COMMISSIONER OF INCOME TAX vs. KERELA STATE INDUSTRIAL DEVELOPMENT

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CIVIL APPEAL No. 3315/1993Supreme Court[1998] 1 S.C.R. 87112 February 1998Bench: 1 JudgeAuthor: B.N. KIRPAL OF3 pages
AI SummaryDismissed

What did the Supreme Court hold?

The Supreme Court dismissed the appeals filed by the Revenue, upholding the decision of the Kerala High Court. The Court held that the statutory deduction under Section 36(1)(viii) of the Income Tax Act, 1961, should be calculated on the total income before the deduction itself is applied. The reasoning was based on the preponderance of judicial opinion from various High Courts, including the Patna High Court in CIT v. Bihar State Financial Corporation, which had been affirmed by the Supreme Court on January 20, 1995. The Court found the Karnataka High Court's approach, which used a mathematical formula and dissented from the Patna High Court's view, to be incorrect. Furthermore, the Court noted that Section 36(1)(viii) was subsequently amended to align with the view taken by the Patna and Kerala High Courts. The ratio decidendi is that the deduction under Section 36(1)(viii) is to be computed on the income computed without reducing the deduction itself, aligning with established judicial precedent and legislative intent.

What were the facts?

The appeals by certificate were filed by the Revenue against the judgment of the Kerala High Court concerning assessment year 1978-79. The High Court had answered a reference in favour of the assessee, Kerala State Industrial Development Corporation Ltd. The question was whether the statutory deduction under Section 36(1)(viii) of the Income Tax Act, 1961, should be calculated on the total income before or after deducting the amount allowable under the said section. The High Court, relying on a Supreme Court observation in Cambay Electric Supply Industrial Company Ltd., held that the deduction should be calculated on the total income before the deduction itself. This view was consistent with decisions of the Patna, Madhya Pradesh, and earlier Kerala High Courts, with only the Karnataka High Court dissenting. The Supreme Court was considering the correctness of the Kerala High Court's decision.

What were the issues?

1. Whether the Tribunal was right in law in holding that the statutory deduction under Section 36(1)(viii) of the Income Tax Act, 1961, should be calculated on the total income before the deduction of the amount allowable under the section? (Question of law, turning on Section 36(1)(viii) of the Income Tax Act, 1961). Assessee's Contentions: The assessee, through the High Court's decision, argued that the deduction under Section 36(1)(viii) should be computed on the total income calculated in accordance with the provisions of Sections 30 to 43A, excluding Section 36(1)(viii) itself. This interpretation was supported by the Supreme Court's observation in Cambay Electric Supply Industrial Company Ltd. v. CIT. Revenue's Contentions: The Revenue's appeal implies a disagreement with the High Court's interpretation. The judgment notes that the Karnataka High Court had expressed a dissenting view, attempting to work out the sub-section on the basis of a mathematical formula, which suggests the Revenue likely supported this dissenting view or an interpretation contrary to the High Court's.

Which sections of the Income-tax Act were involved?

Section 36(1)(viii),Section 30,Section 43A

AI-generated summary — verify with the full judgment below

COMMISSIONER OF INCOME TAX A ' _ _,J. v. KERELA STATE INDUSTRIAL DEVELOPMENT FEBRUARY 12, 1998 [B.N. KIRPAL AND A.P. MISHRA, JJ.j B -.- Income Tax Act, 1961, Section 36(l)(viii)-Deduction-AY 1978-79- Held, the statutory deduction under this section should be calculated on the total income before deduction of the amount allowable under the section. c On a reference as to whether the Tribunal was right in holding that the statutory deduction under Section 36(1)(viii) of the Income Tax Act should be calculated on the total income before deduction of the amount allowable under the section, the Keraia High Court answered the question "-- in the affirmative relying upon the observation of this Court in Cam bay D ~ Electric*. The view was also in consonance with the view taken by the Patna High Court in three decisions the Madhya Pradesh High Court in two decisions and the Kerela High Court in an earlier decision. Only the Karnataka High Court had expressed a dissenting view. Revenue has preferred the present appeal. E Dismissing the appeal, this Court HELD : The impunged decision of the High Court following its earlier decision in CITv. Kerela State Industrial Development Corporation Ltd,. is ::. unexceptionable. Karnataka High Court has tried to work out the sub- section on the basis of a mathematical formula and has dissented from the F )-' ~·I decision of the Patna High Court in C/Tv. Bihar State Financial Corporation, It may here be mentioned that the appeal against the aforesaid judgment reported in Bihar State Financ!al Corporation, was dismissed by this Court on 20.1.1995 thereby affirming the view of the Patna High Court. It may here be noticed that not only the preponderance of the judicial opinion of the G various High Courts is in line with the view expressed by the Kerela High " Court but the relevant sub-section (viii) of Section 36(1) of the Income Tax ~,_r Act has subsequently been amended so as to bring it in line with the view of the Patna and 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 this Court on H 871

