TMI Blog2009 (3) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... or specified categories of resident applicants under section 245N(b)(ii) of the Act and has sought advance ruling in respect of the following two questions:- "1. Whether the Income-tax Authorities are justified in making/confirming the disallowance u/s 36(1)(viii) of the Income-tax Act, amounting to Rs.34,57,00,000/- as per provisions of that section as it stood at the material point of time. 2. Whether the Income-tax Authorities are justified in making/confirming the disallowance of Rs.26,50,00,00/- u/s 36(1)(viia) of the Income-tax Act pertaining to the provision for bad and doubtful debts in spite of the fact that reserve for the same has also been created." 2. The applicant, M/s. Rural Electrification Corporation Ltd. is a public sector undertaking and is engaged in the business of providing long term finance primarily to State Electricity Boards for the purpose of transmission, distribution and generation of electricity so that the society at large is benefited in respect of industrial, agricultural and infrastructural development. It has been stated that the Revenue had, all along in the past, accepted the applicant to be an eligible financial corporation for requisit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant had an opening balance of Rs.272.79 crores by way of carried forward special reserve and had, in addition, created a special reserve out of the current year's profit, to the tune of Rs.36 crores during the year in question. It was further noticed that the applicant had, as the records bear out, reduced an amount of Rs.257.05 crores from the opening balance of special reserve by way of transferring the same to general reserve account, thereby leaving a special reserve as on 31.3.1997 to the tune of Rs.51 crores only. The A.O. did not agree to the explanation furnished by the applicant and came to the conclusion that it was mandatory for the applicant during the year in question also to 'maintain' the special reserve already created and the applicant should not have transferred the same to the General Reserve. The A.O. has also stated in the assessment order that once the applicant has made a withdrawal from the Special Reserve created, it can be safely inferred that no special reserve was created by the applicant. The A.O. accordingly, concluded that the applicant forfeits the claim for the deduction under Section 36(1)(viii) of the Act. Dealing with the contention based on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee." 5. It would be appropriate to reproduce section 36(1)(viii) of the Act as it stood in the relevant assessment years i.e. A.Y.1997-98 in the following terms: - Section 36(1)(viii) : as it stood in the statute during the A.Y.(1997-98) 36(1) - The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 xxx xxx xxx (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, an amount not exceeding forty per cent of the profits derived from such business of providing long-term finance computed under the head "Profits and gains of business or profession" [before making any deduction under this clause ] carried to such reserve account:] Provided that the corporation [or, as the case may be, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section (1) of section 36, any amount subsequently withdrawn from such special reserve shall be deemed to be the profits and gains of business or profession and accordingly be chargeable to income-tax as the income of the previous year in which such amount is withdrawn." Explanation. - Where any amount is withdrawn from the special reserve in a previous year in which the business is no longer in existence, the provisions of this sub-section shall apply as if the business is in existence in that previous year." 8. From the above, it can be seen that while the Legislature had amended section 36(1)(viii) and intended to confer the benefit under that section only if that special reserve created is maintained, the consequence of withdrawing the amount from the special reserve in the previous year is taken care of by sub-section (4A) of section 41. In other words, if any deduction has been allowed in respect of any special reserve under section 36(1)(viii) of the Income-tax Act and it is subsequently withdrawn, then it shall be deemed to have been profits and gains of the business and are chargeable to income-tax. Thus, the creation and maintenance of the reserve funds has been m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act 1997 in section 36(1)(viii) and section 41 of the IT Act have been aptly analyzed by a division bench of Kerala High Court in Kerala Finance Corporation vs. CIT (2003, 129 Taxman 365). "Thus, it can be seen that while the Legislature had amended section 36(1)(viii) and intended to confer the benefit under that section only if that special reserve created is maintained, the consequence of withdrawing the amount from the special reserve in the previous year is taken care of by sub-section (4A) of section 41. In other words, if any deduction has been allowed in respect of any special reserve under section 36(1)(viii) of the Income-tax Act and it is subsequently withdrawn, then it shall be deemed to have been profits and gains of the business and are chargeable to income-tax. Thus, the creation and maintenance of the reserve funds has been made a condition for availing the benefit under section 36(1)(viii) and the consequence of withdrawing any such amount after deduction is made, is also made by fiction of law, deemed to be the profit and gains of business chargeable to tax as the income of the previous year in which amount is withdrawn. Going by the plain language of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for the purpose of claiming the deduction under section 36(1)(viii). It is pointed out that the 2nd proviso which is a computation provision does not make any difference for the interpretation of the main provision in clause (viii). Further, it is submitted that the applicant, in the instant case, has not frittered away the special reserve created; on the other hand, the same has been transferred to the general reserve and the special reserve created during the year to the tune of 36 crores out of profit chargeable to tax, has remained intact and this in itself is sufficient to entitle the applicant to avail the deduction under section 36(1)(viii). It is further submitted that the amendment which was effected by the Finance Act, 1997 making the maintenance of reserve mandatory, cannot be construed as clarificatory in nature. 