2007 (10) TMI 10 - HC - Income Tax

High Court clarifies computation of deduction under Income-tax Act, aligning with Supreme Court ruling

The Rajasthan High Court held that the deduction under Section 36(1)(viii) of the Income-tax Act should be computed on the total income before making any ... Financial Corporation – Question arises whether deduction u/s 36(1)(viii) at 40% was to be worked out in respect to special reserve on the gross total income before making deduction under this section as well as under Chapter VI-A of the ITA,1961- Held, yes Issues Involved:1. Interpretation of Section 36(1)(viii) of the Income-tax Act, 1961.2. Computation of deduction under Section 36(1)(viii) before making any deduction under Chapter VI-A.3. Divergent judicial views on the computation of total income for the purpose of Section 36(1)(viii).Detailed Analysis:1. Interpretation of Section 36(1)(viii) of the Income-tax Act, 1961:The primary issue revolves around the interpretation of Section 36(1)(viii) of the Income-tax Act, 1961, particularly concerning the computation of deductions for financial corporations engaged in providing long-term finance. The section, as it stood before April 1, 1985, allowed a deduction of up to 40% of the profits derived from such business, computed before making any deduction under this clause and Chapter VI-A.2. Computation of Deduction under Section 36(1)(viii) Before Making Any Deduction Under Chapter VI-A:The legal question referred to the court was whether the deduction under Section 36(1)(viii) should be computed on the gross total income before making any deductions under this section and Chapter VI-A. The court examined various precedents, including the decisions of the Patna High Court, Andhra Pradesh High Court, Madhya Pradesh High Court, and Orissa High Court, which uniformly held that the deduction should be calculated on the total income before any deductions under Chapter VI-A.3. Divergent Judicial Views on the Computation of Total Income for the Purpose of Section 36(1)(viii):The court noted that almost all High Courts, except the Karnataka High Court, had taken a consistent view that the deduction under Section 36(1)(viii) should be computed on the total income before making any deductions. The Karnataka High Court, however, had a different interpretation, suggesting that the total income should be computed after making deductions under Section 36(1)(viii).Relevant Judicial Precedents:- Patna High Court (CIT v. Bihar State Financial Corporation [1983] 142 ITR 518): Held that the deduction should be calculated on the total income before any deductions under Section 36(1)(viii).- Andhra Pradesh High Court (CIT v. Andhra Pradesh State Financial Corporation [1989] 175 ITR 87): Affirmed the Patna High Court's view and rejected the Revenue's method of notional calculation.- Madhya Pradesh High Court (CIT v. M. P. Audyogik Vikas Nigam Ltd. [1989] 178 ITR 177): Supported the view that deductions should be calculated on the total income before any deductions under Chapter VI-A.- Orissa High Court (CIT v. Industrial Promotion and Investment Corporation of Orissa [1993] 199 ITR 761): Followed the consistent view of other High Courts that deductions should be computed before making any deductions under Chapter VI-A.Supreme Court's Seal of Approval:The Supreme Court in CIT v. Kerala State Industrial Development Corporation [1998] 233 ITR 197, affirmed the view of the Patna High Court and overruled the Karnataka High Court's decision. The apex court held that the deduction under Section 36(1)(viii) should be calculated on the total income before any deductions under Chapter VI-A, thereby settling the controversy.Conclusion:The Rajasthan High Court concurred with the view taken by the Division Bench in CIT v. Rajasthan Financial Corporation (No. 2) [1998] 229 ITR 252, which aligned with the statutory provisions and the majority of judicial opinions. The court held that the deduction under Section 36(1)(viii) should be computed on the total income before making any deductions under Chapter VI-A and Section 36(1)(viii) itself. The reference was answered in the affirmative, favoring the assessee, with no order as to costs.