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Smart Summary

Structured Summary of the Opinion delivered by Puttaswamy, J.

Factual and Procedural Background

For the assessment year 1975-76 (accounting year ended 31 March 1975) the assessee, a financial corporation established under the State Financial Corporations Act, 1951, created a special reserve of Rs. 19,97,806 and claimed an appropriate deduction in its return. The Income-tax Officer completed assessment on 16 September 1975, allowing the permissible deduction on the special reserve computed "in terms of the Act" but without giving reasons.

The assessee appealed to the Appellate Assistant Commissioner (AAC) who, by order dated 28 September 1976, allowed the appeal and directed that the allowance under section 36(1)(viii) be calculated at 40% of the total income before allowing deductions under Chapter VI-A (relying on a communication from the Central Board of Direct Taxes). The Revenue preferred a second appeal to the Income-tax Appellate Tribunal (the Tribunal), which on 24 December 1977 reversed the AAC, restored the Income-tax Officer's order (i.e., rejected the 40% approach), and thereby raised the legal question which the Tribunal referred to this Court under section 256(1) of the Income-tax Act, 1961.

Procedurally, when the reference first came before this Court there was a default of appearance by the assessee and his counsel and the reference was disposed of on 4 December 1984 by declining to answer the question; on application by the assessee that order was recalled, the reference restored to file, and the matter was subsequently heard on merits, leading to the present judgment.

Legal Issues Presented

  1. Whether, on the facts and in the circumstances of the case, the assessee is entitled to a deduction under section 36(1)(viii) of 2/7ths of Rs. 51,29,454 as held by the Tribunal, or 40% of the same as claimed by the assessee?

Arguments of the Parties

Assessee's Arguments

  • The construction placed by the Tribunal on the term "total income" occurring in the Act was erroneous and unsound.
  • The question should be answered in the negative (i.e., in favour of the assessee), supporting the assessee's claim to 40% (as reflected in the AAC's direction based on the Central Board's communication).

Revenue's Arguments

  • The construction placed by the Tribunal on the term "total income" was a proper and sound construction.
  • Therefore, the Court should answer the question in the affirmative (i.e., in favour of the Revenue), upholding the Tribunal's calculation (which yielded the 2/7ths approach adopted by the Income-tax Officer).

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Cape Brandy Syndicate v. IRC, [1921] 1 KB 64 The classical rule of construction for taxing statutes: one must look at what is clearly said; no intendments, no equity, nothing to be read in or implied; the language used must be looked at fairly. The Court invoked the Rowlatt J. statement from this authority to underline that section 36(1)(viii) must be construed by its clear language and that no legislative intention may be read into it beyond what is plainly stated.
Commissioner of Income-Tax, Bihar v. Bihar State Financial Corporation, [1983] 142 ITR 519 (Patna High Court) Interpreted section 36(1)(viii) (as it stood prior to later amendments) in a manner accepting a claim similar to that made by the assessee in the present case. The Court noted that strong reliance was placed on this decision by the assessee but expressly disagreed with its construction; the Court declined to subscribe to the Patna High Court's view for reasons given in its own analysis.

Court's Reasoning and Analysis

The Court's analysis proceeded in the following steps, each reflecting reasoning stated in the opinion:

