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Commissioner Of Income-Tax v. Bihar State Financial Corporation
Structured Summary of the Opinion — Reference under section 256(1) of the Income-tax Act, 1961
Factual and Procedural Background
This opinion arises from a statement of the case referred by the Income-tax Appellate Tribunal, Patna Bench “B”, in R.A. Nos. 130, 203 and 204 (Pat) of 1975–76 concerning assessment years 1970–71, 1971–72 and 1972–73. The specific referral asks whether the Tribunal erred in law in holding that the allowance for special reserve under section 36(1)(viii) should be calculated at 25% of the total income computed before allowance of the special reserve itself.
The facts framed in the consolidated statement (for the three years) show that for assessment year 1970–71 the Income-tax Officer allowed Rs. 2,01,681 as deduction under section 36(1)(viii) against a claim of Rs. 2,58,320. The Officer calculated that allowance with reference to business income after allowing the special allowance and determined the total income at Rs. 8,31,812 (including interest on securities of Rs. 25,087).
Before the Appellate Assistant Commissioner, the Corporation contended that (a) the special reserve of 25% should be calculated on all incomes taken together (not only business income), and (b) the allowance had to be computed at 25% of the total income before allowing the deduction for the special reserve. The Appellate Assistant Commissioner disagreed with the second point and held that the special reserve had to be calculated after allowing the deduction for the special reserve, but he accepted inclusion of interest on securities for calculation purposes. The Tribunal, however, followed a prior judgment in Tax Case No. 96 of 1971 (CIT v. Bihar State Financial Corporation) and directed that the allowance be calculated at 25% of the total income before allowance of the special reserve itself.
The Commissioner (Revenue) suggested the question of law quoted above, and that question was referred to this Court for opinion (insofar as assessment year 1970–71 is concerned). The Court reviewed the prior judgment and the statutory amendments and concluded that the Tribunal's view was justified.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in holding that the allowance for special reserve under section 36(1)(viii) should be calculated at 25% of the total income computed before the allowance of the special reserve itself?
Arguments of the Parties
Appellant's (Corporation's) Arguments
- The special reserve of 25% should be calculated on all incomes taken together and not only on business income.
- The allowance of the special reserve had to be computed at 25% of the total income before allowing the deduction in respect of the special reserve itself (i.e., the base should be total income prior to that deduction).
Revenue's Arguments
- The deduction provided in section 36 should be made before arriving at the total income; therefore the special reserve must be calculated after allowing deductions under section 36 (including the special reserve deduction) — effectively reducing the base for the 25% calculation.
Appellate Assistant Commissioner's View (as recorded)
- The Appellate Assistant Commissioner took the view that total income should be computed after allowing deductions (other than Chapter VI-A) and consequently held that the special reserve had to be calculated after allowing the deduction for special reserve. He did, however, accept that interest on securities should be included in the income for computing the special reserve.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Bihar State Financial Corporation, Tax Case No. 96 of 1971; reported [1983] 142 ITR 519 | Held that the expression "total income" in clause (viii) of section 36(1) must be taken as the total income computed before making any deduction under Chapter VI-A; therefore, for determining the maximum limit of allowable deduction under clause (viii), one takes the figure of total income before Chapter VI-A deductions. | The Court relied on and followed this decision: it concluded that the Tribunal's direction to calculate the special reserve at 25% of total income computed before the allowance of the special reserve itself was fully justified and rejected the Revenue's contrary submission. |
Court's Reasoning and Analysis
The Court's reasoning proceeded from statutory text and precedent, as recited in the statement of the case:
- The Court examined the statutory provision in question — section 36(1)(viii) — and the amendments introduced by various Finance Acts (notably the Finance Act, 1966; Finance (No. 2) Act, 1967; Finance Act, 1970; and consequential later omissions). The phrase "total income (computed before making any deduction under Chapter VI-A)" was central to interpretation.
- The Court noted that the Tribunal had relied on this Court's earlier decision in Tax Case No. 96 of 1971 (CIT v. Bihar State Financial Corporation), which had specifically considered the effect of the insertion of the parenthetical words and concluded that "total income" for the purposes of clause (viii) could not mean "total assessed income" but must mean total income computed before Chapter VI-A deductions.
- The Court explained the practical and interpretive inconsistency that would follow if the Revenue's view were accepted: treating "total income" as total assessed income plus the amount of a Chapter VI-A deduction would render the statutory amendment inept and otiose. The prior judgment showed that accepting the assesee's interpretation made the amended provision consistent with legislative intent and earlier law.
- Because the prior Bench had expressly considered the amendment and reached the conclusion favourable to the assessee, the Court found no reason to depart from that decision. The Court therefore held that the Tribunal's approach — calculating the special reserve at 25% of the total income computed before allowing the special reserve deduction — was correct.
- The Court rejected the submission of the Revenue (as put forward by its counsel) in light of the earlier judgment and the statutory language and effect of the amendments.
The Court's analysis stayed within the textual meaning of the statute as amended and the binding precedential effect of its earlier decision in Tax Case No. 96 of 1971.
