TMI Blog2008 (7) TMI 982X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the amount qualifying for deduction u/s 36(1)(viii), gross amount of interest on investments and interest on deposits amounting to ₹ 1,29,34,697 (total gross amount of interest on investments and deposits of ₹ 40,29,34,697 less amount of ₹ 39,00,00,000 allowed by the Learned CIT (A) towards inte4rest on investments and deposits on 3 months disbursements) and without prejudice, in holding that no expenditure could be attributed to income of such nature. Note:- The above ground is after considering the following decision of CIT (A) in his order dated 13.01.2003 for A/Y 1997-98 where he has allowed in respect of lease income, guarantee fees, miscellaneous income, interest on deposits and investments (on 3 months disbursements) to qualify for computing deduction u/s 36 (1) (viii) in accordance with the order of CIT (A) for A/Y 96-97 which decided the similar issue. He has further observed that the findings of the CIT (A) in her order for A/Y 96-97 would apply, wherever they are relevant as far as this ground of appeal is concerned. 3 (b) That the Learned CIT (A) has erred in upholding the observation of learned CIT (A) for AY 1996-97 that the income of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thorities below restricted the claim of the assessee under section 36(1) (viii) of the Act to ₹ 76.72 crore against the claim of ₹ 130.47 crore on the reasoning that the reserve of ₹ 53.74 crores was not created by the assessee in the books of account for the year ending on 31.03.197 but was created in the books of the subsequent year i.e. on 3.103.1998. 7. Before us, learned counsel for the assessee referring to section 36 (1) (viii) of the Act submitted that in the instant case, the tax authorities below have denied the claim of the. assessee to the extent of ₹ 53.74 crore on the reasoning that reserve of this amount was not created in the books of account for the year ended 31.03.1997 but was created in the books of the subsequent year. It is not in dispute that the additional reserve was created on 31.03.98. In fact the CIT (A) has noted this fact in his order at Page 6 where he has stated thus: During the appellate proceedings the appellant company was required by me to state exactly on what date in the next year this special reserve was enhanced. In this regard it has been stated by the appellant company that the additional reserve of ₹ 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted. What is required is that deduction is to be allowed of an amount not exceeding 4 0% of the profits carried to the reserve. Significantly like various other sections the reserve under section 36(1)(viii) of the Act is not to be created by debiting the amount of the PandL Account. The requirement, as stated, is that amount not exceeding 40% of the profits be carried to the reserve. Now while creation of reserve is a mandatory requirement the process of creation of reserve is procedural. If the assessee is able to demonstrate that in its books reserve of 40% of the profits has been created, either in the year under consideration, or if there is any shortfall additional reserve has been created in subsequent year out of the profits of the relevant year, the requirement of deduction under section 36(1)(viii) of the Act out to be taken to have been met. 11. Reliance was placed on the following Judgements:- (a) Karimjee P. Ltd. vs. DCIT, 271 ITR 564 (SC). Creation of reserve after the closure of the accounts was construed as complying with the requirement of granting deduction under section 8 8HHC of the Act in this case. The timing of creation or reserve was while the matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the enactment of section 36(1)(viii) of the Act - to augment resources - should be seen in the words used. The language used is plain and unambiguous. It has been held that language employed in a statute is the determinative factor of legislative intent. The first and primary rule of construction is that the intention of the legislation must be found in the words used by as the legislature itself. - Padmasundra Rao (Decd) vs. State of Tamil Nadu [2002] 255 ITR 0147 (SC). If the interpretation of the assessee is to be accepted, it would lead to arbitrary and unjust results which are not permissible. It would lead to avoidable violence with the language of the sub-section - K.P. Veghese vs. ITO (1981) 131 ITR 59. It is added that while interpreting a fiscal statute there is no scope to add any word or intendment. This is supported by the decision of the Apex Court in Orissa State Warehousing Corporation vs. CIT (1999] 237 ITR 589 (SC) wherein it stated that:- A fiscal statute has to be interpreted on the basis of the language used therein and not dehors the same. No words ought to be added and only the language used ought to be considered so as to ascertain the proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. vs. Joint CIT [2003] 260 ITR 102 (Bom). Further, assessee being a company has to follow AS-1 which is mandatory. It states accrual as:- Revenues and costs are accrued, that is recognized as they are earned or incurred (and not as money is received or paid) and recorded in the financial statement of the periods to which they relate. In the case in hand the financial year ends on 31.03.1997 - may be it takes 2 months to finalize - eliminate errors - the auditor finalizes it. It the special reserve was created, it should have been carried to such reserve account' even by the Accounting Standards during the financial year 1996-97 (assessment year 1997-98). The special reserve was not even created on the date of auditing of accounts by the auditor. It has not been done so which is evident and not in dispute. It has been done on 31.03.1998 (assessment year 1998-99). Therefore, even if we are to follow the Accounting Standards, the assessee has no case. Infact, if the assessee was to 'revise its accounts' after the entries in the books had been frozen and audited, it had to separately approach the board of Directors, and AGM for the year in issue. No such e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that orders of lower authorities may be confirmed. 