13. We find it difficult to accept the contention of the Revenue's counsel that clause (viii) of Section 36(1) as it stood before amendment has to be so construed as to imply an obligation to maintain the special reserve intact. It would amount to reading words which were not there in the pre-amended provision. The importance of difference between the exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision of section 36(1)(viii) as the only requirement for claiming the deduction was the creation of the special reserve and the proviso was there to take care of the computational aspect. This very scheme had been existing right from the inception of the Act. Moreover, in the absence of clear words indicating that the amendment was clarificatory, it would not be so construed when the pre amended provision was clear and unambiguous (Ref. Sakuru vs. Tanoji, AIR 1985 1277). Where a new provision impairs an existing right or creates a new obligation, retrospectivity cannot be inferred (vide Govinddas vs. I.T.O.) Another observation therein relevant to the present case is that 'if the enactment is expressed in language which is fairly capable of either interpretation, it ought to be construed as prospective only." 15. There is no doubt that the purpose of the expression 'and maintained' is obviously to impose an additional obligation and it is not merely declaratory of the existing legal provision as discussed earlier. The legislature, by the present amendment, seeks to restrict the benefit which the statute hitherto provided to the assessee. The scope and effect of the aforesaid am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrant to think that the Legislature intended to confer the benefit of the provision only if it continued to maintain the reserve. In the absence of any expression indicating such a requirement by the assessee and in view of the fact that such a requirement was made expressly clear by an amendment brought about by the Finance Act, 1997, we have no hesitation to hold that such a requirement made explicitly clear both by the amendment to section 36(1)(viii) as well as by the insertion of sub-section (4A) of section 41 of the Income-tax Act, any retrospective effect cannot be presumed to be a condition for granting the benefit as per the provisions which stood prior to the amendment in question." 17. In Birla Cement Works vs. CBDT (248 ITR 216) the question arose whether Explanation III to Section 194C of the Income-tax Act, 1961 which was inserted by the Finance Act of 1995 was clarificatory. The Supreme Court held that there were no compelling reasons to hold that Explanation III was clarificatory or retrospective in operation. Although, there were conflicting views on the interpretation of expression "carrying out any work", it was held that section 194C before the insertion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which requires the maintenance of such reserve so created for the purposes of determining deduction under the sub-clause for the instant assessment year. .. …. .. A plea has been taken by the revenue that the amendment so made is only clarificatory in nature and is, therefore, to be considered as applying even to the assessment year under consideration which is 1997-98. The CIT(Appeals) has also taken this line of reasoning while rejecting the plea of the assessee. We are unable to subscribe to the aforesaid interpretive exercise adopted by the CIT (Appeals). Firstly, for the reason that the Finance Act, 1997 as we have seen earlier clearly prescribes that the amendments are to take effect from 1.4.1998 and shall apply in relation to the assessment year 1998-99 and subsequent years. A specific reference by the Legislature itself rules out the scenario of the said amendment being considered as having retrospective effect. Furthermore, in our view the said amendment brings on the Statute a further condition which is required to be fulfilled by an assessee before claiming the benefit under section 36(1)(viii). The Legislature, by the present amendment, seeks to restrict the benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he A.O. considered the applicant's plea and came to the conclusion that since the applicant has not made a provision for bad and doubtful debts, as required by section 36(1)(viia)(c) of the Act, the deduction under the said section is not merited. For coming to this conclusion, the A.O. has observed that there is clear distinction between the words 'Reserve' and 'Provision'. 25. Before us the counsel for the applicant has contended that no adverse inference should be drawn even if the applicant has, instead of making a provision, created a 'reserve' by debiting the same to Profit and Loss Appropriation Account because the creation of 'reserve' has been for the specific purpose of claiming deduction under section 36(1)(viia)(c) of the Act. It has also been emphasized that all along in the past the applicant has been making a provision for bad and doubtful debts and had accordingly been allowed deduction under the said section from A.Y. 1990-91 to 1995-96. It was during the year in question only when the applicant debited it to Profit and Loss appropriation account nomenclatured as 'Reserve for deduction under section 36(1)(viia)(c)', the applicant has been denied the benefit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n made reads:- "Reserve under Section 36(1)(viia) of the Income Tax Act for Bad and Doubtful debts" and the amount debited on this score is 4.5 crores. It is thus clear that the intention of the applicant was for deduction under section 36(1)(viia) only though the 'provision' was nomenclatured as 'reserve'. It is the contention of the applicant that the entry under the caption 'reserve' in place of 'provision' was made in pursuance of the opinion expressed by the Expert Advisory Committee of the Institute of Chartered Accountants (ICAI). The first Appellate Authority, in his order dated 26.4.2005, has referred to such plea, but did not comment anything. Be that as it may, even if it is termed as reserve, which according to the applicant's counsel, was in pursuance of the ICAI's opinion, we are of the view that the nature and character of the entry remains the same as envisaged under clause (viia)(c) of Section 36(1) of the Act. In substance, we are of the opinion that it is a 'provision' though named as 'reserve'. In our view, the debit in the appropriation account would not by itself disentitle the applicant from claiming the deduction. We have to see the substance and real nature ..... X X X X Extracts X X X X X X X X Extracts X X X X
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