Holding and Implications
Holding: The question referred to the Court was answered in the negative — in favour of the assessee and against the Revenue. Concretely, the Court held that the allowance for the special reserve under section 36(1)(viii) should be calculated at 25% of the total income computed before the allowance of the special reserve itself.
Implications:
- Direct effect on the parties: The Tribunal's view was affirmed; the assessee's method of computing the special reserve (as 25% of total income computed before the special reserve deduction) was upheld for the assessment year(s) in question.
- No broader novel precedent was created by this opinion: the Court expressly followed its earlier decision in Tax Case No. 96 of 1971 and stated that the Tribunal's view was "fully justified". The opinion therefore confirms and applies existing precedent rather than establishing a new interpretive rule beyond that precedent.
- Costs: In the circumstances, the Court ordered that there shall be no order as to costs.
1. A statement of the case under section 256(1) of the Income-tax Act, 1961, has been submitted by the Income-tax Appellate Tribunal, Patna Bench “B” in R.A Nos. 130, 203 and 204 (Pat) of 1975–76 for the assessment years 1970–71, 1971–72 and 1972–73, and the following question of law has been referred to this court for its opinion:
“Whether, on the facts and in the circumstances of the case, the Tribunal has erred in law in holding that the allowance for special reserve under section 36(1)(viii) should be calculated at 25% of the total income computed before the allowance of the special reserve itself?”
2. A consolidated statement of the case has been framed and submitted to this court for all the three assessment years in question. The facts that emerge from the statement are these. In the assessment year 1970–71, the Income-tax Officer, while completing the assessment of the Corporation, allowed a sum of Rs. 2,01,681 as admissible deduction under section 36(1)(viii) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), as against the claim of the assessee at Rs. 2,58,320 which had been transferred to a special reserve account. The allowance by the Income-tax Officer was calculated with reference to the business income of the Corporation after allowing the said special allowance of Rs. 2,01,681. The Income-tax Officer had included interest on securities at Rs. 25,087 and had determined the total income of the Corporation at Rs. 8,31,812. A copy of the order of the Income-tax Officer has been marked annexure A to the statement of the case and forms part of the same. Before the Appellate Assistant Commissioner, it was contended on behalf of the Corporation that the special reserve of 25% should be calculated on all the incomes taken together and not only the business income of the Corporation. It was also submitted that the allowance of special reserve had to be computed at 25% of the total income before allowing deduction in respect of the said special reserve. According to the Appellate Assistant Commissioner, the total income was definite and had to be computed after allowing all the deductions except those which are given in Chapter VI-A of the Act. As the deductions under section 36 were not covered by Chapter VI-A, the Appellate Assistant Commissioner was of the view that they had to be deduced for arriving at the total income. The Appellate Assistant Commissioner further considered the order of the Tribunal as not applicable to this year in view of the amendment brought about in the Act. He, therefore, held that the special reserve had to be calculated after allowing the deduction for special reserve. He, however, accepted the second contention regarding the inclusion of interest on securities for the purpose of calculating special reserve. A copy of the order of the Appellate Assistant Commissioner has been marked annexure I and forms part of the statement of the case. When the matter came up before the Appellate Tribunal, the judgment of this court in the case of the assessee for the assessment year 1965–66 was available which had been registered as Tax Case No. 96 of 1971—since reported as CIT v. Bihar State Financial Corporation, [1983] 142 ITR 519. This court accepted the plea of the assessee that the special reserve had to be allowed on the basis of total income computed before allowing the deduction for special reserve. Regarding the amended provisions, the High Court was of the opinion that the amendment strengthened the interpretation which the Corporation wanted the court to put on the provisions. On behalf of the Revenue, it was submitted that the deduction provided in section 36 had to be made before arriving at the total income. The Tribunal considered the arguments and held as follows:
“We have considered the facts of the case and we are of the view that the decision of the Hon'ble High Court is very clear and in view of their observations regarding the amended provisions, no change can be made in this year in principle. In this connection, it may be pointed out that the amendment was made in 1963 as a new Chapter VI-A was added in the Income-tax Act and in place of the rebate, which were allowed in certain circumstances, the new provisions provided for straight deduction. Thus, while under the provision before the amendment, the total income used to be a larger figure, rebates had to be allowed on various items. After the amendment, however, the total income itself undergoes a reduction, as the law now provides for a straightaway deduction in the computation of the total income. This would have reduced the quantum of benefit which was available to the State Financial Corporation, but it was not the intention of the Legislature to do so. It was, therefore, provided that the total income for this purpose was to be computed before making the deduction under Chapter VI-A. Thus, the Legislature has maintained the benefit which was available to the State Financial Corporation before the amendment. There has been, however, no change regarding the basis of calculation of the reserve in any other respect. In view of this, the principles laid down by the Lordships of the Patna High Court would apply to this case also. Respectfully following their Lordships, we direct that the allowance for the special reserve should be calculated at 25% of the total income before the allowance of the special reserve itself.”
3. On these facts, the Commissioner has suggested the following question of law:
“Whether, on the facts and in the circumstances of the case, the Tribunal has erred in law in holding that the allowance for special reserve under section 36(1)(viii) should be calculated at 25% of the total income computed before the allowance of the special reserve itself?”
