TaxTMI 
TaxTMI 
1982 (6) TMI 152
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....n was filed on 9th December, 1977 disclosing an income of Rs. 8,17,372. In the revised return, the claim u/s 36(1)(viii) was made for the allowance of special reserve created by the assessee. The amount of reserve created u/s 36(1)(viii) was Rs. 17,75,000 which the ITO had disallowed without giving any reasons in the assessment order by stating that he was only implementing the orders given by the IAC when the draft assessment order was forwarded to him u/s 144B. It will be a wise and useful practice to incorporate in the assessment order the reasons that prevailed with the IAC which the ITO had been implementing. Otherwise, it will not be possible for the appellate authorities to know exactly what are the reasons that prevailed with the IAC which the ITO had been implementing, unless the directions given by the IAC are also made an annexure to the assessment order. In this case, we experienced this difficulty of not knowing the reasons that prevailed with the IAC. Since the reasons were not available in the order of the ITO, we have to necessarily depend upon the reasons given by the CIT(A) which he stated as under: "The next issue raised in grounds No. 11 and 12 is regarding the....
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.... to in section 28- (viii) In respect of any special reserve created by financial corporation which is engaged in providing long term finance for industrial or agricultural development in India, An amount not exceeding-- (a) in the case of a Financial Corporation or a Joint Financial Corporation established under the State Financial Corporation Act, 1951 (63 of 1951), or an institution deemed under section 46 of that Act to be a Financial Corporation established by the State Government for the State within the meaning of the Act, forty per cent; (b) in the case of any other financial corporation-- (i) where the paid up share capital of the Corporation does not exceeds three crores of rupees, twenty five per cent; (ii) where the paid up share capital of the corporation exceeds three crores of rupees, ten per cent". The portion of the reserve created in its books was like this: For the asst. yr. 1973-74, a reserve of Rs. 23,30,000 was created in the books whereas the actual reserve allowed was only Rs. 12,40,337. Thus, there was an excess reserve of Rs. 10,89,663. For the asst. yr. 1974-75, a reserve of Rs. 6,90,451 was created but the actual reserve allowed for assessment purpo....
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....that the surplus in the development rebate reserve created in the earlier years was at the disposal of the assessee and assessee could have taken it way by a journal entry and brought it back to the reserve by another entry and the net result would have been the same. Rejecting this view, the Madras High Court held that ss. 34(3) contemplated creation of a reserve out of the profits of the relevant previous year and the presence of a larger development rebate reserve in an earlier year could not be taken as satisfying the specific requirements of ss. 36(1)(Viii). The assessee's claim was that there is a marked difference between the wording of ss. 34(3)(a) and 36(1)(viii) and a decision rendered on the language used in s. 34(3)(A) could not be made applicable to the requirement contemplated in s. 36(1)(Viii). Section 34(3)(a) provided that "the deduction referred to in s. 33 shall not be allowed unless an amount equal to seventy five per cent of the development rebate to be actually allowed is debited to the profit and loss account of the relevant previous year and credited to a reserve account to be utilised by the assessee..........". Since the requirements of s. 34(3)(A) was to ....
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....serve must first be created out of the total income and then carried to the reserve account. Creation of reserve and carrying it to reserve account can be accomplished only by debiting the P&L A/c or some other account and crediting to the reserve account. By the use of the words created and carried the double entry referred to in s. 34(3)(A) of debited to the P&L A/c of the relevant previous year and credited to a reserve account is accomplished. Unless there is a debit to the P&L A/c, there cannot be a credit to the special reserve account and unless both these entries are passed, there cannot be creation and carrying on the required percentage of profits form the total income to the reserve account. Therefore, the absence of the words 'debited to the P&L A/c of the relevant previous year and credited to a reserve account' in s. 36(1)(Viii) need not necessarily mean that the debit to the P&L A/c in the concerned year was not necessary. The question of debiting to the P&L A/c of the relevant year as in the case of development rebate would not arise in the case of special reserve because special reserve created is for a different purpose and its nomenclature and character are diffe....
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....of the special reserve created in the earlier years no amount could be transferred to the special reserve to be created in the year under appeal to make good the shortfall, it means that the special reserve created for each year is final, complete and cannot be touched. If that is so, we are unable to understand how the present argument can be advanced based upon the presence of excess reserve created in earlier years. We are, therefore, of the opinion that the object of creating a special reserve in each year fails and will be defeated if we accept the argument advanced on behalf of the assessee. Further, the Finance Act, 1970 inserted an Explanation w.e.f. 1st April, 1966 providing for making good the deficiency of one year in creation of reserve out of the excess of the earlier years. This Explanation reads: Explanation : For the removal of doubts, it is hereby declared that in the case of a financial corporation to which sub-clause (a) applies, if the amount carried to the reserve account referred to in this clause in the accounts of the previous year relevant to the assessment year commencing on the 1st day of April, 1966 falls short of twenty five percent of the total income....