872 SUPREME COURT REPORTS [1998] 1 S.C.R. A 20-1-1995. The view of the other High Court is in consonance with relevant provisions of the Act. This Court, therefore, agrees with the decision of the High Court in answering the question of law in affirmative and in favour of the assessee. (873-C-F] CIT v. Kerela State Industrial Development Corporation Ltd., (1990) B 182 ITR 67 (Ker.); CIT v. Bihar State Financial Corporation, (1983) 142 ITR 518 (Pat.), approved. Karnataka State Financial Corporation v. CIT, (1988) 174 ITR 2~6 (Kant), oveni.Iled. C *Comboy Electric Supply Industrial Company Ltd v. CIT, (1978) 113 ITR 84, referred to. CIVIL APPELLATE JURI ICTION : Civil Appeal Nos. 3315-16 of 1993. D From the Judgment and Order dated 29th Sept., 1989 of the Kerala High E F G Court in ITR Nos. 571 & 572/85. J. Ramamurthi, Rajiv Nanda and B. Krishna Prasad for the Appellant. Roy Abraham and M.M. Kashyap for the Respondent. . The Judgment of the Court was delivered by KIRP AL, J. In these appeals by certificate granted by ihe Karala High Court, the following question of law has been referred in respect of the assessment year 1978-79:- "Whether, the Tribunal was right in law in holding that the statutory deduction under Section 36 (i) (viii) of the LT. Act, 1961 should be calcnlated on the total income before deduction of the amount allowable under the section?" The Kerala High Court came to the conclusion that in computing the total income for the pmpose of Section 36 (1) (viii) of the Income Tax Act, 1961, the total income has to be computed in accordance with the provisions of Sections 30 to 43A except Section 36 (i) (viii). In arriving at this decision, the High Court relied upon the observations of this Court in Cambay Electric H Supply Industrial Co. Ltd. v. Commissioner of Income Tax, (1978) 113 ITR 84. ...

r C.I.T. v. KERELA STATE INDUSTRIAL DEVELOPMENT [KIRPAL, JJ.] 873 The view which was taken by the Kerala High Court was in consonance A with the view taken by the Patna High Court in three decisions, Madhya Pradesh High Court in two decisions and Kerala High Court itself in an earlier decision. It is stated that sudsequent to the decision under appeal, other High Courts have also taken the same view. The only dissenting view which has been expressed is by the Kamataka High Court in Karnataka State Financial B Corporation v. Commissiner of Income Tax, (1988) 174 !TR 206. Having gone through the decisions cited at the Bar, we find that the decision the High Court following its earlier decision in Commissioner of Income Tax v. Kera/a State Industrial Development Corproration Ltd, (No. 2). (1990) 182 !TR 67, is unceptionable. The Karanataka High Court has tried C to work out the sub-section the basis of a mathematical formula and has dissented from the decision of the Patna High Court in Commissioner of Income Tax, Bihar v. Bihar State Financial Corporation, (I 983) 142 !TR 518. It may here be mentioned that Civil Appeal No. 3695 of 1982 against the aforesairl judgment reported in 142 !TR 518 was dismissed by this Court on 20th January, 1995 thereby affirming the view of the Patna High Court. It may D here be noticed that not only 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 Kerala High Courts. The decision of the Karnataka High Court does not appear to E be correct being contrary to the aforesaid decision of the Patna High Court which stands affirmed by its affirmation by this Court on 20th January, I 995. The view of the other High Courts is in consonance with relevant provisions of the Act. We, therefore, agree with the decision of the High Court in answering the question of law in the affirmative and in favour of the assessee. The appeals are dismissed. No order as to costs. R.K.S. Appeal dismissed. F

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