TaxTMI 
TaxTMI 
2003 (2) TMI 60
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.... account. In this view of the matter, the Commissioner was of the opinion that the assessee was not entitled to the deduction under section 36(1)(viii) of the Income-tax Act since the amount from the special reserve has been transferred to another account leaving no amount in the reserve as such. A notice was issued under section 263 of the Income-tax Act to the assessee proposing revision of the assessment. Though the assessee objected to the proposal, the same was overruled and by order dated November 25, 1998, passed under section 263 of the Income-tax Act, the Commissioner directed the Assessing Officer to withdraw the deduction granted under section 36(1)(viii) of the Act. Against the said order, the appellant-assessee preferred an appeal before the Tribunal. The Tribunal also concurred with the view of the Commissioner and dismissed the appeal by its order in I. T. No. 558/Coch of 1998 dated August 24, 1999. Aggrieved thereby, the appellant has preferred this appeal, challenging the decision of the Tribunal, confirming the view of the Commissioner of Income-tax. The admitted facts are that the assessee-financial corporation is constituted under the Kerala Financial Corporat....
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....available/made under this section is admissible for provision purposes. The reserve can, therefore, be utilised to create specific provision for assets classified as "bad and doubtful debts". The assets and liabilities should be reduced to the extent of provisions utilised from the cumulative balance of reserves under section 36(1)(viii), i.e., to say, assets are to be shown net of provisions. It is pursuant to these guidelines, contends appellant's counsel, that the appellant had transferred from the special reserve to the provisions for "bad and doubtful debts" and that provision continued to remain in the books of account. In these circumstances, counsel submits, the deduction claimed under section 36(1)(viii) is supported by law, justified and allowable. The Income-tax Appellate Tribunal, however, relying on the decision in Indian Overseas Bank Ltd. v. CIT [1970] 77 ITR 512 (SC) rejected the contention of the appellant. Reliance placed by the Tribunal on the decisions in CIT v. Standard Motor Products of India Ltd. [1962] 46 ITR 814 (Mad) and Chembra Peak Estates Ltd. v. CIT [1972] 85 ITR 401 (Ker), according to him, is erroneous and the Tribunal has failed to take note of th....
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....pecial reserve in the year in which the amount is withdrawn. For this purpose, a new sub-section (4A) has been introduced in this section, and a reference to this sub-section is also made in sub-section (5) of this section. 21.3. This amendment will take effect from the 1st April, 1998, and will, accordingly, apply in relation to the assessment year 1998-99 and subsequent years." According to learned counsel, the view of the Income-tax Officer allowing the deduction under section 36(1)(viii) on the abovesaid facts and circumstances of the case is therefore justifiable and the question has to be answered in favour of the assessee. Learned counsel appearing for the Revenue, on the other hand, contended that though the word "and maintained" was inserted by an amendment made by the Finance Act, 1997, with effect from April 1, 1998, Even without such amendment, the position in law is that in order to claim the benefit under section 36(1)(viii) it is not sufficient to create a special reserve by any book entry but such reserve so created shall continue without being transferred simultaneously to any other account as is done in this case. In other words, according to him, it is not a....
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....endment was made by the Finance Act, 1997, with effect from April 1, 1998, by inserting the word "and maintained" after the word "created". The provision after the amendment to the extent they are relevant is quoted hereunder : "in respect of any special reserve created and maintained by a financial corporation which is engaged in providing long-term finance for industrial or agricultural development or development of infrastructure facility in India or by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes, an amount not exceeding forty per cent. of the profits derived from such business of providing long-term finance (computed under the head 'Profits and gains of business or profession' before making any deduction under this clause) carried to such reserve account." By the same Finance Act, with effect from April 1, 1998, section 41 of the Income-tax Act also was amended by insertion of a new provision, namely, sub-section (4A) to that section which reads as follows : "Where a deduction has been allowed in respect of any special ....
