TaxTMI 
TaxTMI 
TaxTMI 
2014 (9) TMI 553
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.... of Section 36(1)(viii) as amended with effect from 1/4/1997 do not provide any room for interpretation other than the one adopted by the Commissioner of Income Tax in his order passed u/s.263 of the Income Tax Act ? 2. These appeals are filed by the revenue pertaining to assessment years 2003-04 and 2004-05 respectively. The common issue that arises pertains to the provisions of Section 36(1)(viii) of the Income Tax Act in terms of which a special reserve could be created by the Respondents out of the profits of the company. The special reserve in the present case relates to financial year 1996-97. The Respondents are in the business of housing finance and they claimed deductions in sums of Rs. 10 crores and Rs. 25 crores in the assessment year 2003-04 and 2004-05 respectively. The special reserve fund was created under section 36(1)(vii) of the Act as applicable and amounts transferred to special reserve were exempted from tax at the material time. When the amounts were transferred to the special reserve section 36(1)(viii) read as under : "(viii) in respect of any special reserve created by a financial corporation which is engaged in providing long- term finance for industrial....
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.... 1998 and 1999 and subsequent years. For ease of reference the relevant section 36(1)(viii) post amendment and section 41 (4A) are reproduced below : "36(1) (viii) in respect of any special reserve created and maintained by a specified entity, an amount not exceeding twenty per cent of the profits derived from eligible business computed under the head "Profits and gains of business or profession" (before making any deduction under this clause) carried to such reserve account" "41(4A) Where a deduction has been allowed in respect of any special reserve created and maintained under clause (viii) of sub-section (1) of section 36, any amount subsequently withdrawn from such special reserve shall be deemed to be the profits and gains of business or profession and accordingly be chargeable to income-tax as the income of the previous year in which such amount is withdrawn". Clause 36(1)(viii) as it originally stood merely required creation of special reserve. There was no obligation to maintain the same. In order to ensure that such financial corporation maintained the reserve so created, the amendment was brought about and the words "special reserve created and maintained" were brough....
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....ce it came into effect only in 1998. The amendment to section 36(1)(viii) and obligation to maintain the special reserve fund also came into effect from 1998. According to Mr.Sathe special reserve fund has been created prior to the date when the amendment came into force. There is no restriction on withdrawal of this amount parked in a special reserve fund and withdrawal of the said amount post 1st April, 1998 will not attract the provisions of amended section 36(1)(viii) or the provisions of section 41(4A). According to Mr.Sathe after the amendment to section 36(1)(viii)the assessee is obliged to maintain the fund created after that date. Section 41(4A) also does not come into effect in the cases where monies were transferred to the fund prior to the amendment coming into the effect. The amounts were already parked in fund therefore would remain unaffected by treating such withdrawal as income by profit and gain of business for the previous year in which the said amount is withdrawn. 8. In other words, the amendment to section 36(1)(viii) and introduction of section 41(4A) takes effect prospectively from 1.4.1998 and not retrospectively so as to effect burden of withdrawal of Rs.....
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....ction under section 263. A similar view has been taken by the another Division Bench of this Court in CIT vs. Gabriel India Ltd. (supra) this view has been consistently followed. On the issue pertaining to applicability of the amended provision of reserve funds created prior to the amendment the Delhi High Court in CIT vs. I.F.C.I. (supra) has followed the analysis of the Kerala High Court in the matter of Kerala Finance Corporation Vs. CIT (2003) 261 ITR 708 (Ker). While interpreting the provisions of the amendment, the Kerala High Court held that the amendment was prospective and would be applicable only for the assessment year 1998-99 and therefore cannot be applied for the assessment years prior thereto. The said judgment has held that deduction that has been allowed in respect of amounts transferred to the special reserve under section 36(1)(viii) of the Act prior to amendment and which amounts were subsequently withdrawn should not be subjected to tax. Going by the plain language as it stood at the relevant time, it can be seen that creation of a reserve was sufficient to entitle the assessee to claim the benefit under section 36(1)(viii) and the assessee was not obliged to m....