4. That question of law has been referred for opinion of this court in so far as the assessment year 1970–71 is concerned. Similar view was taken by the Department in the assessment years 1971–72 and 1972–73 The Appellate Assistant Commissioner, following the decision of the High Court, upheld the claim of the assessee and held that the deduction referred to under section 36(1)(viii) envisages deduction at the prescribed percentage of the total assessed income and not the prescribed percentage of the total assessed income after deduction of the amount so allowed. The Appellate Tribunal confirmed the orders of the Appellate Assistant Commissioner by following the decision of this court. The orders of the Income-tax Officer have been made annexures P and Pi, respectively, and the consolidated order of the Appellate Assistant Commissioner has been made annexure Q and the consolidated order of the Tribunal has been made annexure R and they form part of the statement of the case. On these facts, the aforesaid question of law has been referred to this court for its opinion. Having gone through the judgment of this court in Tax Case No. 96 of 1971 (CIT v. Bihar State Financial Corporation, [1983] 142 ITR 519) disposed of on July 19, 1974, we see that the view taken by the Tribunal is fully justified on the facts and in the circumstances of the case.
5. It is true that section 36(1)(viii) was amended and a slight change was made in clause (b) of section 36(1)(viii) by section 8 and Chapter III of the Finance (No. 2) Act of 1971, with effect from April 1, 1968. By the amendment brought about by the Finance (No. 2) Act, 1967, effective from April 1, 1968, only after the term “total income” has been inserted “(computed before making any deduction under Chapter VI-A) This is neither here nor there. The following Explanation was inserted by the Finance Act, 1970, with effect from 1st April, 1966, which was omitted by the Finance Act, 1974, with effect from 1st April, 1975. The Explanation reads thus:
“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 per cent, of the total income and the amount transferred to such reserve account in the accounts of the immediately succeeding previous year exceeds the amount in respect of which the corporation is entitled to the deduction under this clause for the assessment year commencing on the 1st day of April, 1967, an amount equal to such excess shall, for the purpose of allowing the deduction under this clause, be deemed to have been transferred to the reserve account in the accounts of the first-mentioned previous year”.
6. The portion, after its amendment by the Finance Act of 1966 with effect from April 1, 1966, stood as under excepting for the words in parenthesis and in italics:
“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 whose paid-up share capital does not exceed three crores of rupees, twenty five per cent.,
(b) in the case of any other financial corporation, ten per cent.,
of the total income (computed before making any deduction under Chapter VI-A) carried to such reserve account.”
7. After the amendment was brought about by the Finance (No. 2) Act of 1967, omitting the main portion of sub-section (1) of section 36 of the Act, the amended clause (viii), without the two provisos, the relevant portion reads as follows:
“(viii) in respect of any special reserve created by a financial corporation which is engaged in providing long-term finance for industrial development in India, an amount not exceeding:
(a) in the case of a financial corporation whose paid-up share capital does not exceed three crores of rupees, twenty five per cent.,
(b) in the case of any other financial corporation, ten per cent.,
of the total income (computed before making any deduction under Chapter VI-A) carried to such reserve account.”
8. This amendment has already been taken into consideration in our previous judgment and it has been held that the amendment on which the Revenue sought to rely strengthened the interpretation which the assessee wanted the court to put on the relevant provision. The first portion of the amendment which was brought about by the Finance Act, 1966, is not very relevant for our purpose. The words in parenthesis were inserted by the Finance (No. 2) Act, 1967, with effect from April 1, 1968. Learned counsel for the Revenue relied upon this amendment where the words in parenthesis were inserted by the Finance (No. 2) Act of 1967, with effect from April 1, 1968, to rely upon his submission in support of the Revenue that this amendment had brought about a substantial change. Unfortunately for the Revenue, the Bench of this court deciding Tax Case No. 96 of 1971 CIT v. Bihar State Financial Corpn., [1983] 142 ITR 519, had taken special care and great pains not only to refer to but also to consider the effect of the amendment in question and it was held thus [1983] 142 ITR 519 at p. 524:
“After this amendment, it is clear that the expression ‘total income’ occurring in clause (viii) cannot mean the total assessed income. For the purpose of determining the maximum limit of allowable deduction in clause (viii), the figure of total income computed before making any deduction under Chapter VI-A has got to be taken. In such a situation, will it be reasonable to say that the total income must be the total assessed income plus the amount of deduction allowable under Chapter VI-A of the Act? It would thus be seen that if the interpretation which is sought to be put by the Department on the expression ‘total income’ is accepted, then the amended provisions would be wholly otiose and inept; but it would not be so, rather it would be consistent and in consonance with the earlier Act, if the interpretation sought to be put on behalf of the corporation is accepted to be correct.”
9. The judgment of this court squarely covers the point and the submission made by Mr. Rajgarhia, learned counsel for the Revenue, is rejected in view of our decision in that case.
10. Thus, the question referred to us is answered in the negative, in favour of the assessee and against the Revenue. In the circumstances of the case, there shall be no order as to costs.
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