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....mpanies Act, 1949, and the one contemplated by a proviso (b) to section 10(2)(vib) of the Indian Income-tax Act, 1922, are two independent reserves. In that context, it was held that the entries in the account books required by the proviso (b) to section 10(2)(vib) were not an idle formality and a separate reserve fund has to be created for the purpose of section 10(2)(vib). There, the banking company which was the assessee, claimed development rebate under proviso (b) to section 10(2)(vib) of the Indian Income-tax Act, 1922, and contended that a transfer which it has made to a reserve fund was sufficient to meet the requirements of section 17 of the Banking companies Act, 1949, as well as proviso (b) to section 10(2)(vib) of the Indian income-tax Act. Admittedly, the creation of the fund was only under section 17 of the Banking Companies Act. As to whether that amount was sufficient enough to meet the requirement under proviso (b) to section 10(2)(vib) of the Income-tax Act, it was held that it was not sufficient to meet the requirement of the law since in order to claim the benefit of the said proviso there should be a special reserve created for that purpose. In other words, whe....
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.... the Income-tax Act, 1961. On second appeal, the claim of the assessee was found favour with. The matter was referred to the High Court for its opinion and the question was answered in favour of the Revenue by the High Court, against which the assessee filed the appeal before the apex court. It was contended that the view taken by the High Court was erroneous and that it was not necessary that reserve should be created in the previous year during which the machinery or plant was installed. An Explanation was added by the Finance Act, 1966, by which it was declared that the deduction referred to under section 33 could not be denied by reason only that the amount debited to the profit and loss account of the relevant previous year and credited to the aforesaid reserve account exceeded the amount of the profit of such previous year (as arrived at without making the deposit aforesaid) in accordance with the profit and loss account. The Explanation was inserted with retrospective effect from the commencement of the Act. Difference of opinion had existed between the High Courts on the question whether the statute required the creation of the reserve in the previous year in which the new ....
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....nconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by the Government . . . ... (emphasis' supplied only to show that the condition prescribed under clause (B) under section 2(18) is to be "throughout the relevant previous year"). Again, under section 2(18) in clause (A) it is stipulated that a company which is not a private company as defined in the Companies Act, 1956, and the shares in the company not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits were as on the last day of the relevant previous year .... Again, when we come to section 32A(2) while defining an industrial undertaking under Explanation (2) what is required is that "an industrial undertaking shall be deemed to be a small scale industrial undertaking, if the aggregate value of the machinery and plant (other than tools, jigs, dies and moulds) installed, as on the last day of the previous year ......." Again in section 79, the word "last day of the previous year" is specifically mentioned. Thus it can be seen that whenever the Legislature intended that something should be done on the l....
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.... that the reserve having been created, by the transfer of an amount to another account namely, towards provisions for "bad and doubtful debts accounts" its character does not cease to be that of a reserve; on the other hand, it continues to be a reserve fund. Learned counsel for the Revenue, however, placed reliance on the decision of the Supreme Court in CIT v. Travancore Titanium Products Ltd. [2001] 247 ITR 186. The expression "provision" and "reserve" were considered and it was held thus : "The broad distinction between the two is that whereas a provision is a charge against the profits to be taken into account against gross receipts in the profit and loss account, a reserve is an appropriation of profits, the asset or assets by which it is represented being retained to form part of the capital employed in the business. The true nature and character of an appropriation has to be determined with reference to the substance of the matter." In that case, amounts were held to be recorded as "provision" and since the amount was set apart to meet a loan liability and the amount was less than the liabilities it was held that it cannot be regarded as an asset and hence it was not inclu....
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....holding them to be a 'reserve'. In the result, both the questions referred to us are answered in the negative, i.e., against the assessee and in favour of the Revenue." But the apex court did not agree with that view. It observed thus: "A fair reading of the above decisions would go to show that if the transfer of an amount is made ad hoc, when there is no known or anticipated liability, such fund will only be treated as 'reserve'. In this case, substantial amounts were set apart as reserves. No amount of bad debt was actually written off or adjusted against the amount claimed as reserves. No claim for any deduction by way of bad debts was made during the relevant assessment years. The assessee never appropriated any amount against any bad and doubtful debts. The amounts throughout remained in the account of the assessee by way of capital and the assessee treated the said amounts as 'reserves' and not as 'provisions' designed to meet liability, contingency, commitment or diminution in the value of assets known to exist at the relevant dates of the balance-sheets.... It cannot be said either, that the amounts set apart out of the profits were designed to meet any known liability....