17. Countering the submissions of learned DR for the Revenue, the learned AR for the Assessee submitted that in the instant case the main plank of argument of learned DR for the Revenue was that section 28 provides for chargeability of income under the head business carried on during the previous previous year. Section 36(1) of the Act provides for deduction in computing income referred to in section 28 of the act. The contention was that once accounts for a previous year are closed and the assessee is maintaining accounts on mercantile basis, the Act does not permit considering any entry passed after the closure of the accounts. This is, according to the learned DR for the Revenue, the mandate of the accounting standards too. There is no quarrel on the proposition that accounts are maintained on mercantile basis. There is also no denying the plain fact that the income is to be computed for the previous year. But none of the twin reasons pointed out by the learned DR for the Revenue can be taken as a bar to consider an entry passed in succeeding year. Neither any authority nor precedence has been cited for this proposition. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s notified financial corporation engaged in providing long-term finance and is entitled to the benefit under section 36(1)(viii) of the Act. There is no denial of section 36(1) (viii) benefit. Benefit has been granted for an amount of ₹ 76.72 crore and the provisions of the deduction are hence applicable. The issue is only as regards quantification, and in that respect the provisions are to be interpreted liberally. The judgment of Padmasundara Rao vs. State of Tamil Nadu, 255 ITR 148 (SC) cited by the learned DR for the Revenue too favours the case of the assessee. Rather, applying the very same principles, words that do not exist cannot be read in. The judgment of CIT vs. S.N. Gupta, 297 ITR 322 (SC) has no relevance to the matter under consideration. 18. We have considered the rival contentions of both the parties, perused the records and carefully gone through the orders of the tax authorities below. 19. We would first like to reproduce the relevant section referred to by both the parties in their arguments: Section 36(1) : Other deduction:- 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the maters dealt wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue but to our mind answer to such inference drawn by the learned DR for the Revenue is that before making any deduction does not means before making any claim but means at the time of considering such deduction claimed by the assessee. 21. Hon'ble Jurisdictional High Court of Delhi while interpreting similar wordings in the context of section 32A of the Act in the case of Commissioner of Income-Tax vs. Orient Express Company Private Ltd., [1987] 167 ITR 894 [Delhi] while dealing with creation of reserve required under section 32A of the Act at Page 896 held that section prescribes no point of time by which the reserve should be created and in this regard accepted that a reserve created after the closure of the accounts of the year qualifies by observing as under: The second question which is raised only in ITCs Nos. 44 and 45 of 1986 is whether the assessee is disentitled to the investment allowance scheme because no requisite reserve has been created by the assessee-company before the close of books of the relevant previous year. On this, the finding is that the requisite 'reserve' has been created by holding a second annual general meeting of the members of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be from such eligible business of providing long-term financing. In view thereof, we hold that the increase in reserve created on 31.03.98 i.e. in subsequent year/years is allowable subject to the same being from the profits of eligible business of the assessee of the assessment year 1997-98 and not of assessment year 1998-99. 26. Therefore, for ascertaining the same, now we consider the arguments of the learned AR for the Assessee on this point on the basis of documents referred by the learned AR for the Assessee. It was pointed out by learned AR for the Assessee that although reserve created in the year ended on 31.3.98 was of ₹ 53.74 crore for the year ended on 31.3.97 but the profit remaining in General Reserve in F.Y.1996-97 was only ₹ 5327.54 lakh as per profit and loss appropriation account as on Page 49 of the printed accounts for the year ended on 31.3.98 and Page 43 of printed accounts for the current year ended on 31.3.97. It was also pointed out that as per the details of reserves as on 31.3.98, ₹ 5300 lakh was transferred out from General Reserve to Special Reserve created under sec.36(1)(viii) of the Act and, hence, to the extent of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (viii) of the Act was to the extent of ₹ 1,30,47,19,993/-. Hence, the Assessing Officer held that deduction u/s 36(1) (viii) of the Act would be restricted to the amount of reserve created during the year i.e. ₹ 76.72 crore whereas the assessee has withdrawn certain amounts from the special reserve of the preceding year. He further observed that out of ₹ 35. 68 crore of such withdrawal, ₹ 4.60 crore was the amount of reserve on which deduction u/s 36 (1) (viii) of the Act had already been granted in assessment year 1996-97. Since, the reserve to this extent was not maintained by the assessee company, the Assessing Officer added back this amount of ₹ 4,60,55,000/- to the income of the assessee company for the year under consideration. 29. Aggrieved with the order of the Assessing Officer, the assessee filed an appeal before the CIT (A) and the CIT (A) on considering the submissions of the assessee as well as the case law relied upon by the learned AR for the Assessee upheld the order of the Assessing Officer by making following observation in this order:- I have perused all the relevant facts of the case and the case laws relied upon by the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of any special reserve being created and maintained was only first time introduced and substituted for the words special reserve created by the Act of 1997 w.e.f. 01.04.1998 i.e. applicable to assessment year 1998-99, whereas, the case of the assessee under consideration pertains to assessment year 1997-98, meaning thereby that this condition of creating and maintaining the special reserve was not applicable, hence, the tax authorities below committed an error in applying the same in the instant case of the assessee and in refusing the impugned claim of the assessee. Accordingly the order of tax authorities below in this regard are set-aside and Ground No.4 of the appeal of the assessee is allowed. 32. Now, we shall deal with Ground No. 3(a) of the appeal of the assessee. 33. The learned AR for the Assessee submitted before us that he does not want to press this ground of appeal because by a consolidate order dated 11.08.2006 of the ITAT, Delhi Bench G in the case of this very assessee passed in I.T.A. Nos. 1062 and 994/Del/2000, assessment year 1996-97, decided the issue against the assessee vide observations of the Tribunal made in Para 45 of the consolidated order whic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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