TMI Blog2003 (2) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... the special reserve created by the appellant/assessee as a financial corporation engaged in providing long-term finances. The Commissioner of Income-tax, on a perusal of the records noticed that though a reserve was created to the extent of Rs. 71,18,786 by the assessee by debiting the profit and loss account, the amount was transferred immediately to the "provision for bad and doubtful debts account" and that there was no amount available in the special reserve account. In this view of the matter, the Commissioner was of the opinion that the assessee was not entitled to the deduction under section 36(1)(viii) of the Income-tax Act since the amount from the special reserve has been transferred to another account leaving no amount in the reserve as such. A notice was issued under section 263 of the Income-tax Act to the assessee proposing revision of the assessment. Though the assessee objected to the proposal, the same was overruled and by order dated November 25, 1998, passed under section 263 of the Income-tax Act, the Commissioner directed the Assessing Officer to withdraw the deduction granted under section 36(1)(viii) of the Act. Against the said order, the appellant-assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benefit under section 36(1)(viii) of the Income-tax Act during the assessment year in question. It was also contended that the Industrial Development Bank of India had issued guidelines and, as per the guidelines so issued and produced as annexure E, the State Financial Corporation has been permitted to create special reserve to avail of the benefit as permissible in terms of section 36(1)(viii) of the Income-tax Act, 1961. The cumulative balance of the provisions available/made under this section is admissible for provision purposes. The reserve can, therefore, be utilised to create specific provision for assets classified as "bad and doubtful debts". The assets and liabilities should be reduced to the extent of provisions utilised from the cumulative balance of reserves under section 36(1)(viii), i.e., to say, assets are to be shown net of provisions. It is pursuant to these guidelines, contends appellant's counsel, that the appellant had transferred from the special reserve to the provisions for "bad and doubtful debts" and that provision continued to remain in the books of account. In these circumstances, counsel submits, the deduction claimed under section 36(1)(viii) is suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reserves. While this clause imposes a condition of creation of a special reserve, it does not impose any condition on the maintenance of the reserve. 21.2. In order to incorporate the condition regarding maintenance of the reserve, clause (viii) has been amended by substituting the words 'special reserve created' with the words 'special reserve created and maintained'. An amendment has been made in section 41 in order to bring to tax any amount withdrawn from such special reserve in the year in which the amount is withdrawn. For this purpose, a new sub-section (4A) has been introduced in this section, and a reference to this sub-section is also made in sub-section (5) of this section. 21.3. This amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years." According to learned counsel, the view of the Income-tax Officer allowing the deduction under section 36(1)(viii) on the abovesaid facts and circumstances of the case is therefore justifiable and the question has to be answered in favour of the assessee. Learned counsel appearing for the Revenue, on the other hand, contended that thoug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oration or, as the case may be, the company, no allowance under this clause shall be made in respect of such excess : Explanation.-In this clause, - (a) 'financial corporation' shall include a public company and a Government company; (b) 'public company' shall have the meaning assigned to it in section 3 of the Companies Act, 1956 (1 of 1956) ; (c) 'Government company' shall have the meaning assigned to it in section 617 of the Companies Act, 1956 (1 of 1956) ;" The amendment was made by the Finance Act, 1997, with effect from April 1, 1998, by inserting the word "and maintained" after the word "created". The provision after the amendment to the extent they are relevant is quoted hereunder : "in respect of any special reserve created and maintained by a financial corporation which is engaged in providing long-term finance for industrial or agricultural development or development of infrastructure facility in India or by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes, an amount not exceeding forty per cent. of the prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e effect either expressly or impliedly. The circular issued by the Department as quoted above also clarifies the position that it was intended only to operate subsequent to assessment year in question, after the same was amended and not before. The Tribunal has relied on the decision of the Supreme Court in Indian Overseas Bank Ltd. v. CIT [1970] 77 ITR 512, In that case, the question arose for consideration was as to whether the reserves contemplated under section 17 of the Banking Companies Act, 1949, and the one contemplated by a proviso (b) to section 10(2)(vib) of the Indian Income-tax Act, 1922, are two independent reserves. In that context, it