TMI Blog2007 (1) TMI 301X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant would be entitled only to that amount as correctly held by the Assessing Officer. Accordingly, this issue is decided 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 Submitting further, the learned counsel explained that during the year under consideration, the assessee-company had withdrawn a sum of Rs. 1,34,25,000 out of the opening balance of Special Reserve account created for the purpose of section 36(1)( viii ) of the Act to the Profit Loss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 file ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een put in place w.e.f. 1-4-1998 and is not applicable for the year under consideration. The learned counsel also submitted that the insertion of the expression and maintained in section 36(1)( viii ) is also w.e.f. 1-4-1998 by the Finance Act, 1997 and is therefore, 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal (excluding the amounts capitalized from reserves) of the corporation (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;" 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amendment has been carried out (refer to 224 ITR 26 Statute). It is explained therein that the amendment to section 36(1)( viii ) sought to impose an obligation of "maintenance" of special reserve in addition to its creation by the Financial Corporation or the Public Company under clause ( viii ) of sub-section (1) of section 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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