TaxTMI 
TaxTMI 
2009 (3) TMI 39
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.... the Income-tax Authorities are justified in making/confirming the disallowance of Rs.26,50,00,00/- u/s 36(1)(viia) of the Income-tax Act pertaining to the provision for bad and doubtful debts in spite of the fact that reserve for the same has also been created." 2. The applicant, M/s. Rural Electrification Corporation Ltd. is a public sector undertaking and is engaged in the business of providing long term finance primarily to State Electricity Boards for the purpose of transmission, distribution and generation of electricity so that the society at large is benefited in respect of industrial, agricultural and infrastructural development. It has been stated that the Revenue had, all along in the past, accepted the applicant to be an eligible financial corporation for requisite deduction under section 36(1)(viii) of the Act and had accordingly allowed the deduction under the aforesaid section on the profits derived from the business of long-term finance for rural electrification. 1ST Question: 3. Facts:- In the Assessment Year (in short A.Y.) 1997-98 i.e. the year in question, the applicant furnished return of income on 30th November 1997, declaring an income of Rs.24,71,21....
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....to general reserve account, thereby leaving a special reserve as on 31.3.1997 to the tune of Rs.51 crores only. The A.O. did not agree to the explanation furnished by the applicant and came to the conclusion that it was mandatory for the applicant during the year in question also to 'maintain' the special reserve already created and the applicant should not have transferred the same to the General Reserve. The A.O. has also stated in the assessment order that once the applicant has made a withdrawal from the Special Reserve created, it can be safely inferred that no special reserve was created by the applicant. The A.O. accordingly, concluded that the applicant forfeits the claim for the deduction under Section 36(1)(viii) of the Act. Dealing with the contention based on the amendment brought out by Finance Act, 1997, the assessing officer observed:- "… The assessee has referred to the amendment in clause (viii) of sub-section (1) of section 36 effected by Finance Act, 1997 with effect from 1.4.1998. The amendment has the effect of substituting the words in clause (viii) "in respect of any Special Reserve created", with the words "in respect of any Special Reserve created and ....
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....ome referred to in section 28 xxx xxx xxx (viii) …. In respect of any special reserve created 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:] Provided that the corporation [or, as the case may be, the company] is for the time being approved by the Central Government for the purposes of this clause: Provided further that where the aggregate of the amounts carried to such reserve account from time to time exceeds [twice the amount of] the paid-up share capital [(excluding the amounts capitalized from reserves)] of the corporation [or, as the case may be, the company], no all....
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....in a previous year in which the business is no longer in existence, the provisions of this sub-section shall apply as if the business is in existence in that previous year." 8. From the above, it can be seen that while the Legislature had amended section 36(1)(viii) and intended to confer the benefit under that section only if that special reserve created is maintained, the consequence of withdrawing the amount from the special reserve in the previous year is taken care of by sub-section (4A) of section 41. In other words, if any deduction has been allowed in respect of any special reserve under section 36(1)(viii) of the Income-tax Act and it is subsequently withdrawn, then it shall be deemed to have been profits and gains of the business and are chargeable to income-tax. Thus, the creation and maintenance of the reserve funds has been made a condition with effect from 1.4.98 for availing the benefit under section 36(1)(viii) and the consequence of withdrawing any such amount after deduction is made, by fiction of law, deemed to be the profit and gains of business chargeable to tax as the income of the previous year in which the amount is withdrawn. 9. Further, a comparative....
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.... reserve created is maintained, the consequence of withdrawing the amount from the special reserve in the previous year is taken care of by sub-section (4A) of section 41. In other words, if any deduction has been allowed in respect of any special reserve under section 36(1)(viii) of the Income-tax Act and it is subsequently withdrawn, then it shall be deemed to have been profits and gains of the business and are chargeable to income-tax. Thus, the creation and maintenance of the reserve funds has been made a condition for availing the benefit under section 36(1)(viii) and the consequence of withdrawing any such amount after deduction is made, is also made by fiction of law, deemed to be the profit and gains of business chargeable to tax as the income of the previous year in which amount is withdrawn. Going by the plain language of the section as it stood at the relevant point of time, it can be seen that creation of a special reserve was sufficient to entitle the assessee to claim the benefit under section 36(1)(viii) of the Income-tax Act and that the word "and maintained" was inserted only with effect from 1.4.1998 and it is not given any retrospective effect either expressly....
