Rajasthan H.C : The statutory deduction under s. 36(1)(viii) of the IT Act, 1961, should be calculated on the total income before deduction of the amount allowable in the section

High Court Of Rajasthan : Full Bench

CIT vs. Rajasthan Financial Corporation

Section 36(1)(viii)

Asst. Year 1983-84

R.M. Lodha, Shiv Kumar Sharma & Ashok Parihar, JJ.

IT Ref. No. 39 of 1989

5th October, 2007

ORDER

R.M. LODHA, J. :

In the case of CIT vs. Rajasthan Financial Corporation (1997) 140 CTR (Raj) 47 : (1998) 229 ITR 252 (Raj), the Division Bench of this Court took the view that the allowance under s. 36(1)(viii) of the IT Act, 1961 is to be computed before making any deduction under Chapter VI-A as well as any deduction under s. 36(1)(viii) of the Act.

2. The Tribunal, Jaipur Bench, Jaipur for the asst. yr. 1983-84, in relation to assessment of the respondentRajasthan Financial Corporation (for short, ‘the Corporation’) referred the following question of law for answer by this Court :

“Whether on the facts and in the circumstances of the case, the Tribunal was right in confirming the CIT(A)’s view that deduction under s. 36(1)(viii) @ 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 IT Act, 1961 ?”

3. When the aforesaid question of law came up for consideration before the Division Bench on 14th Aug., 2003, the Division Bench presided over by the then Chief Justice opined that the view of this Court in the case of CIT vs. Rajasthan Financial Corporation (cited supra) requires reconsideration. This is how the matter has come up before this Full Bench.

4. Sec. 36 of the IT Act, 1961 (for short, ‘the IT Act’) provides for certain deductions while computing the income referred to in s. 28. Clause (viii) thereof as was obtaining prior to 1st April, 1985 and applicable for the asst. yr. 1983-84 reads thus : “36 Other deductions. (1)………………… (i) to (vii) ……….. (viii) in respect of any special reserve created (and maintained) by a financial corporation which is engaged in providing long-term finance for industrial or agricultural development or development of infrastructure facility in India or by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes, an amount not exceeding forty per cent of the profits derived from such business of providing long-term finance computed under the head ‘Profits and gains of business or profession’ [before making any deduction under this clause] carried to such reserve account :

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. Explanation—In this clause,— (a) ‘financial corporation’ shall include a public company and a Government company; (b) “public company” shall have the meaning assigned to it in s. 3 of the Companies Act, 1956 (1 of 1956);”

In a long line of cases, almost all the High Courts (except Karnataka High Court) has taken the view that the total income on which the deduction under s. 36(1)(viii) of the IT Act is allowable should be computed before making the deduction in terms of s. 36(1)(viii). In other words, the deduction which is permissible in computing the taxable profits of the financial corporation is in respect of an amount transferred by them to the special reserve account upto 40 per cent on their total income computed before making any deduction and that amount of 40 per cent is not to be worked out on the net income.

In the case of CIT vs. Bihar State Financial Corporation (1983) 142 ITR 518 (Pat), the Division Bench of Patna High Court was concerned with the aforesaid provision. Relying upon its earlier decision, the Patna High Court held that the statutory deduction under s. 36(1)(viii) of the IT Act available to a financial corporation in providing long-term finance for housing should be calculated on the total income before deduction of the amount allowable under s. 36(1)(viii).

The Andhra Pradesh High Court in the case of CIT vs. Andhra Pradesh State Financial Corporation (1989) 175 ITR 87 (AP) was also seized with the identical question. The Andhra Pradesh High Court followed the decision of Patna High Court in the case of CIT vs. Bihar State Financial Corporation (supra) and held thus : “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 ITO 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 considered it appropriate to examine this question without reference to any of the circulars of the Board.

Learned counsel for the Revenue has placed reliance on the definition of ‘total income’ in s. 2(45) of the Act and contended that for the purpose of giving any deduction, the income as computed in accordance with the Act alone will have to be taken into account, that is, after giving effect to the deduction mentioned in this section and he supported the calculation adopted by the ITO. He has not been able to cite any authority in support of this contention. According to learned counsel for the assessee, the definition in s. 2(45) will have to be read in the context of the language used in the present section. Instead of adopting a circuitous method, a simple deduction calculated at 40 per cent of the total income arrived at that stage is to be taken into consideration for applying this section. Any notional addition to the income for calculation of a statutory deduction is not justified. He has relied upon two decisions of the Patna High Court in CIT vs. Bihar State Financial Corporation (1983) 142 ITR 518 (Pat) and CIT vs. Bihar State Financial Corporation (1986) 55 CTR (Pat) 132 : (1986) 159 ITR 275 (Pat). In the earlier decision, the aforesaid provision has been considered at length and a similar contention of the Revenue has been negatived. In our view also, this is a correct approach. Our answer to question No. 2 is in the affirmative and in favour of the assessee.”