  1. Threshold legal rule: The Court emphasized the established rule for construing taxing statutes (from Cape Brandy Syndicate) — the statute must be read according to its clear language without importing equivocal intendments.
  2. Statutory text examined: The Court quoted and analysed section 36(1)(viii) as it then stood, and also relied on the statutory definition of "total income" in section 2(45) of the Income-tax Act (which defines "total income" as the total amount of income referred to in section 5, computed in the manner laid down in the Act).
  3. Logical structure drawn from definition: The Court agreed with the Tribunal's observation that the computation referred to in the definition of "total income" encompasses the provisions of the entire Act. Section 36(1)(viii) itself specifies a sole exception — that "total income" for this section must be computed "before making any deduction under Chapter VI-A." No other exception is made in the section.
  4. Prohibition on reading additional exceptions: Because the section does not make an exception in respect of the deduction under section 36(1)(viii) itself, to create one (as urged by the assessee) would be contrary to the language of the section and tantamount to legislating under the guise of interpretation, which the Court found impermissible.
  5. Practical arithmetic demonstration: The Tribunal had demonstrated that once total income is computed before making deductions under Chapter VI-A and before the deduction under section 36(1)(viii), the deduction under that section would be 2/7ths of the amount so arrived at; the Court accepted that the Income-tax Officer's calculation was strictly in accordance with section 36(1)(viii) and that the AAC was in error.
  6. Consideration of later legislative change: The Court noted that Parliament subsequently amended section 36(1)(viii) by the Finance Act, 1985, to accept the position urged by the assessee (i.e., to provide expressly that the deduction shall be 40% of the total income as computed before making any deduction under the mentioned provision and Chapter VI-A). The Court observed that a careful analysis of that amendment and its object did not, in its view, support the assessee's case for the period in question but, conversely, supported the Revenue's construction in the context of the statutory language as it then stood.
  7. Rejection of contrary precedent: The Court considered the Patna High Court decision relied upon by the assessee (Commissioner of Income-Tax, Bihar) and, with respect, disagreed with that court's construction for the reasons it had outlined.
  8. Conclusion of law: On the basis of the foregoing textual and structural analysis, guided by orthodox rules of construction for taxing statutes and the explicit words of section 36(1)(viii) and the definition of "total income", the Court concluded that the Tribunal's construction (which leads to the 2/7ths calculation and the Income-tax Officer's computation) was correct.

Holding and Implications

Holding: The Court answered the referred question in the affirmative, i.e., in favour of the Revenue and against the assessee.

Implications:

  • The Court upheld the Tribunal's construction of "total income" and the application of section 36(1)(viii) as leading to the deduction calculation accepted by the Income-tax Officer (the opinion endorses the Tribunal's view that the deduction is to be worked out on the basis explained by the Tribunal, which produces the 2/7ths result discussed in the opinion).
  • The Appellate Assistant Commissioner's contrary direction (to calculate the allowance as 40% as claimed by the assessee) was held to be in error and the Tribunal's restoration of the Income-tax Officer's calculation is supported.
  • The Court directed that the parties bear their own costs.
  • No broad change in general principles of law was proclaimed beyond the application of the statutory language; the Court did not purport to create a novel rule of law separate from its textual construction of the existing statutory provisions (the opinion also notes a subsequent legislative amendment which, from April 1, 1985, addressed the point in terms favourable to the assessee for future cases).

This summary is confined strictly to information contained in the provided opinion and does not add or infer facts or legal propositions beyond that text.

    Karnataka State Financial Corporation v. Commissioner Of Income-Tax.

    The Judgment of the Court was delivered by

    Puttaswamy, J.:— For default of appearance of the assessee and his learned counsel, this court, on December 4, 1984, disposed of this reference declining to answer the question. On an application made by the assessee, this Court later recalled the said order, restored the reference to its original file and has heard the same on merits and that is how this order has come to be made by us.

    2. In this reference made under section 256(1) of the Income-tax Act, 1961 (Central Act 43 of 1961) (“the Act”), the Income-tax Appellate Tribunal, Bangalore Bench, Bangalore (“the Tribunal”), at the instance of the assessee, has referred the following question of law for the opinion of this court:

    “Whether, on the facts and in the circumstances of the case, the assessee is entitled for deduction under section 36(1)(viii) of 2/7ths of Rs. 51,29,454 as held by the Tribunal or 40% of the same, as claimed by the assessee?”

