the assessment year 1968-69 and alow the assessee the set off of development rebate which is allowable by reference to the reserve created by the assessee for the year 1968- 69. It would, therefore, be necessary to examine as to whether the carry forward development rebate gets priority over the carry forward losses of earlier years or vice-versa. ( 6 ) MR. K. K. Wadera, the learned counsel for the department invites our attention to the various statutory provisions. We may notice these. Section 4 of the Act is the charging section and it provides that where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of the Act in respect of the total income of the previous year or years, as the case may be, of every person. Section 5 provide for the scope of total income and lays down that subject to the provisions of the Act, the total income in any previous year of a person who is a resident includes all income from whatever source derived which is received or deemed to be received in India in such year by cr on behalf of such person accrues or arises or is deemed to accrue or arise to him in India during such year. Section 14 deals with the heads of income. The income under the head profits and gains of business or profession is included in it. Part D of Chapter IV deals with it. Section 28 provides what income can be chargeable to Income-tax under the heads profit and gains of business or profession . Under Section 29 of the Act it has been provided that the income referred to in Section 28 shall be computed in accordance with the provisions contained in Sections 30 to 43a. Under Section 33 of the Act, provision has been made for the development rebate and Clause (a) of sub-section (1) of Section 33 provides that in respect of a new ship or new machinery or plant (other thanoffice appliances or road transport vehicles) which is owned by the assessee and is wholly used for the purpose of the business carried on by him, there shall, in accordance with and subject to the provisions of Section 33 and of Section 34, be allowed a deduction, in respect of the previous year in which the ship was acquired or the machinery or plant was installed or, if the ship, machinery or plant is first put to use in the immeditely succeeding previous year, then, in respect of that previous year, a sum by way of development rebate as specified in clause (b) of Section, 33. Section 33 (2) provides that in the case of a ship acquired or machinery or plant installed after December 31, 1957, where the total income of the assessee assessable for the assessment year relevant to the previous year in which the ship was acquired or the machinery or plant installed or the immediately succeeding previous year, as the case may be, the total income for this purpose being computed without making any allowance under sub-section (1) or sub-section (IA) of Section 33 or sub-section (1) of Section 33-A or any deduction under Chapter VI-A or Section 280-O is nil or is less than the full amount of the development rebate calculated at the rats applicable thereto under sub-section (1) or sub-section (1a), as the case may be. It further provides that the sum to be allowed by way of development rebate for that assessment year under sub-section (1) or sub-section (1a) shall be only such amount as is sufficient to reduce the total income to nil. A provision is further made that the amount of the development rebate, to the extent to which it has not been allowed as aforesaid, shall be carried forward to the following assessment years, and the development rebate to be allowed for the following assessment year shall be such amount as is sufficient to reduce the total income of the assessee assessable for that assessment year, computed in the manner aforesaid, to nil, and the balance of the development rebate, if any, still outstanding shall be carried forward to the following assessment years and so on, so however that no portion of the development rebate shall be carried forward for more than eight assessment years immediately succeeding the assessment year relevant to the previous year in which the ship was acquired or the machinery or plant installed or the immediately succeeding previous year, as the case may be. ( 7 ) BASED on these provisions, Mr. Wadera urged that the provisions of Sections 29 to 43-A should be first applied before the question of considering the carry forward and set off of business losses from the previous year under the provisions of Section 72 is taken into consideration. His submission is that under the scheme of Section 33, development rebate is to be set off in lump sum in the earlier year relevant to the previous year in which the plant or machinery was installed. His submission is that under the scheme of Section 33, development rebate is to be set off in lump sum in the earlier year relevant to the previous year in which the plant or machinery was installed. The authorities under the Act are required to give development rebate for the current year and, therefore, carry forward and set off of the business losses from the previous year will have to be relegated to the lower order of seniority as compared to the unabsorbed development rebate and development rebate of the current year. Reference was also made to the provisions contained in Section 72 (1) and (2 ). He contended that because of the specific provisions of Section 32 (2), before current years development rebate can be given effect to and deducted by virtue of the scheme of Clauses (1) and (2) of sub-section (2) of Section 33, priority has to be given to the unabsorbed development rebate over the current years development rebate and hence by virtue of the specific provisions of Section 33 (2) of