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TMI Blog2007 (1) TMI 301X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer had determined the deduction under section 36(1)(viii) at Rs. 1,41,19,217. To appreciate the reasoning of the Assessing Officer to scale down the amount deductible under section 36(1)(viii), a reference can be made to the following amounts of other reserves appearing in the balance sheet : "Other Reserves Special Reserve for the purpose of Rs. 16,39,35,459 section 36(1)(viii) of Income-tax Act, 1961 Balance as per last Balance Sheet Rs. 2,75,44,217 Addition during the year Rs. 1,34,25,000 Less : Amount transfer to profit Rs. 17,80,54,676 & loss account Rs. 17,80,54,676" The Assessing Officer noted that deduction under section 36(1)(viii) is available in respect of a special reserve created and the same should not exceed 40 per cent of the profits derived from the business as referred to in the said section. According to the Assessing Officer, the assessee had created the reserve during the year of only Rs. 1,41,19,217 (i.e. Rs. 2,75,44,217 - Rs. 1,34,25,000). As against this the assessee contended that it had created special reserve to the extent of Rs. 2,75,44,217 as portrayed above. The Assessing Officer, co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d against the appellant." Against the aforesaid, the assessee is in appeal before us. 5. Before us the learned counsel for the assessee submitted that the assessee meets with all the conditions necessary for claiming deduction under section 36(1)(viii) of the Act. According to the learned counsel, the First Appellate Authority has not considered the plea of the assessee that the basis of addition was not confronted to the assessee at any stage during the course of assessment proceedings. Therefore, there was no opportunity, whatsoever provided to the assessee to explain to the Assessing Officer that no disallowance was called for. Submitting further, the learned counsel explained that during the year under consideration, the assessee-company had withdrawn a sum of Rs. 1,34,25,000 out of the opening balance of Special Reserve account created for the purpose of section 36(1)(viii) of the Act to the Profit & Loss Appropriation Account and also Rs. 45,00,000 out of opening balance of General Reserve. 5.1 The assessee in its written submissions filed before the CIT (Appeals) explained thus the reasons and the manner for making the two withdrawals, which is as under : "The net profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , not applicable for the year under consideration. The learned counsel submitted that in the Resolution passed in the meeting of the Board of Directors of the Board on 28-7-1997, the creation of the special reserve for the purpose of section 36(1)(viii) for Rs. 2,75,44,217 has been approved, a copy of which has been placed in the paper book. That, therefore the stand of the revenue is untenable. 6. On the other hand, learned DR has defended the orders of the lower authorities by placing reliance on the same. The learned DR submitted that in this case the assessee had created a reserve and has also made certain withdrawals from the reserve created and it is only the net amount which could be said to have been created during the year. That, therefore, deduction under section 36(1)(viii) is to be limited to the extent of such net reserve created. The learned DR referred to following discussion in para 3.4 of the assessment order also to justify the stand of the revenue : "It is further noticed in this regard that after the so-called transfer to the Profit and Loss Appropriation Account, the same amount has been transferred to provision for non-performing assets. So in effect, the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y;" Section 36(1)(viii) provides for a statutory deduction at the rate of 40 per cent of the profits computed under the head "Profits and gains of Business or Profession" (before making any deduction under the said clause) which are carried to a special reserve account subject to the conditions stated in the sub-section. The said deduction is available to the Financial Corporation as understood for the said section in terms of the Explanation thereof. There is no dispute that in principle, the assessee is eligible for claiming deduction under the said clause. The only difference between the assessee and the revenue is with regard to quantum of deduction. This difference is due to varied meaning of expression 'Special Reserve Created' in the said clause. The assessee claims that it has transferred a sum equivalent to Rs. 2,75,44,217 from its profit and loss appropriation account to special reserve account in the balance sheet. The assessee has, during the year also transferred from the balance of the reserve credit in the earlier years a sum of Rs. 1,34,25,000 to the profit and loss appropriation account. According to the revenue, only the net of the two i.e., Rs. 1,41,19,217 is to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 36. The following excerpts from the Memorandum Explaining the provisions in Finance Bill, 1997 is worthy of notice : "Maintenance of a special reserve by a financial corporation or a public company. Clause (viii) of sub-section (1) of section 36 permits the deduction of an amount not exceeding forty per cent of the profits derived from the business of providing long-term finance carried to any special reserve, created by a financial corporation or a public company. While this clause imposes a condition of creation of a special reserve, it does not impose any condition on the maintenance of the reserve. In order to incorporate the condition regarding maintenance of the reserve, clause (viii) is proposed to be amended by substituting the words 'special reserve created' with the words 'special reserve created and maintained'. An amendment to section 41 is also proposed 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) is sought to be introduced in this section, and a reference of this sub-section is also sought to be made in sub-section (5). The proposed amendments wi ..... 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