2015 (6) TMI 34 - AT - Income Tax

Disallowance u/s 36 1 (viii - no reserve was created - appellant submits that the appellant may be permitted now to create such reserve - Held that - The case of the assessee that admittedly it had not created any reserve in its books of account before claiming the said deduction under section 36(1)(viii) of the Act on the surmise that no such reserve is to be created in view of wording of the section finds no merit in the said plea of the assessee in view of the similar wordings in section 36(1)(viia) of the Act which have been interpreted in the case of State Bank of Patiala vs. CIT (2004 (5) TMI 12 - PUNJAB AND HARYANA High Court) which, in turn, has been applied in the case of Shri Mahalaxmi Co-op. Bank Ltd. vs. ITO (2014 (1) TMI 1366 - ITAT PUNE). In the absence of any reserve being created the assessee is not entitled to the said claim of deduction under section 36(1)(viii) of the Act. Plea of the assessee that it should be allowed an opportunity to create the said reserve in its books of account now - Held that - In view of the clear wording of the section that where it is provided that the special reserve is to be created and maintained by the special entity from its profit derived from the eligible business, then such non-creation of special reserve by the assessee cannot be made good by creating any reserve on a later date. The books of account of the assessee are admittedly audited and in the absence of any reserve being created in such audited books of account, no remedy is available to the assessee to create such a reserve on a later date. The facts in the case of CIT vs. Punjab State Industrial Development Corporation (2009 (11) TMI 37 - PUNJAB AND HARYANA HIGH COURT) were different, wherein the assessee had already created a reserve before claiming the deduction under section 36(1)(viii) of the Act. However, the assessee therein was entitled to a higher deduction under section 36(1)(viii) of the Act for which opportunity was granted to create additional reserve. In the facts of the present case, there was no reserve created by the assessee and in the absence of same, we find no merit in the alternate plea raised by the assessee and the same is dismissed.- Decided against assesse.

Summary

Issues Involved:
1. Confirmation of disallowance under section 36(1)(viii) of the Income-tax Act, 1961.
2. Requirement of debiting the reserve to the Profit and Loss Account for claiming deduction under section 36(1)(viii).
3. Request to create the reserve under section 36(1)(viii) post-facto.

Detailed Analysis:

1. Confirmation of Disallowance under Section 36(1)(viii):
The primary issue in this appeal is the disallowance of Rs. 11,51,111 claimed by the assessee under section 36(1)(viii) of the Income-tax Act, 1961. The assessee, a Co-operative Bank, did not create a special reserve in its books of account for the financial year 2009-10 but claimed the deduction in the revised return. The Assessing Officer disallowed the claim due to the absence of a reserve created during the relevant financial year. The CIT(A) upheld this disallowance, noting that the deduction under section 36(1)(viii) necessitates the creation and maintenance of a special reserve in the books of account, which the assessee failed to do.

2. Requirement of Debiting the Reserve to the Profit and Loss Account:
The CIT(A) emphasized that the special reserve must be created out of the total income before any deduction under Chapter VI-A and must be reflected in the books of account. The CIT(A) relied on the judgment of the Hon'ble Punjab & Haryana High Court in State Bank of Patiala vs. CIT, which held that creating a provision for bad and doubtful debts in the books of account is necessary for claiming deductions under section 36(1)(viia). The same principle was applied to section 36(1)(viii), requiring the creation of a reserve in the books of account for the deduction to be allowable.

3. Request to Create the Reserve Post-Facto:
The assessee requested permission to create the reserve post-facto during the assessment proceedings, which was rejected by the CIT(A). The Tribunal noted that the requirement under section 36(1)(viii) is to create the reserve from the profits of the relevant financial year before claiming the deduction. The Tribunal found no merit in the assessee's plea that no reserve creation was necessary, citing similar requirements in section 36(1)(viia) and the interpretation by the Hon'ble Punjab & Haryana High Court. The Tribunal also dismissed the alternate plea to create the reserve later, stating that the reserve must be created in the audited books of account of the relevant financial year, and no remedy exists to create such a reserve at a later date.

Conclusion:
The Tribunal upheld the CIT(A)'s order, confirming the disallowance of Rs. 11,51,111 under section 36(1)(viii) due to the assessee's failure to create a special reserve in its books of account. The Tribunal also rejected the request to create the reserve post-facto, emphasizing the necessity of creating the reserve from the profits of the relevant financial year before claiming the deduction. Consequently, the appeal of the assessee was dismissed.