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....; on the other hand, the same has been transferred to the general reserve and the special reserve created during the year to the tune of 36 crores out of profit chargeable to tax, has remained intact and this in itself is sufficient to entitle the applicant to avail the deduction under section 36(1)(viii). It is further submitted that the amendment which was effected by the Finance Act, 1997 making the maintenance of reserve mandatory, cannot be construed as clarificatory in nature. 13. We find it difficult to accept the contention of the Revenue's counsel that clause (viii) of Section 36(1) as it stood before amendment has to be so construed as to imply an obligation to maintain the special reserve intact. It would amount to reading words which were not there in the pre-amended provision. The importance of difference between the expressions 'created' and 'maintained' cannot be understated. But for the amendment, the restriction against withdrawal of special reserve cannot be read into the main clause (viii). The legislature having noticed the need for amendment so as to prevent its misuse or to carry out the objective in a more effective manner, thought it fit to introduce the ....
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....ould not be so construed when the pre amended provision was clear and unambiguous (Ref. Sakuru vs. Tanoji, AIR 1985 1277). Where a new provision impairs an existing right or creates a new obligation, retrospectivity cannot be inferred (vide Govinddas vs. I.T.O.) Another observation therein relevant to the present case is that 'if the enactment is expressed in language which is fairly capable of either interpretation, it ought to be construed as prospective only." 15. There is no doubt that the purpose of the expression 'and maintained' is obviously to impose an additional obligation and it is not merely declaratory of the existing legal provision as discussed earlier. The legislature, by the present amendment, seeks to restrict the benefit which the statute hitherto provided to the assessee. The scope and effect of the aforesaid amendment, as also the insertion of section 41(4A) have been elaborated in the following portion of the departmental circular No.763, dated 18th February,1998 :- "Amendment of section 36(1)(viii) to incorporate the condition of maintenance of special reserve. 21.1 Clause (viii) of sub-section (1) of section 36 permits the deduction of an amount not ex....
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....no hesitation to hold that such a requirement made explicitly clear both by the amendment to section 36(1)(viii) as well as by the insertion of sub-section (4A) of section 41 of the Income-tax Act, any retrospective effect cannot be presumed to be a condition for granting the benefit as per the provisions which stood prior to the amendment in question." 17. In Birla Cement Works vs. CBDT (248 ITR 216) the question arose whether Explanation III to Section 194C of the Income-tax Act, 1961 which was inserted by the Finance Act of 1995 was clarificatory. The Supreme Court held that there were no compelling reasons to hold that Explanation III was clarificatory or retrospective in operation. Although, there were conflicting views on the interpretation of expression "carrying out any work", it was held that section 194C before the insertion of Explanation III was not applicable to transport contracts. By Explanation III, an inclusive definition of 'work' was introduced so as to cover carriage of goods and passengers by any mode of transport other than by Railways. 18. In the case of Allied Motors (P) Ltd. vs. CIT which was cited by the A.O., the Supreme Court took the view that the....
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....ation which is 1997-98. The CIT(Appeals) has also taken this line of reasoning while rejecting the plea of the assessee. We are unable to subscribe to the aforesaid interpretive exercise adopted by the CIT (Appeals). Firstly, for the reason that the Finance Act, 1997 as we have seen earlier clearly prescribes that the amendments are to take effect from 1.4.1998 and shall apply in relation to the assessment year 1998-99 and subsequent years. A specific reference by the Legislature itself rules out the scenario of the said amendment being considered as having retrospective effect. Furthermore, in our view the said amendment brings on the Statute a further condition which is required to be fulfilled by an assessee before claiming the benefit under section 36(1)(viii). The Legislature, by the present amendment, seeks to restrict the benefit which the Statute hitherto provided to the assessee, unless such restriction is specifically made retrospective under normal circumstances, such provisions cannot be read as retrospective in nature. ……. amendments which create a higher obligation on the assessee shall be deemed to be prospective unless otherwise specifically provided." 20.....
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....rve' and 'Provision'. 25. Before us the counsel for the applicant has contended that no adverse inference should be drawn even if the applicant has, instead of making a provision, created a 'reserve' by debiting the same to Profit and Loss Appropriation Account because the creation of 'reserve' has been for the specific purpose of claiming deduction under section 36(1)(viia)(c) of the Act. It has also been emphasized that all along in the past the applicant has been making a provision for bad and doubtful debts and had accordingly been allowed deduction under the said section from A.Y. 1990-91 to 1995-96. It was during the year in question only when the applicant debited it to Profit and Loss appropriation account nomenclatured as 'Reserve for deduction under section 36(1)(viia)(c)', the applicant has been denied the benefit of deduction, submits the counsel. It has also been contended that nature and character of the reserve remains the same as envisaged under section 36(1)(viia) of the Act and, accordingly, the applicant should not be penalized for the technical lapse, if any. In course of arguments, the learned counsel also stated that as per the advice/opinion of the Expert ....