9911796707
TMI Blog2012 (2) TMI 687X X X X Extracts X X X X X X X X Extracts X X X X ..... fore claiming this deduction, the income from housing finance business was ₹ 37,16,06,408/-. On this income the assessee claimed deduction u/s.36(1)(viii) of ₹ 14,79,41,734/-. The Assessing Officer examined the balance sheet of the assessee in the light of the proviso to Section 36(1)(viii) and it was noticed that the paid up capital was ₹ 20,48,52,500/- and the general reserve-1 was ₹ 29,89,00,000/-. The assessee was asked to explain as to whether it had complied with the proviso to section 36(1)(viii), to which the assessee submitted that it had paid up capital of ₹ 20,48,75,450/-, general reserves -1 of ₹ 29,89,00,000/-, share premium of ₹ 5,25,00,000/- and profit and loss account balance of ₹ 4,85,44,330/-, which would total to ₹ 60,48,19,780/-, and pleaded that all these four amounts should be considered for computing the aggregate specified in the proviso to Section 36(1)(viii). By this the intention of the assessee was to increase the figure of "twice the amount of paid up share capital and of general reserves.". It was observed by the Assessing Officer that in the assessment year 2003-04 also the assessee had t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f carrying on the business of providing long term finance for construction or purchase of houses in India for residential purposes. The provisions regarding this special deduction also existed in the IT Act, 1922 and were retained in the IT Act, 1961. The scope of the provisions of the said clause was later on widened by the Finance (No.2) Bill, 1971 to include in its ambit the approved financial corporations engaged in providing long term finance for agricultural development in India. The objective of this deduction originally was to stimulate industrial development of the country. The benefit of this deduction was also intended to enable corporations to augment their initial low equity base on account of limited accessibility to capital market. In the wake of liberalization, from the beginning of the 90's there has been considerable expansion and deepening of the capital market. Accessibility to capital market has markedly improved. The Finance Act 2007, therefore, has limited the deduction to 20% of the profits derived from the business of providing long term finance. Considering the provision for outer limit to the deduction, which is twice the amount of the paid up s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sioner of Income-tax (Appeals)-1 has grossly erred in not appreciating the fact the word "PAID UP CAPITAL + GENERAL RESERVES" has to be read as a single coined word and not separately which affects the very fundamental purpose of providing the relief under the provisions of Sec.36(1)(viii) and further the learned Commissioner of Income-tax (Appeals)-1 has failed to appreciate the fact that the Coined Word "PAID UP CAPITAL + GENERAL RESERVES" is already defined as NET WORTH under other laws and the learned Commissioner of Income-tax (Appeals)-1 ought to have considered the arguments made by the appellant in this regard and the Learned Commissioner of Income-tax (Appeals)-I, has erred in not appreciating the written arguments made by the appellant regarding the meaning of "PAID UP CAPITAL + GENERAL RESERVES". iii) The learned Commissioner of Income-tax (Appeals)-1 has grossly erred in not considering the Budget Speech made by the Honorable Finance Minister which clearly established the meaning of the Coined Word ("PAID UP CAPITAL + GENERAL RESERVES") as NET WORTH. iv) The learned Commissioner of Income-tax (Appeals)-1 has grossly erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such reserve account from time to time exceeds [ twice the amount of] the paid up share capital and [ of the general 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. The said proviso before its amendment in 1997, (as applicable up to Assessment year 1996 -97) stated as under; "Provided further that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid-up share capital [Excluding the amounts capitalized from reserves] The learned representative submitted that from the above proviso to s. 36(1)(viii) read with the proviso before its amendment in 1997, brings the following two things. 1. The proviso as applicable upto Asst.year 1996 -97 restricted the total deduction upto twice the Paid up capital - and such paid up capital was one that has been allotted for wholly for a consideration of cash, and the bonus shares issued out of capitalization of Capital reserves were not to be considered. In other words, the proviso has been made more liberal, and W.E.F. assessment year 1997 - 98, the paid up capital amount as appear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. It can only refer to the tax, if any payable by the assessee mentioned in the first part of S. 271(1)(a)(i). The expression used is not "tax" but "the tax". That expression can be reasonably understood as referring to the expression earlier used in the provision, namely, "the amount of the tax, if any, payable" by the assessee." He further submitted that in the present case of the appellant also, in the proviso to s.36(1)(viii) the word "the General Reserves" appear after the word "Paid Up Share Capital" and by applying the ratio held by their Honorable Lordships of the Supreme Court of India, it becomes very clear that the words, "PAID UP CAPITAL" AND " GENERAL RESERVES" are inseparable and have to be read and understood together, and not separately as separate words carrying different meanings and or expressions. 3. The combined word - "SUM OF PAID UP CAPITAL AND FREE RESERVE" has already been defined under the Companies Act, 1956, as "NET WORTH" and for the purposes of the said definition, the explanation to the said provision states that "Free Reserves" means all reserves created out of the profits and share premium account but does not include reserves created out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) has mentioned as under; Reference: Finance Minister Budget Speech - ITR -Sl.No: 172: "I also propose to partially modify a deduction that is available to certain companies. Without altering the overall limit of the special reserve equal to twice the Net worth under section 36(1)(viii) of the Income-tax act, I propose to stretch the period by restricting the deduction to 20% of the profits each year and limit the benefit to banks and certain financial corporations." Even from the above budget speech of the Honorable Finance Minister it can be seen that the word used is "Net Worth", which is in turn defined as a" Sum of Paid up Capital and Free Reserves", which is very similar or same as