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TMI Blog2007 (10) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... g deduction under this section as well as under Chapter VI-A of the Income-tax Act, 1961 ?" 3 When the aforesaid question of law came up for consideration before the Division Bench on August 14, 2003, the Division Bench presided over by the then Chief Justice opined that the view of this court in the case of CIT v Rajasthan Financial Corporation (No. 2) [1998] 229 ITR 252 requires reconsideration. This is how the matter has come up before this Full Bench. 4 Section 36 of the Income-tax Act, 1961 (for short, "the Income-tax Act") provides for certain deductions while computing the income referred to in section 28. Clause (viii) thereof as was obtaining prior to April 1, 1985, and applicable for the assessment year 1983-84 reads thus "36. Other deductions.—(1) … (viii) in respect of any special reserve created 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion to be Rs. 1,000, according to the assessee, for calculating the deduction under this section (and if this sum of Rs. 1,000 is put in a reserve fund), 40 per cent. should be calculated on Rs. 1,000 and a deduction of Rs.. 400 is to be given. According to the Revenue, the deduction at 40 per cent. should be calculated on the figure of total income arrived at after this deduction also is applied for which a notional calculation is to be done by adding 40 per cent., to the total income and then calculating the deduction to be allowed at 40 per cent. of Rs. 1,400. The Income-tax Officer has adopted the method urged by the Revenue, but the first appellate authority and the Tribunal have not accepted it and reliance was placed on the instructions of the Board, which were in vogue during the relevant accounting and assessment year: The applicability of the said instructions is the subject-matter of question No. 1.We have considered it appropriate to examine this question without reference to any of the circulars of the Board. Learned counsel for the Revenue has placed reliance on the definition of 'total income' in section 2(45) of the Act and contended that for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... court for its opinion. Having heard learned counsel for the parties, we have come to the conclusion that this reference must be answered in the affirmative and against the Revenue. Clause (viii) of section 36(1) of the Act provides for deduction on the basis of total income computed before making any deduction under Chapter VI-A of the Act. 'Total income' as defined by 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. Chapter III of the Act refers to income which do not form part of total income. Chapter VI-A provides for certain deductions which are required to be made in computing total income. However, section 36(1) (viii) of the Act provides that deduction admissible under that provision has to be calculated on the basis of total income computed before making any deduction under Chapter VI-A of the Act. In view of this provision, it would not be permissible for the assessing authority, as held in CIT v. Bihar State Financial Corporation [1983] 142 ITR 518 (Patna), to find out what would be the total income after making the deduction admissible under section 36(1)(viii) of the Act and then limit the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, of the view that the Tribunal was justified in setting aside the order of the Commissioner passed under section 263 of the Act. It was right in holding that the deduction permissible under section 36(1)(viii) of the Act was to be calculated on the assessee's total income as it stood before the deduction allowable under section 36(1)(viii) of the Act. A view similar to ours has been expressed by the Patna High Court in CIT v. Bihar State Financial Corporation [1983] 142 ITR 518 and CIT v. Bihar State Financial Corporation [1986] 159 1TR 275 (Patna), the Andhra Pradesh High Court in CIT v. Andhra Pradesh State Financial Corporation [1989] 175 ITR 87, and the Madhya Pradesh High Court in CIT v. M. P. Audyogik Vikas Nigam Ltd. (No. 2) [1989] 178 ITR 179 (MP). In view of our analysis, we differ from the contrary view expressed by the Karnataka High Court in Karnataka State Financial Corporation v. CIT [1988] 174 ITR 206." 10 The view of the Karnataka High Court is, however, otherwise. They departed from the view of the Patna High court, the Andhra Pradesh High Court, the Madhya Pradesh High Court and the Orissa High Court. In the case of Karnataka State Financial Corporation v. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to a deduction, in the computation of their taxable profits, of an amount not exceeding 40 per cent. of the total income carried to a special reserve. Under the existing provisions, the total income for this purpose is the total income as computed before making any deduction under Chapter VI-A. It is proposed to provide that the deduction shall be for an amount not exceeding 40 per cent. of the total income as computed before making any deduction under the aforesaid provision and Chapter VI-A.' A careful analysis of the amendment effected by the 1985 Act and the object with which the same has been amended, far from sup porting the case of the assessee, supports the case of the Revenue. In CIT v. Bihar State Financial Corporation [1983] 142 ITR 519 (Patna) on which very strong reliance was placed by Sri Natarajan, the Patna High Court consisting of Untwalia C. J. (as his Lordship then was) and S. K. Jha J. examining the scope and ambit of section 36(1)(viii) as it stood prior to its amendment by the Finance (No. 2) Act of 1967, set out at pages 521 and 522 of that report, accepted a similar claim of the assessee. In reaching that conclusion, the court also relied on the later am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of Orissa [1993] 199 ITR 761 has followed the decisions given in the case of CIT v. Bihar State Financial Corporation [1983] 142 ITR 518 (Patna), CIT v. Andhra Pradesh State Financial Corporation [1989] 175 ITR 87 (AP) and CIT v. M. P. Audyogik Vikas Nigam Ltd. (No. 2) [1989] 178 ITR 179 (MP) and the decision given in the case of Karnataka State Financial Corporation v. CIT [1988] 174 ITR 206 (Karn) was not followed. By the amendment by the Finance Act, 1985, the words 'computed before making any deduction under this clause and Chapter VI-A' were substituted for the words 'computed before making any deduction under Chapter VI-A'. This amendment was brought into force with effect from April 1, 1985, and was applicable to the assessment year 1985-86. The deduction which is permissible in computing the taxable pro fits of the financial corporation is in respect of the amount transferred by them to the special reserve account up to 40 per cent. on their total income computed before making any deduction. So far as computation of deduction before the provisions of Chapter VI-A are applicable it has been so provided specifically and there is no problem. The income without giving an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 36(1)(viii) of the Income-tax Act, 1961, should be calculated on the total income before deduction of the amount allowable in the section ?" 14 The aforesaid question of law before the Supreme Court was in respect of the assessment year 1978-79. The relevant provision for the said assessment year 1978-79 was exactly the same provision with which we are concerned. The Supreme Court held that the view of the Kerala High Court that in computing the total income for the purpose of section 36(1) (viii) of the Income-tax Act, 1961, the total income has to be computed in accordance with the provisions of sections 30 to 43A except section 36(1) (viii) was in accord with the decisions of the Patna and the Madhya Pradesh High Courts (decisions which we have noticed above). The Supreme Court held as follows (page 198) "Having gone through the decisions cited at the Bar, we find that the decision of the High Court following its earlier decision in CIT v. Kerala State Industrial Development Corporation Ltd. (No. 2) [1990] 182 ITR 67, is unexceptionable. The Karnataka High Court has tried to work out the sub-section on the basis of a mathematical formula and has dissented from the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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