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Income Tax – Deductions – Transfer to reserve to be worked out on gross total income before making deduction u/s 36 as well as under Chapter VI-A of Act : Rajasthan HC Larger Bench

THE issue before the High Court of Rajasthan was

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in confirming the Commissioner of Income-tax (Appeals)’ view that deduction under section 36(1) (viii) of transfer of reserve at 40 per cent, was to be worked out on the gross total income before making deduction under this section as well as under Chapter VI-A of the Income-tax Act, 1961 ?”

In a long line of cases, almost all the High Courts -Patna High Court, the Andhra Pradesh High Court, the Madhya Pradesh High Court and the Orissa High Court (except Karnataka High Court which has taken a dissenting view ) taken the view thatThe total income on which the deduction under section 36(1)(viii) of the Income-tax Act is allowable should be computed before making the deduction in terms of section 36(1) (viii). In other words, the deduction which is permissible in computing the taxable profits of the financial corporation is in respect of an amount transferred by them to the special reserve account up to 40 per cent, on their total income computed before making any deduction and that amount of 40 per cent, is not to be worked out on the net income.

To Illustrate

Assuming the total income before applying this provision to be Rs. 1,000, according to the assessee, for calculating the deduction under this section (and if this sum of Rs. 1,000 is put in a reserve fund), 40 per cent, should be calculated on Rs. 1,000 and a deduction of Rs. 400 is to be given. According to the Revenue, the deduction at 40 per cent, should be calculated on the figure of total income arrived at after this deduction also is applied for which a notional calculation is to be done by adding 40 per cent., to the total income and then calculating the deduction to be allowed at 40 per cent, of Rs. 1,400.

The revenue has adopted the second method urged but the first appellate authority and the Tribunal has not accepted it and reliance was placed on the instructions of the Board, which were in vogue during the relevant accounting and assessment year.

The Supreme Court had the final say in the case of Kerala State Industrial Development Corporation, .” The Karnataka High Court has tried to work out the sub-section on the basis of a mathematical formula and has dissented from the decision of the Patna High Court in CIT v. Bihar State Financial Corporation. It may here be mentioned that Civil Appeal No. 3695 of 1982 – CIT v. Bihar State Financial Corporation against the aforesaid judgment was dismissed by Supreme Court on January 20, 1995, thereby affirming the view of the Patna High Court.

Supreme Court noted the preponderance of the judicial opinion of the various High Courts is in line with the view expressed by the Kerala High Court but ” the relevant sub-clause (viii) of section 36(1) has subsequently been amended so as to bring it in line with the view of the Patna and the Kerala High Courts.” The decision of the Karnataka High Court does not appear to be correct being contrary to the decision of the Patna High Court which stands affirmed by its affirmation by Supreme Court on January 20,1995. The view of the other High Courts is in consonance with the relevant provisions of the Act.

The Supreme Court, thus, puts its seal of approval on the decision of the Patna High Court in the case of Bihar State Financial Corporation and overruled the decision of the Karnataka High Court holding otherwise.

The Rajasthan High Court therefore could not take a different view

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