was held that the entries in the account books required by the proviso (b) to section 10(2)(vib) were not an idle formality and a separate reserve fund has to be created for the purpose of section 10(2)(vib). There, the banking company which was the assessee, claimed development rebate under proviso (b) to section 10(2)(vib) of the Indian Income-tax Act, 1922, and contended that a transfer which it has made to a reserve fund was sufficient to meet the requirements of section 17 of the Banking companies Act, 1949, as well as proviso (b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction (3) of section 34 of the Income-tax Act for claiming the development rebate under section 33(1) of the said Act. In that case, the assessee was a textile mill. For the assessment year 1962-63, the previous year being the calendar year 1951, it claimed certain amounts as allowances as development rebate under section 33(1) of the Income-tax Act. The Income-tax Officer rejected the claim on the ground that the assessee had not created a reserve as contemplated under section 34(3) of the Income-tax Act, 1961. On second appeal, the claim of the assessee was found favour with. The matter was referred to the High Court for its opinion and the question was answered in favour of the Revenue by the High Court, against which the assessee filed the appeal before the apex court. It was contended that the view taken by the High Court was erroneous and that it was not necessary that reserve should be created in the previous year during which the machinery or plant was installed. An Explanation was added by the Finance Act, 1966, by which it was declared that the deduction referred to under section 33 could not be denied by reason only that the amount debited to the profit and loss account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied with either as on a particular day or for the whole of the year, as the case may be, the Legislature has always taken care to specifically mention the requirements. For example, in section 2(18) of the Income-tax Act the words "company in which the public are substantially interested" is defined and clause (B) specifically refers "the shares in the company held by a Government and as per clause (B) if shares carrying not less than 50 per cent. of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by the Government . . . ... (emphasis' supplied only to show that the condition prescribed under clause (B) under section 2(18) is to be "throughout the relevant previous year"). Again, under section 2(18) in clause (A) it is stipulated that a company which is not a private company as defined in the Companies Act, 1956, and the shares in the company not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits were as on the last day of the relevant previous year .... Again, when we come to section 32A(2) while defining an in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ruction for the purposes of the two enactments. The broad distinction between the two is that whereas a 'provision' is a charge against the profits to be taken into account against gross receipts in the profit and loss account, a 'reserve' is an appropriation of profits, the asset or assets by which it is represented being retained to form part of the capital employed in the business." According to learned counsel for the appellant, applying the aforesaid meaning there cannot be any doubt that the reserve having been created, by the transfer of an amount to another account namely, towards provisions for "bad and doubtful debts accounts" its character does not cease to be that of a reserve; on the other hand, it continues to be a reserve fund. Learned counsel for the Revenue, however, placed reliance on the decision of the Supreme Court in CIT v. Travancore Titanium Products Ltd. [2001] 247 ITR 186. The expression "provision" and "reserve" were considered and it was held thus : "The broad distinction between the two is that whereas a provision is a charge against the profits to be taken into account against gross receipts in the profit and loss account, a reserve is an appropri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the facts and circumstances of the case, sums of money set apart by the assessee as reserves are really "provisions" and not "reserves" and so, such sums are not entitled to the relief granted by the Appellate Tribunal. It concluded as follows : "For the reasons recorded above, we are of the view that on the facts and circumstances of the present case, the sums of money set apart by the assessee herein for meeting its anticipated liability were a 'provision' and the Tribunal erred in law in holding them to be a 'reserve'. In the result, both the questions referred to us are answered in the negative, i.e., against the assessee and in favour of the Revenue." But the apex court did not agree with that view. It observed thus: "A fair reading of the above decisions would go to show that if the transfer of an amount is made ad hoc, when there is no known or anticipated liability, such fund will only be treated as 'reserve'. In this case, substantial amounts were set apart as reserves. No amount of bad debt was actually written off or adjusted against the amount claimed as reserves. No claim for any deduction by way of bad debts was made during the relevant assessment years. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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