TMI Blog1996 (5) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... ated as income of the assessee ? " The questions relate to the interpretation of the provisions of clause (viii) of sub-section (1) of section 36 of the Income-tax Act for computing the income under the head "Profits and gains of business and profession". The said clause during the year under assessment read as under : " In respect of any special reserve created by a financial corporation which is engaged in providing long-term finance for industrial or agricultural development in India, an amount not exceeding-- (a) in the case of a financial corporation or a joint financial corporation established under the State Financial Corporations Act, 1951 (63 of 1951), or an institution deemed under section 46 of that Act to be a financial corporation established by the State Government for the State within the meaning of that Act, 40 per cent.; (b) in the case of any other financial corporation,-- (i) where the paid-up share capital of the corporation does not exceed three crores of rupees, 25 per cent.; (ii) Where the paid-up share capital of the corporation exceeds three crores of rupees, 10 per cent.; of the total income (computed before making any deduction under Chapter V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clude the said figure in the income of the assessee. The Tribunal found that there was no error and the order was not prejudicial to the interests of the Revenue. This dispute has arisen because in the annual report of the assessee there was a note accompanying the balance-sheet that interest had accrued on the amount decreed or under litigation. According to the Income-tax Officer, the assessee was following the mercantile system of accounting and, therefore, he should have included the interest which has accrued in its income in the profit and loss account. It appears that on that basis the Income-tax Officer included the interest in the income of the assessee, in the assessment years 1978-79 and 197980. Before the Tribunal, it was found that the observations of the Commissioner of Income-tax that it is not open to the assessee to follow a hybrid system of accounting was not proper. The assessee was found to have been following the hybrid system of accounting right from the beginning which was accepted by the Revenue in the past. No particular reason for the departure in the assessment year 1977-78 has been given except that the decision in the case of the Kerala High Court was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of any special reserve created by a financial corporation which is engaged in providing long-term finance for industrial or agricultural development 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 total income computed before making any deduction under this clause is to be carried to such reserve account. The Income-tax Officer was of the view that the amount of 40 per cent. should be worked out on the net income and not on the gross total income. Circular No. 204/72/75/ITA/1, dated August 13, 1979, was issued in which it was stated that the relief under section 36(1)(viii) is to be worked out on the net income and on that basis the assessment was framed. The Commissioner of Income-tax (Appeals) has followed the decision of the Tribunal in respect of the earlier year wherein it was observed : "Section 36(1)(viii) provides deduction of 40 per cent. of the total income (computed before making any deduction under Chapter VI-A). The dispute now is as to what is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is clause. In these circumstances, it was directed that the total income for this purpose will be before allowing the deductions under this clause and will be worked out on that basis. The Allahabad High Court in the case of CIT v. U. P. Financial Corporation, [1996] 217 ITR 191 observed that the deduction under section 36(1)(viii) of the Income-tax Act, 1961, cannot be restricted to the net total income as defined in section 2(45) of the said Act. Section 36(1)(viii) itself creates an exception in this regard by providing that the total income with reference to which the deduction is to be computed is the total income computed before making any deduction under Chapter VI-A. The Orissa High Court in the case of CIT v. Orissa State Financial Corporation [1993] 201 ITR 595 has observed that the total income on which the deduction under section 36(1)(viii) of the Income-tax Act is allowable should be computed before making the deduction in terms of section 36(1)(viii). The Orissa High Court in the case of CIT v. Industrial Promotion and Investment Corporation of Orissa [1993] 199 ITR 761 has followed the decisions given in the case of CIT v. Bihar State Financial Corporation [1983] ..... 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