High Court clarifies deduction calculation under Income-tax Act, supporting broader approach

Commissioner Of Income-Tax Versus Tamilnadu Textile Corporation

Commissioner Of Income-Tax Versus Tamilnadu Textile Corporation - [1996] 218 ITR 212, 146 CTR 543 Issues:
1. Interpretation of the expression "total income computed before making any deduction under Chapter VI-A" in section 36(1)(viii) of the Income-tax Act, 1961.
2. Whether the deduction under section 36(1)(viii) should be calculated at 25 per cent. of the total income before deduction of the amount allowed or of the total assessed income.

Analysis:
The judgment delivered by the High Court of Madras addressed three tax cases involving the Tamil Nadu Textile Corporation, Coimbatore for different assessment years. The central question in all three cases was the interpretation of the expression "total income computed before making any deduction under Chapter VI-A" in section 36(1)(viii) of the Income-tax Act, 1961. The specific issue was whether the deduction under this section should be computed at 25 per cent. of the total income before any deduction or of the total assessed income. This interpretation was crucial for determining the tax liability of the assessee.

The court highlighted an amendment made in 1985 which substituted the original expression with "total income (computed before making any deduction under this clause and Chapter VI-A)." This change explicitly stated that the deduction under section 36(1)(viii) should be calculated based on the total income before any deduction under both Chapter VI-A and the specific clause. The court noted that while the amendment did not declare its nature as declaratory or for removing doubts, it clarified the computation method for the deduction.

Various High Courts had differing opinions on this matter. The Karnataka High Court previously held that the deduction should be based only on the total income as defined under section 2(45) of the Act, excluding deductions under Chapter VI-A. However, other High Courts, including Patna, Andhra Pradesh, Madhya Pradesh, Kerala, Gujarat, and West Bengal, interpreted the expression more broadly, considering the context and the wording of the Act.

After considering the arguments presented by both the Revenue and the assessee, the court aligned with the reasoning of the High Courts favoring the broader interpretation. It concluded that the deduction under section 36(1)(viii) should be computed at 25 per cent. of the total income before any deduction under Chapter VI-A and the specific clause. This decision was based on the contextual analysis of the relevant provisions and the sound reasoning adopted by other High Courts.