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Delhi High CourtIndian Cases

Industrial Finance Corporation Of … vs Commissioner Of Income-Tax on 13 November 1997

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Delhi High Court
Industrial Finance Corporation Of … vs Commissioner Of Income-Tax on 13 November, 1997
Equivalent citations: [1998]233ITR13(DELHI)
Author: R.C. Lahoti
Bench: R.C. Lahoti, J.B. Goel
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 June 30, 1976, the Corporation transferred to a reserve created under Section 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 Section 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 Income-tax Act, 1961. The deduction is available only where the financial corporation is approved by the Central Government 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 Section 36(1)(viii) was considered by the Central Board of Direct Taxes and in a Circular letter No. F. No. 36/19/ 65-IT (Audit) dated November 25, 1969, the view taken was that the deduction to be allowed under Section 36(1)(viii) is to be calculated by applying the specified percentage to the total income arrived at after allowing the deduction under Section 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 dated November 12, 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 Section 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 dated February 1, 1974, to different financial corporations.

2. The Central Board of Direct Taxes considered the matter again and in their circular letter No. 204/72/75-ITA-II dated August 13, 1979, it was clarified that the earlier view communicated in the circular letter dated November 25, 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 Section 36(1)(viii).

3. The assessee’s claim before the Income-tax Officer was that the specified percentage of deduction under Section 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 Section 36(1)(viii). The claim has been turned down by the Income-tax Officer, also by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal forming an opinion that deduction under Section 36(1)(viii) cannot be allowed for working out the total income for the purpose of deduction under Section 36(1)(viii). The Tribunal also formed an opinion that the circular dated November 12, 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 dated November 12, 1973, issued by the Central Board of Direct Taxes interpreting the provisions of Section 36(1)(viii) of the Income-tax 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 dated November 12, 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 Central Board of Direct Taxes. 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 v. West Bengal Industrial Development Corporation Ltd. [1993] 203 ITR 422. On the other hand, learned counsel for the Revenue has placed reliance on a decision by the Karnataka High Court in Karnataka State Financial Corporation v. CIT [1988] 174 ITR 206.

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 Section 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 (headnote of [1993] 203 ITR 422) :

“As Section 36(1)(viii) of the Income-tax 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., Section 36(1)(viii). Section 10 of the Finance Act, 1985, has amended Section 36(1)(viii) of the Act with effect from April 1, 1985, so that the total income shall be computed before making any deduction under Section 36(1)(viii) also …… deduction should be made from the total income as computed before allowing the deduction under Section 36(1)(viii) of the Act.”
Learned counsel for the assessee has also invited our attention to the decisions of the Supreme Court, though a brief one, rendered on September 14, 1990, in Civil Appeal No. 770 of 1976, CIT v. Bihar State Financial Corporation which reads as under ;

“This appeal is directed against the judgment of the High Court of Patna dated July 19, 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.”
It is pointed out that the above said appeal was preferred against the judgment of the High Court of Patna in CIT v. Bihar State Financial Corporation [1983] 142 ITR 518, 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 Section 36(1)(viii) should be given on the total income which should be worked out before making any deduction under Chapter VI-A.

7. 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 dated November 12, 1973, issued by the Central Board of Direct Taxes interpreting the provisions of Section 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.
The reference is answered accordingly, No order as to costs.