8. The question with which we are concerned also came up for consideration before the Division Bench of the Madhya Pradesh High Court in the case of CIT vs. M.P. Audyogik Vikas Nigam Ltd. (1989) 77 CTR (MP) 9 : (1989) 178 ITR 177 (MP). The Division Bench of the Madhya Pradesh High Court held thus : “For the assessment years in question, the assessee claimed exemption of a portion of its income under the provisions of s. 36(1)(viii) of the Act. The ITO allowed the deduction on the basis of the total income as reduced by the deduction under s. 36(1)(viii) of the Act. On appeal, the CIT(A) held that the assessee was entitled to deduction under s. 36(1)(viii) of the Act on the basis of total income arrived at before making any deduction under s. 36(1)(viii) of the Act. Aggrieved by the order passed by the CIT(A), 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 s. 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 s. 2(45) of the Act means the total amount of income referred to in s. 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, s. 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 provision, it would not be permissible for the assessing authority, as held in CIT vs. Bihar State Financial Corporation (1983) 142 ITR 518 (Pat), to find out what would be the total income after making the deduction admissible under s. 36(1)(viii) of the Act and then limit the amount of deduction to 40 per cent of the total income, as reduced by the deduction under s. 36(1)(viii) of the Act. In our opinion, the Tribunal was right in holding that the deduction permissible under s. 36 (1)(viii) of the Act had to be calculated on the basis of the total income of the assessee as it stood before the deduction allowable under s. 36(1)(viii) of the Act.”

9. In the case of CIT vs. Industrial Promotion & Investment Corporation of Orissa (1992) 103 CTR (Ori) 222 : (1993) 199 ITR 761 (Ori), the Division Bench of Orissa High Court considered the question whether the total income on which deduction under s. 36(1)(viii) of the IT Act has to be computed must be calculated before deducting the relief allowable under s. 36(1)(viii). The Division Bench presided over by A. Pasayat, J. (as his Lordship then was) considered the statutory provisions contained in s. 36(1)(viii) as was obtaining prior to an amendment and followed the view of Patna High Court, Andhra Pradesh High Court and Madhya Pradesh High Court. This is what the Division Bench of Orissa High Court held : “Before the amendment, obviously, the deduction under the provision, i.e., s. 36(1)(viii), was not to be considered. ‘Total income’ is defined in s. 2(45) of the Act. It means the total amount of income referred to in s. 5, computed in the manner laid down in the Act. Chapter III deals with incomes which do not form part of total income. Certain deductions are provided for in Chapter VIA. For the purpose of determining the maximum limit of allowable deduction in cl. (viii), the figure of total income computed before making any deduction under Chapter VI-A has got to be taken. According to the Department, the total income must be the total assessed income plus the amount of deduction allowable under Chapter VI-A of the Act. If such a view is taken, the amended provisions would be wholly otiose and inapt. If the position was as suggested by the Department, the amendment was not necessary. Under the provisions of the relevant clause of s. 36(1), an amount not exceeding 40 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 CIT passed under s. 263 of the Act. It was right in holding that the deduction permissible under s. 36(1)(viii) of the Act was to be calculated on the assessee’s total income as it stood before the deduction allowable under s. 36(1)(viii) of the Act. A view similar to ours has been expressed by the Patna High Court in CIT vs. Bihar State Financial Corporation (1983) 142 ITR 518 (Pat) and CIT vs. Bihar State Financial Corporation (1986) 55 CTR (Pat) 132 : (1986) 159 ITR 275 (Pat), the Andhra Pradesh High Court in CIT vs. Andhra Pradesh State Financial Corporation (1989) 175 ITR 87 (AP), and the Madhya Pradesh High Court in CIT vs. M.P. Audyogik Vikas Nigam Ltd. (1989) 77 CTR (MP) 9 : (1989) 178 ITR 179 (MP). In view of our analysis, we differ from the contrary view expressed by the Karnataka High Court in Karnataka State Financial Corporation vs. CIT (1988) 174 ITR 206 (Kar).”