    3. In order to appreciate the question referred to us, it is necessary to notice the facts that are not in dispute in the first instance. For the assessment year 1975-76, relevant to the accounting year ending on March 31, 1975, the assessee, a financial corporation, established and functioning under the State Financial Corporations Act, 1951 (Act LXII of 1951), filed its return before the Income-tax Officer, Company Circle-IV, Bangalore, inter alia, declaring that it had created a sum of Rs. 19,97,806 as special reserve and for appropriate deduction on tne said sum by including the same in its total income for the said assessment year. On September 16, 1975, the Income-tax Officer completed the assessment allowing the permissible deduction on the said special reserve at the rate admissible thereto computing the same in terms of the Act, but without giving reasons in support of the same.

    4. Aggrieved by the order of the Income-tax Officer, the assessee filed an appeal before the Appellate Assistant Commissioner of Income-tax, Bangalore Range, Bangalore, who by his order dated September 28, 1976, allowed the said appeal in these words:

    “5. Regarding ground No. (v), the Income-tax Officer is directed to calculate the allowance under section 36(1)(viii) at 40% of the total income before allowing deduction under Chapter VI-A and not under section 36(1) of the Income-tax Act. This point has been clarified by the Central Board of Direct Taxes in a letter to the Ministry of Finance, Department of Banking in their letter F. No. 204/35/73.ITA II dated 12-11-1973.”

    5. Aggrieved by this order of the Appellate Assistant Commissioner, the Revenue filed a second appeal before the Tribunal which by its order dated December 24, 1977, allowed the same, reversed the order of the Appellate Assistant Commissioner and restored the order of the Income-tax Officer. Hence, this reference.

    6. Sri T.V Natarajan, learned advocate of the Madras Bar, assisted by Sri Kalimulla Sheriff of Bangalore Bar, appeared for the assessee; Sri K. Srinivasan, learned senior standing counsel for the Income-tax Department, assisted by Sri H. Raghavendra Rao, junior standing counsel, appeared for the Revenue.

    7. Sri Natarajan has urged that the construction placed by the Tribunal on the term “total income” occurring in the Act vis-a-vis the special reserve created by the assessee was erroneous and unsound and the question must be answered in the negative and in favour of the assessee.

    8. Sri Srinivasan has urged that the construction placed by the Tribunal on the term “total income” was the proper construction and a sound one and, therefore, we must answer the question in the affirmative and in favour of the Revenue.

    9. In disallowing the claim of the assessee, while the Income-tax Officer did not give reasons, the Appellate Assistant Commissioner, in allowing the same, exclusively based it on the opinion furnished by the Central Board of Direct Taxes to which it did not later subscribe. In that view, the Tribunal independently examined the question and expressed thus:

    “4. ‘Total income’ is defined in section 2(45) of the Income-tax Act as ‘the total amount of income referred to in section 5, computed in the manner laid down in this Act’. The computation referred to in the above definition encompasses the provisions of the entire Act. The only exception which has to be made under section 36(1)(viii) is that the total income for the purposes of this section must be the one ‘computed before making any deduction under Chapter VI-A’. No other exception is made. Since no other exception is specifically made in the section itself, to make an exception in respect of the deduction under section 36(1)(viii) would be contrary to the language of the section. It was suggested that there might be difficulty in arriving at the deduction, if the Department's view is to be accepted. In our opinion, no such difficulty would arise since the matter is one of simple mathematics as shown below:

    Let ‘X’ be the amount deductible under section 36(1)(viii), ‘T’ the total income (before making any deduction under Chapter VI-A), and ‘Y’ the amount of what we might call the gross total income before deductions under Chapter VI-A and also before deduction under section 36(1)(viii). Then, according to the view we have taken above:

    10. The above calculation would show that once the total income is computed before making any deduction provided for under Chapter VI-A and also before making the deduction under section 36(1)(viii), the deduction under that section would be 2/7ths of the amount so arrived at. The calculation made by the Income-tax Officer is, therefore, strictly in accordance, with the provisions of section 36(1)(viii) and the Appellate Assistant Commissioner was in error in holding otherwise.”

    11. Whether this view expressed by the Tribunal is correct or not is the sole question that arises for our determination.

