Deduction u/s 36(1)(viii) of Income-tax Act, 1961. - Income Tax - 1275/CBDT

INSTRUCTION NO. 1275/CBDT Dated : August 13, 1979 Section(s) Referred: 36(1)(viii) Statute: Income - Tax Act, 1961 Under section 36(1)(viii) of the Income-tax Act, 1961, financial corporations engaged in providing long term finance for industrial or agricultural development in India are entitled to a deduction, in the computation of their taxable profits, of the amount transferred by them out of such profits to a special reserve account, upto a specified percentage of their total income as computed before making any deduction under Chapter VI-A of that Act. This deduction is available only where the financial corporation is approved by the Central Government for the purposes of this section. A question may arise whether the specified percentage of rate is to be applied to the total income (computed before making any deduction under Chapter VI-A) before or after making any deduction under section 36(1)(viii) of the Income-tax Act, 1961. 2. This question was examined by the Board on an earlier occasion and the decision arrived at was communicated in Board's Circle letter F.No. 36/19/65-IT(Audit) dated 25-11-1969. The view taken at that time was that the deduction to be allowed under section 36(1)(viii) is to be calculated by applying the specified percentage to the total income arrived at after allowing the deduction under section 36(1)(viii). Subsequently, however, the Board issued a clarification to the Department of Banking, vide its U.O. No. 204/35/73-ITA-II, dated 12.11.1973 wherein it was clarified that the percentage would be applied to the total income computed before making any deduction under Chapter VI-A as well as any deduction under section 36(1)(viii) of the Income-tax Act. Thus the above clarification had the effect of negating the earlier instructions of the Board dated 25.11.1969. 3. The matter has been re-examined by the Board and it has been decided that the earlier view communicated vide letter dated 25.11.1969 is correct. It means that the specified percentage will be applied to the total income (before making any deduction under Chapter-VIA) as reduced by the deduction allowable under section 36(1)(viii). 4. The Board desire that the pending assessments be completed in accordance with the aforesaid instructions. Remedial action wherever feasible should also be taken to withdraw the higher deduction allowed as a result of the clarification issued by the Board to the Department of Banking, vide letter dated 12.11.1973.