the Act, unabsorbed development rebate from the previous year and the current years development rebate will get priority over the carry forward business loss and unabsorbed depreciation from the previous year. ( 8 ) AS noticed by us in I. T. R. 195175, Parliament in Section 33 has made specific statutory provisions for the purpose of granting incentives to businessmen who invest on new ships or new plant or machinery or in modernising plant and equipment. In order to earn development rebate, the assessee has to satisfy certain specified conditions which are provided under Section 34 of the Act and the unabsorbed development rebate can be carried forward only for eight years as provided by the Act. The development rebate in the case of plant or machinery varies according to the year of installation and the use to which it was put. Sub-section (2) of Section 33, in the case of a ship acquired or the machinery or plant installed after 31st day of December, 1957, requires the computation of the total income of the assessee assesable for the assessment year relevant to the previous year in which the ship was acquired or the machinery or plant installed or the immediately succeeding previous year, as the case may be. The total income is required to be computed first without making any allowance under sub- section. (1) or sub-section (1a) of Section 33 or sub-section (1) of Section 33-A or any deduction under Chapter VI-A or Section 380-O. If the legislative intent was to compute the total income first without making any allowance/deduction under Section 72, then it would have been so expressed. The total income as defined in Section 2 (45) of the Act means the total amount of income referred to in Section. 5, computed in the manner laid down in the Act. The manner of computation laid down by the Act forms an integral part of the definition of total income. This specially defined concept of total income has to be applied while construing and then working out the provisions of Sections 33 (2) and 72 of the Act, The statutory requirement is to first compute the total income in the manner laid down in the Act and on computing the total income, the allowability of development rebate is thereafter to be considered. In the computation of the total income under the head profit and gains in business or profession , in the same year of assessment, loss from one head can be set off against the income of another head. The requirement of Sections 70 and 71 is that both intra head adjustment and interhead adjustment must be during thesame year of assessment. Section 72 deals with carry forward and set off of business losses. There are certain conditions governing carry forward of the business loss but we are not concerned with those restrictions here. The loss may be carried forward and set off against the profits and gains in a subsequent year of any business, profession or vocation. If the loss cannot be wholly so set off, the amount of loss not so set off can be carried forward to the following assessment year and so on. Thus in computation of total income, the carry forward losses have also to be taken note of. If the loss cannot be wholly so set off, the amount of loss not so set off can be carried forward to the following assessment year and so on. Thus in computation of total income, the carry forward losses have also to be taken note of. In other words, by virtue of the provisions contained in Section 72 of the Act before, arriving at the figure of total income, the carry forward business losses have to be set off and it is only after the set off of carry forward business losses from the previous year that an amount of profit and gains of business or profession which is one of the heads, of total income in view ot Section 14, can be arrived at. After arriving at the figure ot total income in this manner, then only the development rebate is to be allowed as a deduction. If this set off carry forward business losses is not done before arriving at the total figure of income in the manner dontemplated by sub-section (2) of Section 33, then the direct impact of Section 72 could not be given effect to. The total income of the asseseee for the year under consideration has to be worked out by first giving effect to the carry forward losses. ( 9 ) THE carry forward business losses under Section 72 (2) read with Section 72 (1) get precedence over the unabsorbed development rebate and the current years development rebate. We are fortified in this view by a Division Bench of the Gujarat High Court in "mangaram Mills Company v. Commissioner of Income-tax, Gujarat" 135 ITR 122 (2 ). The question was posed in a reference as to the order, of priority in a current years depreciation carry forward development rebate, current years development rebate, carry forward losses from earlier years and unabsorbed depreciation. The Gujarat High Court dealt with at great length the statutory provisions and the meaning to be assigned to the material words "total income". After placing reliance on "combay Electric Supply Co. The Gujarat High Court dealt with at great length the statutory provisions and the meaning to be assigned to the material words "total income". After placing reliance on "combay Electric Supply Co. Ltd v. Commissioner of Income-tax", 113 ITR 84 (SC) (3) it was expressed : "though there is no direct authority for the priority to be given as between carried forward business loss, unabsorbed depreciation and carried forward development rebate under the provisions of s. 72 (1), s. 32 (2) and s. 33 (2) of the 1961 Act, there is a direct authority of the Supreme Court relating to the priority to be given at the time of setting off of carried forward