    12. But, in order to decide the question which really turns on the true construction of section 36(1)(viii) of the Act and the term “total income” occurring in the Act, it is useful to bear in mind the oft-quoted classical statement of Rowlatt J. in Cape Brandy Syndicate v. IRC, [1921] 1 KB 64, 71, referred to with approval by our Supreme Court, which reads thus:

    “In a taxing Act, one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used”.

    13. Bearing this rule and other rules of construction that is no longer any doubt. We will read section 36(1)(viii) as it then stood which governs the assessment year. That section reads thus:

    “36(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28—…

    (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 in India,

    an amount not exceeding—

    (a) in the case of a financial corporation or a joint financial corporation established under the State Financial Corporations 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 that Act, forty per cent….

    of the total income (computed before making any deduction under Chapter VI-A) carried to such reserve account.”

    14. Section 36 of the Act at one place provides for other deductions in respect of the specific matters dealt therein in computing the income referred to in section 28 of the Act. Section 36 of the Act groups the deductions at one place.

    15. Section 36(1)(viii) allows a special deduction on the special reserve created by the specified financial institutions, computing the same in the manner specified therein. The deduction allowed is not a general deduction to all taxpayers of all their incomes but a special deduction only on special reserve to the extent and in the manner indicated therein. The manner and method of allowing the deduction is indicated in the section itself and the same must be worked out only in terms of that section and on no other basis. Whether that should be done before or after computing the total income was exclusively for the Legislature to decide. If the Legislature provides that the same should be done before computing the total income, then that must be done only before that and not after that as suggested by the assessee. We are of the view that the construction suggested by Sri Natarajan would really amount to legislation in the thin guise of interpretation which is plainly impermissible. We are of the view that the construction placed by the Tribunal on the provision with due regard to the scheme and object of the Act and its language is sound and correct

    16. Section 10 of the Finance Act of 1985 (Central Act No. 32 of 1985) (“1985 Act”), accepting the very case urged by the assessee, has suitably amended section 36(1)(viii) of the Act with effect from April 1, 1985. The object of the said amendment is set out in the Memorandum explaining the provisions in the Finance Bill under “Income-tax”, at para 106, thus (See [1985] 152 ITR (St.) 175).

    “106. Financial corporations engaged in providing long-term finance for industrial or agricultural development in India or public companies providing long-term finance for construction or purchase of houses in India for residential purposes are entitled to a deduction, in the computation of their taxable profits, of an amount not exceeding 40 per cent. of the total income carried to a special reserve. Under the existing provisions, the total income for this purpose is the total income as computed before making any deduction under Chapter VI-A. It is proposed to provide that the deduction shall be for an amount not exceeding 40 per cent. of the total income as computed before making any deduction under the aforesaid provision and Chapter VI-A.”

    17. A careful analysis of the amendment effected by the 1985 Act and the object with which the same has been amended, far from supporting the case of the assessee, supports the case of the Revenue. In Commissioner Of Income-Tax, Bihar v. Bihar State Financial Corporation., [1983] 142 ITR 519 (Appendix) on which very strong reliance was placed by Sri Natarajan, the Patna High Court consisting of Untwalia C.J (as his Lordship then was) and S.K Jha J. examining the scope and ambit of section 36(1)(viii) as it stood prior to its amendment by the Finance (No. 2) Act of 1967, set out at pages 521 and 522 of that report, accepted a similar claim of the assessee. In reaching that conclusion, the court also relied on the later amendment made to section 36(1)(viii) of the Act. We are of the view that the construction placed by their Lordships in this case, for the various reasons set out by us earlier, with respect, is not sound. With respect, we regret our inability to subscribe to the views expressed by their Lordships in this case.

    18. On the foregoing discussion, we hold that the question referred to us has to be answered in the affirmative. We, therefore, answer the question referred to us in the affirmative, in favour of the Revenue and against the assessee. But, in the circumstances of the case, we direct the parties to bear their own costs.

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    Karnataka State Financial Corporation v. Commissioner Of Income-Tax.
    (Oct 9, 1985)