2008 (7) TMI 982 - AT - Income Tax

Summary

Issues Involved:
1. Legality of the CIT(A)'s order.
2. Restriction of the claim under Section 36(1)(viii).
3. Exclusion of interest income from deduction under Section 36(1)(viii).
4. Disallowance of amount withdrawn from special reserve under Section 36(1)(viii).
5. Initiation of penalty proceedings under Section 271(1)(c).

Detailed Analysis:

Issue 1: Legality of the CIT(A)'s Order
The first ground was deemed general in nature and did not require adjudication by the Tribunal.

Issue 2: Restriction of the Claim under Section 36(1)(viii)
The Assessee claimed a deduction of Rs. 130.47 crore under Section 36(1)(viii), but the CIT(A) restricted it to Rs. 76.72 crore. The core question was whether the reserve created in a subsequent year could be considered for the deduction in the relevant year. The Tribunal noted that the legislative intent of Section 36(1)(viii) was to facilitate the building up of internal resources by financial corporations. The Tribunal referred to various judgments, including Karimjee P. Ltd. vs. DCIT and CIT vs. Orient Express Company Pvt. Ltd., which supported the creation of reserves after the closure of accounts. The Tribunal concluded that a reserve created in subsequent years, before the finalization of the grant of deduction, should be considered. The Tribunal allowed the deduction to the extent of Rs. 129.72 crore, partially allowing the assessee's claim.

Issue 3: Exclusion of Interest Income from Deduction under Section 36(1)(viii)
The CIT(A) excluded Rs. 1,29,34,697 from the deduction, arguing that interest on investments and deposits beyond three months was taxable under "income from other sources" and not as "business income." The Assessee conceded that this ground was liable to be rejected based on a prior ITAT decision for AY 1996-97. The Tribunal rejected this ground as not pressed.

Issue 4: Disallowance of Amount Withdrawn from Special Reserve under Section 36(1)(viii)
The CIT(A) upheld the disallowance of Rs. 4.60 crore withdrawn from the special reserve, arguing that the reserve was not maintained as required. The Tribunal observed that the requirement to "maintain" the special reserve was introduced from AY 1998-99 and was not applicable to AY 1997-98. The Tribunal set aside the orders of the lower authorities and allowed this ground in favor of the assessee.

Issue 5: Initiation of Penalty Proceedings under Section 271(1)(c)
The Assessee conceded that this ground was liable to be rejected because the Committee on Disputes (COD) had not accorded approval to prosecute this ground before the Tribunal. The Tribunal rejected this ground.

Conclusion
The Tribunal partially allowed the appeal, granting relief on the restriction of the claim under Section 36(1)(viii) and the disallowance of the amount withdrawn from the special reserve. Other grounds were either not pressed or rejected. The order was pronounced on July 31, 2008.