1999 (8) TMI 117 - AT - Income Tax

Summary

Issues Involved:
1. Entitlement to deduction under section 36(1)(viii) of the Income-tax Act.
2. Validity of the transfer of funds from the Special Reserve Account to the Provision for Bad and Doubtful Debts Account.
3. Compliance with section 36(1)(viii) requirements.
4. Jurisdiction and application of mind by the Commissioner under section 263.

Issue-wise Detailed Analysis:

1. Entitlement to deduction under section 36(1)(viii) of the Income-tax Act:
The assessee, Kerala Financial Corporation, claimed a deduction of Rs. 70,04,148 under section 36(1)(viii) for the assessment year 1994-95, which was initially allowed by the Assessing Officer. The Commissioner later found that the entire amount in the Special Reserve Account had been transferred to the Provision for Bad and Doubtful Debts Account, leaving no balance in the Special Reserve Account. The Commissioner directed the withdrawal of the deduction granted, leading to the present appeal.

2. Validity of the transfer of funds from the Special Reserve Account to the Provision for Bad and Doubtful Debts Account:
The assessee argued that the creation of the reserve by debiting the profit and loss account fulfilled the condition under section 36(1)(viii). Subsequently, the amount was transferred to the Provision for Bad and Doubtful Debts Account in compliance with IDBI guidelines. The assessee contended that the transfer was a legitimate use of augmented resources and did not violate section 36(1)(viii). However, the Commissioner and the Tribunal found that the transfer defeated the intention of the Legislature, which required the reserve to be maintained.

3. Compliance with section 36(1)(viii) requirements:
The Tribunal examined whether creating the reserve by book entries without maintaining the amount in the Special Reserve Account constituted sufficient compliance with section 36(1)(viii). The Tribunal referred to the Supreme Court's decision in Indian Overseas Bank Ltd. v. CIT, which emphasized that the reserve should be a separate reserve and not be utilized for other purposes. The Tribunal concluded that the immediate transfer of the amount from the Special Reserve Account to another account did not comply with section 36(1)(viii). The amendment by the Finance Act, 1997, which required the reserve to be maintained, was also considered, but the Tribunal noted that the amendment clarified the existing requirement rather than introducing a new one.

4. Jurisdiction and application of mind by the Commissioner under section 263:
The assessee contended that the Commissioner had not exercised his discretion before issuing the notice under section 263 and had acted on the suggestion of the Audit Party. The Tribunal found no evidence to support this contention and noted that the Commissioner had applied his mind to the records and financial statements. The Tribunal upheld the Commissioner's order, stating that the Commissioner had found the Special Reserve under section 36(1)(viii) did not exist during the relevant previous year, as it had been transferred to the Provision for Bad and Doubtful Debts Account.

Conclusion:
The Tribunal dismissed the appeal by the assessee and upheld the Commissioner's order, concluding that the transfer of the amount from the Special Reserve Account to the Provision for Bad and Doubtful Debts Account did not comply with the requirements of section 36(1)(viii). The Tribunal also found that the Commissioner had validly exercised his jurisdiction under section 263.