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TMI Blog2012 (2) TMI 687X X X X Extracts X X X X X X X X Extracts X X X X ..... ct. Before claiming this deduction, the income from housing finance business was ₹ 37,16,06,408/-. On this income the assessee claimed deduction u/s.36(1)(viii) of ₹ 14,79,41,734/-. The Assessing Officer examined the balance sheet of the assessee in the light of the proviso to Section 36(1)(viii) and it was noticed that the paid up capital was ₹ 20,48,52,500/- and the general reserve-1 was ₹ 29,89,00,000/-. The assessee was asked to explain as to whether it had complied with the proviso to section 36(1)(viii), to which the assessee submitted that it had paid up capital of ₹ 20,48,75,450/-, general reserves -1 of ₹ 29,89,00,000/-, share premium of ₹ 5,25,00,000/- and profit and loss account balance of ₹ 4,85,44,330/-, which would total to ₹ 60,48,19,780/-, and pleaded that all these four amounts should be considered for computing the aggregate specified in the proviso to Section 36(1)(viii). By this the intention of the assessee was to increase the figure of twice the amount of paid up share capital and of general reserves. . It was observed by the Assessing Officer that in the assessment year 2003-04 also the assessee had taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... object of carrying on the business of providing long term finance for construction or purchase of houses in India for residential purposes. The provisions regarding this special deduction also existed in the IT Act, 1922 and were retained in the IT Act, 1961. The scope of the provisions of the said clause was later on widened by the Finance (No.2) Bill, 1971 to include in its ambit the approved financial corporations engaged in providing long term finance for agricultural development in India. The objective of this deduction originally was to stimulate industrial development of the country. The benefit of this deduction was also intended to enable corporations to augment their initial low equity base on account of limited accessibility to capital market. In the wake of liberalization, from the beginning of the 90's there has been considerable expansion and deepening of the capital market. Accessibility to capital market has markedly improved. The Finance Act 2007, therefore, has limited the deduction to 20% of the profits derived from the business of providing long term finance. Considering the provision for outer limit to the deduction, which is twice the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us provisions of Incometax law. ii) The learned Commissioner of Income-tax (Appeals)-1 has grossly erred in not appreciating the fact the word PAID UP CAPITAL + GENERAL RESERVES has to be read as a single coined word and not separately which affects the very fundamental purpose of providing the relief under the provisions of Sec.36(1)(viii) and further the learned Commissioner of Income-tax (Appeals)-1 has failed to appreciate the fact that the Coined Word PAID UP CAPITAL + GENERAL RESERVES is already defined as NET WORTH under other laws and the learned Commissioner of Income-tax (Appeals)-1 ought to have considered the arguments made by the appellant in this regard and the Learned Commissioner of Income-tax (Appeals)-I, has erred in not appreciating the written arguments made by the appellant regarding the meaning of PAID UP CAPITAL + GENERAL RESERVES . iii) The learned Commissioner of Income-tax (Appeals)-1 has grossly erred in not considering the Budget Speech made by the Honorable Finance Minister which clearly established the meaning of the Coined Word ( PAID UP CAPITAL + GENERAL RESERVES ) as NET WORTH. iv) The learned Commissioner of Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36(1)(Viii) : Provided : that where the aggregate of the amounts carried to such reserve account from time to time exceeds [ twice the amount of] the paid up share capital and [ of the general reserves ] of the corporation [or as the case may be, the company], no allowance under this clause shall be made in respect of such excess. The said proviso before its amendment in 1997, (as applicable up to Assessment year 1996 -97) stated as under; Provided further that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid-up share capital [Excluding the amounts capitalized from reserves] The learned representative submitted that from the above proviso to s. 36(1)(viii) read with the proviso before its amendment in 1997, brings the following two things. 1. The proviso as applicable upto Asst.year 1996 -97 restricted the total deduction upto twice the Paid up capital - and such paid up capital was one that has been allotted for wholly for a consideration of cash, and the bonus shares issued out of capitalization of Capital reserves were not to be considered. In o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of that provision. It may be noted that the expressed used is not tax but the tax . The definite article the must have a refrrence to something said earlier. It can only refer to the tax, if any payable by the assessee mentioned in the first part of S. 271(1)(a)(i). The expression used is not tax but the tax . That expression can be reasonably understood as referring to the expression earlier used in the provision, namely, the amount of the tax, if any, payable by the assessee. He further submitted that in the present case of the appellant also, in the proviso to s.36(1)(viii) the word the General Reserves appear after the word Paid Up Share Capital and by applying the ratio held by their Honorable Lordships of the Supreme Court of India, it becomes very clear that the words, PAID UP CAPITAL AND GENERAL RESERVES are inseparable and have to be read and understood together, and not separately as separate words carrying different meanings and or expressions. 