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TMI Blog1992 (1) TMI 86X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax Officer, before granting deduction under the said provision, all deductions, including deduction under the said provision allowable under the Act except deduction under Chapter VI-A of the Act were to be allowed in working out the total income for the purpose of such deduction. It is not disputed that, in the assessment year under reference, the assessee was entitled to deduction equivalent to 40 per cent. of the total income. The controversy is with regard to the computation of total income, 40 per cent. of which is allowed as deduction. The Income-tax Officer, therefore, allowed deduction under section 36(1)(viii) of the Act to the extent of Rs. 58,52,184. The other question which arose for consideration before the Incometax Officer was with regard to the expenditure which the assessee had incurred in providing tea and refreshments to the members of its staff and visitors/customers, and entertaining customers at hotels. The total of such expenditure incurred by the assessee came to Rs. 64,576. The Income-tax Officer held that, out of the said expenditure, the assessee had incurred expenditure of Rs. 4,832 in giving parties to different persons in posh hotels. Suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the members of its staff and its constituents could not be considered to be high. According to the Commissioner, no part of the said expenditure could be considered to be lavish. Therefore, following the decision of this court in CIT v. Patel Brothers and Co. Ltd. [1977] 106 ITR 424, disallowance of Rs. 49,832 made by the Income-tax Officer was deleted. Being aggrieved by the order of the Commissioner, the Revenue carried the matter in appeal before the Income-tax Appellate Tribunal ("the Tribunal", for short). The Tribunal, following its earlier decisions, confirmed the view taken by the Commissioner on the aforesaid two claims made by the assessee, namely, (i) deduction under section 36(1)(viii), and (ii) deduction of the expenditure A part of which was held to entertainment expenditure by the Income-tax Officer. It is in the background of the above facts that the Tribunal has, at the instance of the Revenue, referred to us, for our opinion, the following two questions : " (1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the relief under section 36(1)(viii) of the Income-tax Act, 1961, should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amounts capitalised from reserves) of the corporation, no allowance under this clause shall be made in respect of such excess;" The argument of the Revenue is that section 2(45) defines " total income " to mean the total income referred to in section 5 computed in the manner laid down in the Act. The assessee's income is chargeable to income-tax under section 28 of the Act, which deals with profits and gains of business or profession. Section 29 lays down that income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43A. Section 36(1)(viii) clearly provides for the deduction of a certain percentage of the total income computed before making the deductions under Chapter VI-A carried to the reserve account. Therefore, according to the Revenue, the only deduction excluded for the purpose of working out deduction under section 36(1)(viii) is deductions under Chapter VI-A. Therefore, for the purpose of working out deduction under section 36(1)(viii), what is required to be done is to compute the total income after making all deductions as provided in section 29 which includes deduction under section 36(1)(viii) and apply the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the total income as reduced by such deduction for the purpose of working out the admissible deduction under that provision. Since section 36(1)(viii) itself provides that the total income for the purpose of the said provision is total income before the deduction under Chapter VI-A, it would mean that, for the purpose of working out deduction under that provision, the total income would be the total income before deduction (1) under Chapter VI-A, and (2) under that provision, [section 36(1)(viii)]. It may also be mentioned here that, what was implicit in section 36(1)(viii) has now been made explicit by subsequent amendment of the said clause (viii) with effect from April 1, 1985, by which it was specifically provided that total income for the purpose of applying the requisite percentage is total income before any deduction under that clause and Chapter VI-A. The Revenue, however, strongly relied on the decision of the Karnataka High Court in Karnataka State Financial Corporation v. CIT [1988] 174 ITR 206, in support of the view canvassed by it. That was a case in which the assessee, a State Financial Corporation, established under the State Financial Corporations Act, 1951, fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion gets exhausted and there is no question of again reducing the total income by such deduction and again applying the requisite or appropriate percentage for working out the admissible deduction. There is no justification for making the deduction twice over. The total income to which the appropriate percentage is to be applied to work out deduction under section 36(1)(viii) would obviously mean the total income before such deduction. Therefore, the expression "total income", in the context in which it is used in section 36(1)(viii), can only mean total income before deduction under that clause and Chapter VI-A. In our opinion, the provision is very clear and there is no need to evolve or apply any formula. Therefore, in our opinion, deduction under section 36(1)(viii) has to be worked out by applying the proper percentage to the total income computed before making any deduction under that clause and Chapter VI-A. We are fortified in the view which we are taking by the decisions of the Patna High Court in CIT v. Bihar State Financial Corporation [1983] 142 ITR 518, CIT v. Bihar State Financial Corporation [1983] 142 ITR 519 and CIT v. Bihar State Financial Corporation [1986] 15 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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