2011 (1) TMI 1184 - HC - Income Tax

Deduction under section 36(1)(viii) of the Income Tax Act - Assessing Officer disallowed the claim for the reason that appellant being a Scheduled Bank does not fall within the meaning of financial corporation referred to in section 36(1)(viii) of the Act Held that - assessee is not a financial corporation falling under section 36(1)(viii) of the Act, provisions of section 36(1)(viii) until it was amended by Finance Act, 2006 did not include Banking Companies governed by the provisions of the Banking Regulation Act, order of the Tribunal upheld and assessee s appeal dismissed

Summary

Issues:
Interpretation of the term "financial corporation" under section 36(1)(viii) of the Income Tax Act for the purpose of claiming deduction by a Scheduled Bank.

Analysis:
The appellant, a Scheduled Bank, claimed deduction under section 36(1)(viii) of the Income Tax Act for the assessment year 2004-2005, asserting its classification as a "financial corporation." The Assessing Officer disallowed the claim, leading to an appeal. The CIT(Appeals) ruled in favor of the appellant, considering it a "financial corporation." However, the Income Tax Appellate Tribunal overturned this decision, stating that a Scheduled Bank does not qualify as a "financial corporation" under section 36(1)(viii) of the Act. The appellant challenged this ruling, leading to the current appeal.

The primary consideration was whether the appellant, as a public limited company and a Scheduled Bank, meets the criteria of a "financial corporation" under section 36(1)(viii) of the Act. The deduction under this section pertains to profits earned from providing long-term finance for specific purposes by financial corporations. The amendment introduced by the Finance Act, 2006, effective from 1.4.2007, extended this benefit to Banking Companies prospectively. As the amendment specifically included Banking Companies for deduction under section 36(1)(viii), the appellant's claim for the year 2004-2005 was deemed ineligible.

The Court analyzed the legislative intent behind the definition of "financial corporation" in section 36(1)(viii) and the subsequent amendment. It noted that while Scheduled Banks are public companies, the Act distinguishes them separately, evident from section 36(1)(viia) dealing with Scheduled Banks. The specific provision for financial corporations under clause (viii) of section 36(1) includes public and Government companies within its definition. The Court highlighted that the Legislature's intent was clear in providing separate deductions for different types of entities, including Banking Companies under the amended provision.

The Court emphasized that Scheduled Banks and financial corporations, despite similarities in operations, are distinct entities under different regulatory frameworks. It observed that the Legislature's intent was to exclude Scheduled Banks from the definition of financial corporations until the 2006 amendment explicitly included Banking Companies. Consequently, the Court upheld the Tribunal's decision, dismissing the appellant's appeal based on the interpretation of section 36(1)(viii) and the legislative history surrounding the inclusion of Banking Companies for deductions under the provision.