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TMI Blog2007 (10) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... ances of the case, the Tribunal was right in confirming the Commissioner of Income-tax (Appeals)' view that deduction under section 36(1)(viii) at 40 per cent. was to be worked out on the gross total income before making deduction under this section as well as under Chapter VI-A of the Income-tax Act, 1961 ?" 3 When the aforesaid question of law came up for consideration before the Division Bench on August 14, 2003, the Division Bench presided over by the then Chief Justice opined that the view of this court in the case of CIT v Rajasthan Financial Corporation (No. 2) [1998] 229 ITR 252 requires reconsideration. This is how the matter has come up before this Full Bench. 4 Section 36 of the Income-tax Act, 1961 (for short, "the Income-tax Act") provides for certain deductions while computing the income referred to in section 28. Clause (viii) thereof as was obtaining prior to April 1, 1985, and applicable for the assessment year 1983-84 reads thus "36. Other deductions.—( 1) … (viii) in respect of any special reserve created by a financial corporation which is engaged in providing long-term finance for industrial or agricultural development or development of inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt followed the decision of the Patna High Court in the case of CIT v. Bihar State Financial Corporation [1983] 142 ITR 518 and held thus (page 89) "The controversy can be illustrated by giving an example Assuming the total income before applying this provision to be Rs. 1,000, according to the assessee, for calculating the deduction under this section (and if this sum of Rs. 1,000 is put in a reserve fund), 40 per cent. should be calculated on Rs. 1,000 and a deduction of Rs.. 400 is to be given. According to the Revenue, the deduction at 40 per cent. should be calculated on the figure of total income arrived at after this deduction also is applied for which a notional calculation is to be done by adding 40 per cent., to the total income and then calculating the deduction to be allowed at 40 per cent. of Rs. 1,400. The Income-tax Officer has adopted the method urged by the Revenue, but the first appellate authority and the Tribunal have not accepted it and reliance was placed on the instructions of the Board, which were in vogue during the relevant accounting and assessment year: The applicability of the said instructions is the subject-matter of question No. 1.We have co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -tax (Appeals), the Revenue preferred an appeal before the Tribunal. The Tribunal dismissed the appeal. Aggrieved by the order passed by the Tribunal, the Revenue sought reference and it is at the instance of the Revenue that the aforesaid question of law has been referred to this court for its opinion. Having heard learned counsel for the parties, we have come to the conclusion that this reference must be answered in the affirmative and against the Revenue. Clause (viii) of section 36(1) of the Act provides for deduction on the basis of total income computed before making any deduction under Chapter VI-A of the Act. 'Total income' as defined by section 2(45) of the Act means the total amount of income referred to in section 5, computed in the manner laid down in the Act. Chapter III of the Act refers to income which do not form part of total income. Chapter VI-A provides for certain deductions which are required to be made in computing total income. However, section 36(1) (viii) of the Act provides that deduction admissible under that provision has to be calculated on the basis of total income computed before making any deduction under Chapter VI-A of the Act. In view of this pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , an amount not exceeding forty per cent, of the total income computed before making any deduction under Chapter VI-A has to be deducted. The total income on which the deduction is admissible has to be the total income before making any deduction under Chapter VI-A of the Act only. We are, therefore, of the view that the Tribunal was justified in setting aside the order of the Commissioner passed under section 263 of the Act. It was right in holding that the deduction permissible under section 36(1)(viii) of the Act was to be calculated on the assessee's total income as it stood before the deduction allowable under section 36(1)(viii) of the Act. A view similar to ours has been expressed by the Patna High Court in CIT v. Bihar State Financial Corporation [1983] 142 ITR 518 and CIT v. Bihar State Financial Corporation [1986] 159 1TR 275 (Patna), the Andhra Pradesh High Court in CIT v. Andhra Pradesh State Financial Corporation [1989] 175 ITR 87, and the Madhya Pradesh High Court in CIT v. M. P. Audyogik Vikas Nigam Ltd. (No. 2) [1989] 178 ITR 179 (MP). In view of our analysis, we differ from the contrary view expressed by the Karnataka High Court in Karnataka S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance Bill under 'Income-tax', at paragraph 106, thus (See [1985] 152 ITR (St.) 175). '106. Financial corporations engaged in providing long-term finance for 'industrial or agricultural development in India or public companies providing long-term finance for construction or purchase of houses in India for residential purposes are entitled to a deduction, in the computation of their taxable profits, of an amount not exceeding 40 per cent. of the total income carried to a special reserve. Under the existing provisions, the total income for this purpose is the total income as computed before making any deduction under Chapter VI-A. It is proposed to provide that the deduction shall be for an amount not exceeding 40 per cent. of the total income as computed before making any deduction under the aforesaid provision and Chapter VI-A.' A careful analysis of the amendment effected by the 1985 Act and the object with which the same has been amended, far from sup porting the case of the assessee, supports the case of the Revenue. In CIT v. Bihar State Financial Corporation [1983] 142 ITR 519 (Patna) on which very strong reliance was placed by Sri Natarajan, the Patna High Court cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of CIT v. Orissa State Financial Corporation [1993] 201 ITR 595 has observed that the total income on which the deduction under section 36(1)(viii) of the Income-tax Act is allowable should be computed before making the deduction in terms of section 36(1)(viii). The Orissa High Court in the case of CIT v. Industrial Promotion and Investment Corporation of Orissa [1993] 199 ITR 761 has followed the decisions given in the case of CIT v. Bihar State Financial Corporation [1983] 142 ITR 518 (Patna), CIT v. Andhra Pradesh State Financial Corporation [1989] 175 ITR 87 (AP) and CIT v. M. P. Audyogik Vikas Nigam Ltd. (No. 2) [1989] 178 ITR 179 (MP) and the decision given in the case of Karnataka State Financial Corporation v. CIT [1988] 174 ITR 206 (Karn) was not followed. By the amendment by the Finance Act, 1985, the words 'computed before making any deduction under this clause and Chapter VI-A' were substituted for the words 'computed before making any deduction under Chapter VI-A'. This amendment was brought into force with effect from April 1, 1985, and was applicable to the assessment year 1985-86. The deduction which is permissible in com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oration [1983] 142 ITR 518 and overruled the decision of the Karnataka High Court in the case of Karnataka State Financial Corporation v. CIT [1988] 174 ITR 206. The question before the Supreme Court in the case of Kerala State Industrial Development Corporation [1998] 233 ITR 197 for consideration was thus (page 198) : "Whether the Tribunal was right in law in holding that the statutory deduction under section 36(1)(viii) of the Income-tax Act, 1961, should be calculated on the total income before deduction of the amount allowable in the section ?" 14 The aforesaid question of law before the Supreme Court was in respect of the assessment year 1978-79. The relevant provision for the said assessment year 1978-79 was exactly the same provision with which we are concerned. The Supreme Court held that the view of the Kerala High Court that in computing the total income for the purpose of section 36(1) (viii) of the Income-tax Act, 1961, the total income has to be computed in accordance with the provisions of sections 30 to 43A except section 36(1) (viii) was in accord with the decisions of the Patna and the Madhya Pradesh High Courts (decisions which we have noticed ab ..... X X X X Extracts X X X X X X X X Extracts X X X X
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