2007 (1) TMI 301 - AT - Income Tax

Summary

Issues Involved:
1. Determination of deduction allowable u/s 36(1)(viii) of the Income-tax Act, 1961.

Summary:

Issue 1: Determination of deduction allowable u/s 36(1)(viii) of the Income-tax Act, 1961

The assessee, a State Financial Corporation, claimed a deduction of Rs. 2,59,51,362 u/s 36(1)(viii) after creating a special reserve of Rs. 2,75,44,217. The Assessing Officer (AO) determined the deduction at Rs. 1,41,19,217, considering the net reserve created after withdrawals. The CIT (Appeals) upheld the AO's decision.

The assessee contended that the AO erred by treating withdrawals from the opening balance of the special reserve as affecting the reserve created during the year. The assessee argued that it created a special reserve of Rs. 2,75,44,217 and that the withdrawals were for specific purposes, not infringing section 36(1)(viii).

The CIT (Appeals) disagreed, stating that the reserve must be maintained for its specific purpose, and the amount claimed under section 36(1)(viii) was not fully credited to the reserve in the balance sheet.

Before the Tribunal, the assessee argued that the conditions for claiming the deduction were met and that the basis for the AO's addition was not confronted during the assessment proceedings. The assessee explained that withdrawals were necessary to meet obligations and that the reserve created was Rs. 2,75,44,217. The assessee also noted that the amendments requiring the reserve to be "maintained" were effective from 1-4-1998 and not applicable for the year under consideration.

The Tribunal found that section 36(1)(viii) required the creation of a special reserve, not its maintenance, for the relevant assessment year. The amendment adding the words "and maintained" was effective from 1-4-1998, indicating no such requirement for the year under consideration. The Tribunal concluded that the assessee met the pre-condition for the deduction by creating a special reserve of Rs. 2,75,44,217 and directed the AO to allow the deduction as claimed.

In the result, the appeal of the assessee was allowed.