1985 (10) TMI 5 - HC - Income Tax

Interpretation of Income-tax Act: Special Reserve Deduction for Financial Corporations

The High Court of Karnataka interpreted section 36(1)(viii) of the Income-tax Act, 1961 regarding a financial corporation's special reserve deduction ... Deduction, Financial Corporation Issues involved: Interpretation of section 36(1)(viii) of the Income-tax Act, 1961 regarding deduction entitlement for a financial corporation's special reserve.Summary:The High Court of Karnataka addressed a reference made under section 256(1) of the Income-tax Act, 1961, regarding the deduction entitlement of a financial corporation's special reserve. The case involved the interpretation of whether the assessee was entitled to a deduction under section 36(1)(viii) of either 2/7ths or 40% of the total amount. The dispute arose from the assessment year 1975-76, where the Income-tax Officer allowed the deduction without providing reasons, the Appellate Assistant Commissioner directed the deduction at 40%, and the Tribunal reversed this decision. The Court considered the construction of 'total income' and the special reserve as per the Act.The Tribunal's view was based on the definition of 'total income' and the provisions of section 36(1)(viii), concluding that the deduction should be 2/7ths of the total income computed before any Chapter VI-A deductions. The Court emphasized that the deduction was specific to certain financial institutions and must be calculated as per the Act's provisions. The Court rejected the assessee's argument that the deduction should be calculated after computing the total income, stating it would amount to impermissible legislation through interpretation.The Court highlighted the subsequent amendment to section 36(1)(viii) by the Finance Act of 1985, which supported the Revenue's position. It also disagreed with a previous decision of the Patna High Court regarding a similar claim, emphasizing the correct interpretation based on the Act's language and objectives. Ultimately, the Court answered the reference question in the affirmative, in favor of the Revenue, directing each party to bear their own costs.