3. The combined word - SUM OF PAID UP CAPITAL AND FREE RESERVE has already been defined under the Companies Act, 1956, as NET WORTH and for the purposes of the said definition, the expla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nister in his budget speech made on February 28, 2007 before the Honorable Parliament while presenting his budget for the year 2007 - 08, and in respect of proposing an amendment to the very provisions of S. 36(1)(viii) has mentioned as under; Reference: Finance Minister Budget Speech - ITR -Sl.No: 172: I also propose to partially modify a deduction that is available to certain companies. Without altering the overall limit of the special reserve equal to twice the Net worth under section 36(1)(viii) of the Income-tax act, I propose to stretch the period by restricting the deduction to 20% of the profits each year and limit the benefit to banks and certain financial corporations. Even from the above budget speech of the Honorable Finance Minister it can be seen that the word used is Net Worth , which is in turn defined as a Sum of Paid up Capital and Free Reserves , which is very similar or same as used under the provisions of S. 36(1)(viii). It has been held by their Honorable Lordships of the Supreme Court of India in; [A] K.P.Verghese Vs Income-Tax Officer Anr (1981)131 ITR 597 (SC) INTERPRETATION OF STATUTES - RULE OF INTERPRETATION ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purposes of interpretation of the said provision, and the said words cannot be separately interpreted. The words used in the proviso to S. 36(1)(viii) is same as is used under the definition of the word NET WORTH under the Companies Act, 1956, which applies to all the Companies, and more so to the Appellant being a Company Incorporated under the Companies Act, 1956. The speech of the Honorable Finance Minister also removes or clears all doubts in respect of such interpretation, since the word used by the Honorable Finance Minister in his above budget Speech also is NET WORTH . According to the learned representative, in other words, as the word Sum of Paid Up Capital and of the Free Reserve (General Reserves) has already been defined under another Law governing the Companies, and the said word is not defined under the provisions of Income-Tax Act, 1961, the said definition squarely becomes applicable in the case of the Appellant. The provisions of S. 36(1)(viii) providing the statutory allowance of 40% of its profits from its business of Long term housing finance was provided with a social objective of providing a roof to every citizen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the assets of an enterprise, after deducting all its liabilities. Net worth is an important determinant of the value of a company, considering it is composed primarily of all the money that has been invested since its Inception, as well as the retained earnings for the duration of its operation. Gross Net worth is the sum of the Equity Capital and the Reserves (Excluding revaluation reserve ). Tangible Net Worth is Gross Net Worth less Intangibles, miscellaneous expenses not written off and debit balance in Profit and Loss Account. Honorable Lordships, the appellant humbly submits that, the definition provided under the Companies Act, 1956 read with the Budget speech of the Honorable Finance Minister clearly establishes the fact that the word used in the proviso to S. 36(1)(viii) is nothing but NET WORTH and no other meaning can be assigned to the said words other than what is already defined under Company Law. The learned representative submitted that the definition to words provided under the laws promulgated by the Honorable Parliament has to be given effect and as already held by the Honorable courts of India, that while interpreting beneficial provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. The assessee claimed that the share premium account, P L A/c Balance and Special Reserve Opening Balance also to be considered as General Reserves. 6. Now the question to be decided is as to whether the items mentioned at slno.2,3 4 can be considered as items of general reserve. 7. There is no definition regarding term General Reserves under the Income tax Act. There is no positive definition also under the Companies Act. 8. The CIT(A) in his order discussed these issues at page no 15-20. After considering the provisions in the Companies Act, the CIT(A) came to the following findings it is thus clear that a general reserve should be a revenue reserve and should be a free reserve in the sense that it should be capable of distribution as dividend freely through the profit and loss account. 9. The CIT(A) justified the above finding with various judicial decisions at Page no.17 18 of his order. 10. As regards share premium A./c it is stated that it is not coming under general Reserves as it is not a free reserve and the same can t be distributed through P L a/c( Page No. 19 and para 3.5.1 of CIT(A) order) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ward of set off . There is a discussion about networth in said decision and the same can be at best can be regarded as an observation and not as a ratio laid down by the Supreme Court. 20. Similarly the decision CIT vs [ESKAYEF LTD 211 CTR (Kar) 31 rendered by Hon ble High Court of Karnataka was in the context of companies(Profits) surtax act 1964 and there is a reference to the reserve but there is no discussion of distinction between reserve and general reserve. 21. As discussed by CIT(A) the word general reserve used with specific purpose and should give specific meaning and it can t be equated with either capital reserve or special reserve or ordinary reserve etc. 22. The reference to general reserves in plural do not envisage to bring into its scope of other items of share premium, P L A/c balance and Special Reserve Opening Balance. Therefore the assessee s argument that use of plural in respect of general reserves does not help the assessee s case. In view of the above submissions, the learned DR submitted that the decision of CIT(A) deserves to be upheld and assessee s appeal may be dismissed. 07. We have heard the riv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tributed through the profit and loss account. Therefore, it is a free reserve. In terms of the Companies Act, the balance in share premium account cannot be distributed through the profit and loss account. Due to this incapacity, it is not a revenue reserve. Therefore, it is not a general reserve. 3.5.2. Balance in Profit and loss account : A reserve is appropriated out of profits. The balance under profit and loss account in the balance sheet cannot be called a reserve since the amount is not transferred to the reserve account. Items 4 5 under reserves and surplus (schedule 6 of the Companies Act) relate to other reserves and surplus is balance in profit and loss account. This indicates that balance in profit and loss account is distinct from reserves. The amount in the profit and loss account cannot be considered a reserve. 3.5.3. Special Reserve : It is contended that a special reserve is also one form of general reserve belonging to the company, retained and invested in the business of the company. It has all the characteristics of other reserves. This argument of the appellant does not conform to the meaning of special reserve u/s.36(1)(viii) of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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