10. The view of Karnataka High Court is, however, otherwise. They departed from the view of Patna High Court, Andhra Pradesh High Court, Madhya Pradesh High Court and Orissa High Court. In the case of Karnataka State Financial Corporation vs. CIT (1988) 174 ITR 206 (Kar), the Karnataka High Court gave its reasoning that under s. 36(1)(viii), the only exception that had to be made is that the total income for the purpose of s. 36(1)(viii) must be the one “computed before making any deduction under Chapter VI-A” and no other exception has been made and since there is no exception specifically made in the section itself, making an exception in respect of deduction under s. 36(1)(viii) would be contrary to the language of the section. This is how the Karnataka High Court dealt with the matter : “Sec. 36(1)(viii) allows a special deduction on the special reserve created by the specified financial institutions, computing the same in the manner specified therein. The deduction allowed is not a general deduction to all taxpayers of all their incomes but a special deduction only on special reserve to the extent and in the manner indicated therein. The manner and method of allowing the deduction is indicated in the section itself and the same must be worked out only in terms of that section and on no other basis. Whether that should be done before or after computing the total income was exclusively for the legislature to decide. If the legislature provides that the same should be done before computing the total income, then that must be done only before that and not after that as suggested by the assessee. We are of the view that the construction suggested by Sri Natarajan would really amount to legislation in the thin guise of interpretation which is plainly impermissible. We are of the view that the construction placed by the Tribunal on the provision with due regard to the scheme and object of the Act and its language is sound and correct. Sec. 10 of the Finance Act of 1985 (Central Act No. 32 of 1985) (‘1985 Act’), accepting the very case urged by the assessee, has suitably amended s. 36(1)(viii) of the Act w.e.f. 1st April, 1985. The object of the said amendment is set out in the Memorandum Explaining the Provisions in the Finance Bill under ‘Income-tax’, at para 106, thus [See (1985) 45 CTR (TLT) 52 : (1985) 152 ITR (St) 175)] : ‘106. Financial corporation 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 supporting the case of the assessee, supports the case of the Revenue.

In CIT vs. Bihar State Financial Corporation (1983) 142 ITR 519 (Pat) (Appendix) on which very strong reliance was placed by Sri Natarajan, the Patna High Court consisting of Untwalia C.J. (as his Lordship then was) and S.K. Jha J. examining the scope and ambit of s. 36(1)(viii) as it stood prior to its amendment by the Finance (No. 2) Act of 1967, set out at pp. 521 and 522 of that report, accepted a similar claim of the assessee. In reaching that conclusion, the Court also relied on the later amendment made to s. 36(1)(viii) of the Act. We are of the view that the construction placed by their Lordships in this case, for the various reasons set out by us earlier, with respect, is not sound. With respect, we regret our inability to subscribe to the views expressed by their Lordships in this case.”

11. The Division Bench of this Court in the case reported in (1997) 140 CTR (Raj) 47 : (1998) 229 ITR 252 (Raj) (supra), referred to aforenoted decisions of various High Courts and followed the view taken by the Patna High Court, Andhra Pradesh High Court, Madhya Pradesh High Court and Orissa High Court and was not persuaded to follow the line of reasoning given by Karnataka High Court in its decision reported in (1988) 174 ITR 206 (Kar) (supra). We deem it proper to extract the relevant portion of the said decision as it is : “In the second appeal before the Tribunal, it was observed that it will be the gross total income and 40 per cent deduction is to be computed with reference to the gross total income. Chapter VI-A provides for certain deductions out of the gross total income to arrive at the total income. For the purposes of cl. (viii) such deductions are not taken into consideration. In other words, the gross total income will be the total income for the purpose of this clause. In these circumstances, it was directed that the total income for this purpose will be before allowing the deductions under this clause and will be worked out on that basis. The Allahabad High Court in the case of CIT vs. U.P. Financial Corporation (1995) 129 CTR (All) 247 : (1996) 217 ITR 191 (All) observed that the deduction under s. 36(1)(viii) of the IT Act, 1961, cannot be restricted to the net total income as defined in s. 2(45) of the said Act. Sec. 36(1)(viii) itself creates an exception in this regard by providing that the total income with reference to which the deduction is to be computed is the total income computed before making any deduction under Chapter VI-A. The Orissa High Court in the case of CIT vs. Orissa State Financial Corporation (1992) 104 CTR (Ori) 46 : (1993) 201 ITR 595 (Ori) has observed that the total income on which the deduction under s. 36(1)(viii) of the IT Act is allowable should be computed before making the deduction in terms of s. 36(1)(viii).

The Orissa High Court in the case of CIT vs. Industrial Promotion & Investment Corporation of Orissa (1992) 103 CTR (Ori) 222 : (1993) 199 ITR 761 (Ori) has followed the decisions given in the cases of CIT vs. Bihar State Financial Corporation (1983) 142 ITR 518 (Pat), CIT vs. Andhra Pradesh State Financial Corporation (1989) 175 ITR 87 (AP), CIT vs. M.P. Audyogik Vikas Nigam Ltd. (1989) 77 CTR (MP) 9 : (1989) 178 ITR 177 (MP) and the decision given in the case of Karnataka State Financial Corporation vs. CIT (1988) 174 ITR 206 (Kar) 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 w.e.f. 1st April, 1985, and was applicable to the asst. yr. 1985-86.