business loss and unabsorbed depreciation in Cambay Electric Supply Industrial Co. Ltd. v. CIT (1978) 113 ITR 84 (SC ). In that case, the Supreme Court was concerned with the provisions of s. 80e of the 1961 Act as it then stood. Under that section, special deduction was to be given at the rate of 8 per cent on profits and gains attributable to the business of generation and distribution of electricity. The question was whether in arriving at the figure on the basis of which 8 per cent deduction was to be calculated, the unabsorbed depreciation and unabsorbed development rebate were to be deducted. There the Supreme Court pointed out that the important words in s. 80e (1) are those that appear in parent thesis, viz. , "was computed in accordance with the other provisions of the Act" and since it was income from business, the same, in view of s. 29, had to be computed in accordance with ss. 30 to 43, which would include s. 41 (2) (providing for the balancing charge), s. 32 (2) (providing for carry forward of depreciation) and s. 33 (2) (providing for carry forward of development rebate), but, what is deally material is that in this decision the Supreme Court also pointed out that s. 72 (l) has a direct impact upon the computation under the head "profits and gains of business or profession". Tulzapurkar, J. speaking for the Supreme Court, pointed out at p. 97 of the report, that it was not possible to accept the view that s. 72 had no bearing on, or was unconnected with, the computation of the total income of an assessee under the head "profits and gains of business or profession". Tulzapurkar, J. speaking for the Supreme Court, pointed out at p. 97 of the report, that it was not possible to accept the view that s. 72 had no bearing on, or was unconnected with, the computation of the total income of an assessee under the head "profits and gains of business or profession". Actually, s. 72 (l) provides that where the net result of computation under the head "profits and gains of business or profession" is a loss and such loss cannot be or is not wholly set off against the income under any head of income in accordance with the previsions of s. 71, so much of the loss as has not been so set off, subject to the other prvisions of the Chapter, shall be carried forward to the following assessment year and shall be set off against the profits and gains, if any, or any business or profession for that assessment year. Therefore, s. 72 (1) has a direct impact upon the computation under the head "profits and gains of business or profession". In other words, the correct figure of total income, which is otherwise taxable under the other provisions of the Act, cannot be arrived at without working out the net result of computation under the head "profits and gains of business or profession". The correct order of priority was then given as under: (1) current year depreciation because that is the first charge on the receipts in the profit and loss account; (2) carry forward business losses under Section 72 (2) read with Section 72 (1); (3) unabsorbed depreciation by virtue of the provisions of Section 32 (2); (4) unabsorbed development rebate because of the provisions of Clauses (1) and (2) of Section 32 (2) and current years development rebate. THE Madras High Court in "commissioner of Income-tax v. Coromandel Steel Ltd". 130 ITR 856 (4) came to a similarconclusion. Their Lordship held that first comes the deduction of depreciation of the current year; then as between unabsorbed business loss carried forward and unabsorbed depreciation loss has priority over unabsorbed depreciation and has to be allowed. Unabsorbed development rebate comes up for consideration only after these two allowances. The same view is shared by the Kernataka High Court in "mysore Paper Mills Ltd. v. Commissioner of Income-tax", 117 ITR 132 (5 ). Unabsorbed development rebate comes up for consideration only after these two allowances. The same view is shared by the Kernataka High Court in "mysore Paper Mills Ltd. v. Commissioner of Income-tax", 117 ITR 132 (5 ). ( 10 ) A subsidy point may also be noticed before concluding the discussion. For the assessment year 1966-67, there was. a profit of Rs. 11. 195 but even for that year no reserve was created. Information is not available on the record as to the anabsorbed losses of the earlier years brought forward for the assessment year 1966-67. It is, however, not disputed by Shri C. S. Aggarwal, the learned counsel for the assessee that the failure to create a reserve inspite of there being sufficient profits available, confiscates the right to claim the development rebate. Such is the law laid down by the Madras High Court in "radhika Mills Ltd v. Commissioner of Income-tax", 74 ITR 661 (6 ). The extent of confiscation will, however, be the amount of development rebate that could have been allowed vis-a-vis the total income as reduced by the development rebate actually allowed as a deduction as per the amount of development rebate reserve created. If the profit of Rs. 11,195 for the assessment year 1966- 67 is set off by the unabsorbed losses for the earlier year then the failure to create a reserve would not entail any confiscation as the unabsorbed losses of the earlier years get precedence over the development rebate. ( 11 ) I answer the reference in the affirmative to the extent indicated i. e. against the department and in favour of the assesses with no order as to costs. H. C. GOEL. J. As per my discussion in my order in the case Commissioner of Income-tax. Delhi-I, New Delhi v. M/s. Metal Forgings Private Limited. Reported in I. L. R. (1984) II Delhi 215. (ITR No. 195 of 1975), I agree with the conclusion of S. S. Chadha. J.