Industrial Finance Corporation ... vs Commissioner Of Income Tax
1997 Latest Caselaw 984 Del

JUDGMENT

R.C. Lahoti, J.

1. The assessee is a statutory corporation established under the Industrial Finance Corporation Act, 1948, and set up for the purpose of providing long and medium term credits. During the year ending 30th June, 1976, the Corporation transferred to a reserve created under s. 36(1)(viii) a sum of Rs. 41,02,578, being ten per cent of the total income of Rs. 4,10,25,778. Under the provisions of s. 36(1)(viii) 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 profit of the amount transferred by them out of such profits to a Special Reserve Account, up to a specified percentage of their total income as computed before making any deduction under Chapter VI-A of the IT Act, 1961. The deduction is available only where the financial corporation is approved by the Central Govt. for the purposes of this section. The question 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 s. 36(1)(viii) was considered by the CBDT and in a Circular letter No. F. No. 36/19/65-IT (Audit) dt. 25th November, 1969, the view taken was that the deduction to be allowed under s. 36(1)(viii) is to be calculated by applying the specified percentage to the total income arrived at after allowing the deduction under s. 36(1)(viii). Subsequently, however, the Board issued a clarification to the Department of Banking vide its U.O. No. 204/35/73-IT-II dt. 12th November, 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 s. 36(1)(viii) of the Act. This view of the Board was circulated by the Reserve Bank of India, Bombay, in their letter No. LFD. No. OPR/1565/32-33 of 1974 dt. 1st February, 1974, to different financial corporations.

2. The CBDT considered the matter again and in their circular letter No. 204/ 72/75-ITA-II dt. 13th August, 1979, it was clarified that the earlier view communicated in the circular letter dt. 25th November, 1969, was the correct view. In other words, it was clarified that the specified percentage will be applied to the total income (before making any deduction under Chapter VI-A as reduced by the deduction allowable under s. 36(1)(viii).

3. The assessee's claim before the ITO was that the specified percentage of deduction under s. 36(1)(viii) should be given on the total income which should be worked out before making any deduction under Chapter VI-A and without making any deduction under s. 36(1)(viii). The claim has been turned down by the ITO, also by the CIT(A) and the Tribunal forming an opinion that deduction under s. 36(1)(viii) cannot be allowed for working out the total income for the purpose of deduction under s. 36(1)(Viii). The Tribunal also formed an opinion that the circular dt. 12th November, 1973, had to be disregarded because it was not in accordance with the provisions of section 36(1)(viii).

4. On an application filed by the assessee, the Tribunal has referred the following questions for the opinion of the High Court :

"(i) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that Circular No. 204/35/73-ITA-I dt. 12th November, 1973, issued by the CBDT interpreting the provisions of s. 36(1)(viii) of the IT Act, 1961, in favour of the assessee, was not to be applied to the assessee's case ?

(ii) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that Circular No. 204/35/73-ITA-II dt. 12th November, 1973, was not in consonance with the provisions of the Act ?"

The questions are two, but in substance they are one. However, the questions do not apply an appropriate phraseology. The Tribunal was expected to frame the questions based on law and not styling them as calling for an opinion on the correctness or otherwise of the circular issued by the CBDT. However, the crux of the questions is based on accepting the plea of the assessee and we would answer the question from the point of view.

5. Learned counsel for the applicant has invited our attention to a recent decision delivered by the Calcutta High Court in CIT vs. West Bengal Industrial Development Corpn. Ltd. . On the other hand, learned counsel for the Revenue has placed reliance on a decision by the Karnataka High Court in Karnataka State Financial Corpn. vs. CIT (1988) 174 ITR 206 (Kar) : TC 15R.1647.

6. The view taken by the High Court of Karnataka is that while calculating the income, it was not permissible to make an exception in respect of the deduction under s. 36(1). The decision of the Karnataka High Court has been referred to by the Calcutta High Court for the purpose of dissenting therefrom. The Calcutta High Court has referred to the decisions of the Patna, Andhra Pradesh and Madhya Pradesh High Courts taking a view to the contrary and concluded as under :

"As s. 36(1)(viii) of the IT Act, 1961, originally stood, no indication was given as to how the total income should be computed for the purpose of allowing the deduction under the section. In 1967, an amendment was made which provided that the total income shall be computed before making any deduction under Chapter VI-A. The decisions of all other High Courts, excepting the Karnataka High Court have taken the view that not only the computation should be made before making any deduction under Chapter VI-A but before making also any deduction under the aforesaid provision, i.e., s. 36(1)(viii). Sec. 10 of the Finance Act, 1985, has amended s. 36(1)(viii) of the Act w.e.f. 1st April, 1985, so that the total income shall be computed before making any deduction under s. 36(1)(viii) also . . . . . . deduction should be made from the total income as computed before allowing the deduction under s. 36(1)(viii) of the Act."

7. Learned counsel for the assessee has also invited our attention to the decision of the Supreme Court, though a brief one, rendered on 14th Sep., 1990, in Civil Appeal No. 770 of 1976, CIT vs. Bihar State Financial Corpn. which reads as under :

"This appeal is directed against the judgment of the High Court of Patna dt. 19th July, 1974. After hearing learned counsel for the parties we find no good reason to interfere with the impugned order. The appeal fails and is accordingly dismissed but there will be no order as to costs."

8. It is pointed out that the above said appeal was preferred against the judgment of the High Court of Patna in CIT vs. Bihar State Financial Corpn. (1983) 142 ITR 518 (Pat) : TC 15R.1633, which has been followed by the Calcutta High Court and now stands affirmed by the Supreme Court. In our view, the law as interpreted by the Calcutta High Court is the correct statement of law and we find ourselves in entire agreement therewith. We are also of the opinion that the specified percentage of deduction under s. 36(1)(viii) should be given on the total income which should be worked out before making any deduction under Chapter VI-A.

9. For the foregoing reasons, the questions referred to by the Tribunal are answered as under :

(A) On the facts and circumstances of the case, the Tribunal was not right in holding that the circular dt. 12th November, 1973, issued by the CBDT interpreting the provisions of s. 36(1)(viii) in favour of the assessee was not to be applied to the assessee's case.

(B) On the facts and circumstances of the case, the Tribunal was not right in holding that Circular No. 12/11/1973 was not in consonance with the provisions of the Act.

10. The reference is answered accordingly. No order as to costs.