M/S.THE FEDERAL BANK LTD. vs. THE ASSISTANT COMMISSIONER OF INCOMETAX

Admittedly appellant is a public limited company registered under the Companies Act and it is a Scheduled Bank governed by the provisions of the Banking Regulation Act. The deduction admissible under Section 36(1)(viii) is a percentage of profit earned from the business of providing long term finance for industrial or agricultural development or development of infrastructure by financial corporations. Since the deduction admissible under Section 36(1)(viii) during the relevant period is only to financial corporations, the question to be considered is whether assessee answers the description of "financial corporation" within the meaning of that term contained under the abovereferred provision of the Act. Before proceeding to consider assessee's case, we have to necessarily consider the amendment later introduced to Section 36(1)(viii) by Finance Act, 2006 with effect from 1.4.2007, wherein among other financial institutions Banking Companies are also granted the benefit of deduction under the said provision. Admittedly the amendment extending the benefit of deduction under Section 36(1)(viii) is given only prospective effect from 1.4.2007 and so much so, if the specific inclusion of Banking Companies through the amendment in 2007 only entitles Scheduled Banks for claiming deduction, then certainly the assessee would not be entitled to the benefit of deduction for the year 2004-2005. For easy reference we extract hereunder Section 36(1)(viii) as it stood at the relevant time: "S.

Other deductions:-(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 and maintained 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 heard "Profits and gains of business or profession" before making any deduction under this clause) carried to such reserve account: Provided that . . . . Explanation:- In this clause, (a) "financial corporation" shall include a public company and a Government company; (b) "public company" shall have the meaning assigned to it in section 3 of the Companies Act, 1956(1 of 1956); ............... ............... (e) "long-term finance" means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years." Even though assessee has no case that amendment is clarificatory and it has retrospective operation, the position canvassed is that since it is a public company falling within the definition under clause (b) of Explanation to the abovereferred provision and is engaged in long term financing of infrastructural facility, it is entitled to be treated as a "financial corporation" and so much so, it is entitled to deduction. Standing Counsel appearing for the respondent on the other hand contended that the definition clauses in Section 36(1)(viii) underwent a sea change and it is only after the amendment various financial institutions like Banking Companies, Co-operative Banks etc. were brought within the meaning of specified entity defined under the said provision. The contention of the Revenue is that unless the assessee answers the description of "financial corporation" as defined under the provisions of the Act as it stood during the relevant assessment year, assessee is not entitled to the deduction claimed.

After hearing both sides and after going through the orders of the Tribunal, we feel the conclusion drawn by the Tribunal that assessee is not a financial corporation falling under Section 36(1)(viii) of the Act during the relevant year is perfectly correct. In fact, if we go through the scheme of various deductions provided under sub-sections of Section 36(1), it would be seen the deductions are specifically oriented to certain types of assessees. Even though Scheduled Banks are also public companies registered under the Companies Act, the Income Tax Act specifically refers to Scheduled Banks as such which is clear from the provisions of Section 36(1)(viia). Section 36(1)(viia) deals with Scheduled Bank, Non-scheduled Bank and related terms applicable to the Banks like rural branches, rural advances etc. In fact, special deduction provided to financial corporations was separately brought under the subsequent sub-section namely, clause (viii) of Section 36(1) wherein financial corporation is given an inclusive definition covering public companies and Government companies. It is not as if the Legislature was unaware of the fact that Scheduled Banks are registered under the Companies Act. When the Legislature makes special provisions for deductions admissible to different types of assessees and when Scheduled Banks are specifically referred to in the Sections made applicable to them, it cannot be assumed that the Legislature wanted to cover Scheduled Banks within the meaning of public companies engaged in financing making them financial corporations. If the assessee's contention that a Scheduled Bank engaged in long term financing including advance for infrastructural development falls within the definition of public company and in turn financial corporation within the meaning of Section 36(1)(viii) is accepted, then there was no need for the amendment introduced in 2007 referred to above whereunder banking companies are also specifically granted deduction under Section 36(1)(viii) of the Act. As already pointed out by us, the Legislature made specific provisions in Section 36(1) (viia) for Scheduled Banks and made certain provision for deduction exclusively for financial corporations under Section 36(1) (viii). Even though Scheduled Banks and financial corporations engaged in business of analogous character, the Banking Companies are not generally referred as financial corporations. Normally financial corporations are either statutory corporations created under specific statutes like State Financial Corporations Act, Industrial Credit and Investment Corporation Act etc. which are public companies. However, these are obviously separate and distinct entities different from Scheduled Banks which are covered by provisions of the Banking Regulation Act. The Legislature obviously did not want to extend the benefit of deduction under Section 36(1)(viii) to Schedules Banks until they amended the provisions by Finance Act, 2006 with effect from 1.4.2007 covering Banking Companies also for the purpose of deduction provided therein. So much so, we feel the provisions of Section 36(1)(viii) until it was amended by Finance Act, 2006 did not include Banking Companies governed by the provisions of the Banking Regulation Act. In this view of the matter, we uphold the order of the Tribunal and dismiss the assessee's appeal. C.N.RAMACHANDRAN NAIR Judge M.L.JOSEPH FRANCIS JudgeP.S. to Judge pms