used under the provisions of S. 36(1)(viii). It has been held by their Honorable Lordships of the Supreme Court of India in; [A] K.P.Verghese Vs Income-Tax Officer & Anr (1981)131 ITR 597 (SC) "INTERPRETATION OF STATUTES - RULE OF INTERPRETATION - TASK OF INTERPRETATION OF STATUTORY ENACTMENT - NOT A MECHANICAL ONE - IS MORE THAN MERE READING OF MATHEMATICAL FORMULAE - IS ALSO AN ATTEMPT TO DISCOVER THE LEGISLATIVE INTENT FROM THE LANGUAGE USED - INTERPRETATION NOT TO BE SOLELY BAS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies, and more so to the Appellant being a Company Incorporated under the Companies Act, 1956. The speech of the Honorable Finance Minister also removes or clears all doubts in respect of such interpretation, since the word used by the Honorable Finance Minister in his above budget Speech also is "NET WORTH". According to the learned representative, in other words, as the word "Sum of Paid Up Capital and of the Free Reserve (General Reserves)" has already been defined under another Law governing the Companies, and the said word is not defined under the provisions of Income-Tax Act, 1961, the said definition squarely becomes applicable in the case of the Appellant. The provisions of S. 36(1)(viii) providing the statutory allowance of 40% of its profits from its business of Long term housing finance was provided with a social objective of providing a roof to every citizen of the Country, by providing him / her with funds towards purchase and or construction of a residential house at considerably low interest rates, and repayment spread over long periods even extending upto a period of 20 years. The housing loans provided by every housing finance company and or Banks becam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Net Worth is Gross Net Worth less Intangibles, miscellaneous expenses not written off and debit balance in Profit and Loss Account." Honorable Lordships, the appellant humbly submits that, the definition provided under the Companies Act, 1956 read with the Budget speech of the Honorable Finance Minister clearly establishes the fact that the word used in the proviso to S. 36(1)(viii) is nothing but "NET WORTH" and no other meaning can be assigned to the said words other than what is already defined under Company Law. The learned representative submitted that the definition to words provided under the laws promulgated by the Honorable Parliament has to be given effect and as already held by the Honorable courts of India, that while interpreting beneficial provisions, the same has to be given a Liberal interpretation and as well as one that is beneficial to the Assessee has to be considered. He finally submitted that he had already filed the list of cases relied by the appellant, and as well as definitions provided under the Companies Act, 1956, relevant pages of the definition provided under the book published by the wholly owned subsidiary of CRISIL, and as well as the releva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justified the above finding with various judicial decisions at Page no.17& 18 of his order. 10. As regards share premium A./c it is stated that it is not coming under general Reserves as it is not a free reserve and the same can't be distributed through P&L a/c( Page No. 19 and para 3.5.1 of CIT(A) order) 11. The P&L A/c can't be called as General Reserves since amount is not transferred to reserve a./c even as mentioned by Commissioner of Income-tax (Appeals) a mass of undistributed profit is not reserve even though it is shown as reserve in balance sheet 183 ITR 456(Madras). (Page No. 19 and para 3.5.2 of CIT(A) order) 12. Special Reserve:- The special reserve is for special purpose and it can't be distributed through P&L a/c as dividends or otherwise. (Page No. 19 and para 3.5.3 of CIT(A) order) 13. In view of the detailed discussion as mentioned above the items mentioned at sl no. 2,3&4 can't be categorized as coming under "general reserves". 14. The assessee's counsel heavily relied on various provision and decisions relating to the word "networth" which was not used in the said provision of section 36(1)(viii). The networth is defined in section 49,50, 503 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... general reserves does not help the assessee's case. In view of the above submissions, the learned DR submitted that the decision of CIT(A) deserves to be upheld and assessee's appeal may be dismissed. 07. We have heard the rival submissions and considered the facts and materials on record. The only issue for us to adjudicate upon is whether the term "General Reserve" includes share premium, P & L A/c balance and Special Reserve opening balance, for computing the eligible amount for claiming the deduction u/s.36(1)(viii) by the assessee. As rightly contended by the learned DR, there is no definition of the term "General Reserve" under the Income-tax and there is also no positive definition under the Companies Act, 1956. 08. The learned Commissioner of Income-tax (Appeals) while rejecting the plea of the assessee, after considering all the case laws relied upon by the assessee before him; has observed as under : "The basic issue to be decided by him involved answering the question whether the word "General Reserves" included in it (i) Share premium amount of ₹ 5,25,00,000/- and (ii) P & L A/c balance of ₹ 4,85,44,330/-, while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company, retained and invested in the business of the company. It has all the characteristics of other reserves. This argument of the appellant does not conform to the meaning of special reserve u/s.36(1)(viii) of the Act. U/s.36(1)(viii) a special reserve has to be created to be eligible to claim deduction under that section. It is not only necessary to create a special reserve but it also should be maintained. The requirement of the reserve to be maintained was introduced in section 36(1)(viii) by the Finance Act 1997 w.e.f.1.4.1998. A reserve created to meet a specific requirement under law is for a specific purpose. On the other hand as per the definition given by Institute of Chartered Accounts a general reserve should have no specific purpose. The special reserve is for a special purpose. It cannot be distributed freely through the profit and loss account as dividends or otherwise. It is therefore not a free reserve. Since it is not a free reserve and is for a specific purpose it cannot be called general reserve. In view of the foregoing it is held that the Assessing Officer was justified in ignoring the balance in the following accounts : 1) Share premium account 2) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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