The deduction which is permissible in computing the taxable profits of the financial corporation is in respect of the amount transferred by them to the special reserve account upto 40 per cent on their total income computed before making any deduction. So far as computation of deduction before the provisions of Chapter VI-A are applicable it has been so provided specifically and there is no problem. The income without giving any effect to the deduction computed under this section has been interpreted by the various High Courts referred to above. We also agree that 40 per cent of the total income computed before making any deduction under this clause and Chapter VI-A of the Act is interpreted by the provisions of this section and accordingly, we are of the view that the Tribunal was justified in holding that the allowance under s. 36(1)(viii) is to be computed before making any deduction under Chapter VI-A as well as any deduction under s. 36(1)(viii) of the IT Act, 1961.”

12. We may say without any hesitation, and we do, that we are persuaded to concur with the view taken by the Division Bench of this Court in the case of assessee Corporation itself reported in (1997) 140 CTR (Raj) 47 : (1998) 229 ITR 252 (Raj) (supra), since it is in tune with the statutory provision contained in s. 36(1)(viii) and the various High Courts except one. If the construction of a statutory provision on its plain reading leads to a clear meaning, obviously such construction has to be adopted without any external aid. Sec. 36(1)(viii) itself provides, “an amount not exceeding 40 per cent of the total income (computed) before making any deduction under Chapter VI-A carried to such reserve account”. The provision, thus, categorically carves out an exception that the total income with reference to which deduction is to be computed is the total income computed before making any deduction in Chapter VI-A. This is how this provision has been construed by various High Courts in the cases cited supra. We find no justifiable reason to take a different view.

13. In any case, the controversy must be treated to have been set at rest by the Supreme Court in the case of CIT vs. Kerala State Industrial Development Corporation (1998) 149 CTR (SC) 493 : (1998) 233 ITR 197 (SC), where the apex Court approved the decision of Patna High Court in the case of CIT vs. Bihar State Financial Corporation (supra) and overruled the decision of Karnataka High Court in the case of Karnataka State Financial Corporation (supra). The question before the Supreme Court in the case of Kerala State Development Corporation (supra) for consideration was thus :

“Whether the Tribunal was right in law in holding that the statutory deduction under s. 36(1)(viii) of the IT 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 asst. yr. 1978-79. The relevant provision for the said asst. yr. 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 s. 36(1)(viii) of the IT Act, 1961, the total income has to be computed in accordance with the provisions of ss. 30 to 43A except s. 36(1)(viii) was in accord with the decisions of Patna and Madhya Pradesh High Courts (decisions which we have noticed above). The Supreme Court held as follows : “Having gone through the decisions cited at the Bar, we find that the decision of the High Court following its earlier decision in CIT vs. Kerala State Industrial Development Corporation Ltd. (1990) 182 ITR 67 (Ker), is unexceptionable. The Karnataka High Court has tried to work out the subsection on the basis of a mathematical formula and has dissented from the decision of the Patna High Court in CIT vs. Bihar State Financial Corporation (1983) 142 ITR 518 (Pat). It may here be mentioned that Civil Appeal No. 3695 of 1982—CIT vs. Bihar State Financial Corporation (1998) 233 ITR 195 (SC) against the aforesaid judgment in (1983) 142 ITR 518 (Pat) (supra), was dismissed by this Court on 20th Jan., 1995, thereby affirming the view of the Patna High Court. It may here be noticed that not only the preponderance of the judicial opinion of the various High Courts is in line with the view expressed by the Kerala High Court but the relevant sub-cl. (viii) of s. 36(1) has subsequently been amended so as to bring it in line with the view of the Patna and the Kerala High Courts. The decision of the Karnataka High Court does not appear to be correct being contrary to the aforesaid decision of the Patna High Court which stands affirmed by its affirmation by this Court on 20th Jan., 1995. The view of the other High Courts is in consonance with the relevant provisions of the Act. We, therefore, agree with the decision of the High Court in answering the question of law in the affirmative and in favour of the assessee.”

The Supreme Court, thus, puts its seal of approval on the decision of the Patna High Court in the case of Bihar State Financial Corporation (supra) and overruled the decision of Karnataka High Court holding otherwise.

In what we have discussed above, we hold that the decision of this Court in the case of Rajasthan Financial Corporation (supra) lays down the correct law.

Our answer to the question referred to by the Tribunal under s. 256(1) of the IT Act is in the affirmative. We dispose of the income-tax reference, accordingly, with no order as to costs.

[Citation : 295 ITR 195]

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