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Income Tax Appellate Tribunal, A BENCH, CHENNAI
Before: SHRI MAHAVIR SINGHAND
आदेश /O R D E R
PER MAHAVIR SINGH, VICE PRESIDENT:
This appeal by the assessee is arising out of the revision passed by the Principal Commissioner of Income Tax, PCIT, Chennai-3 in Order No.ITBA/REV/F/REV5/2023-24/1063776516 (1) dated 31.03.2024. The assessment was framed by the Assistant Commissioner of Income Tax, Corporate Circle 6(2), Chennai, for
The only issue in this appeal of assessee is as regards to the order of PCIT assuming jurisdiction u/s.263 of the Act, setting aside the assessment framed by the AO u/s.143(3) of the Act dated 28.12.2019 only on the issue of disallowance of deduction u/s.36(1)(viii) of the Act being the total reserve of Rs.32.34 crores were created much before the allowability of claim in the assessment order and restricting the allowances/deduction u/s.36(1)(viii) of the Act at Rs.29 crores being the reserve created in the financial year relevant to assessment year 2018-19.
At the outset, the ld.counsel for the assessee first argued the issue on merits. He stated the facts that the assessee company filed its original return of income for assessment year 2017-18 on 31.10.2017 and subsequently had revised its return of income on 13.12.2018 and accordingly, assessment was completed u/s.143(3) vide order dated 28.12.2019. Subsequently, the PCIT on going through the assessment records issued show cause notice vide DIN No.ITBA/REV/F/REV1/2023-24/1061742007(1) dated 29.02.2024 requiring the assessee as to why the claim of deduction u/s.36(1)(viii) of the Act be not restricted to Rs.29 crores as against allowed by AO at Rs.32,34,08,900/-. The PCIT in his show-cause noted that the records related to the assessment were perused and on perusal of the details, it is seen from the computation of total income submitted by the assessee that an amount of Rs.32,34,08,900/- was claimed u/s.36(1)(viii) of the Act, whereas only an amount of Rs.29,00,00,000/- was appropriated to the special reserve account created u/s.36(1)(viii) of the Act for the financial year 2017-18 as it is evident from Note-3 “Reserves & Surplus” of the annual accounts. Thus, only Rs.3,34,08,900/- ought to have been disallowed as not eligible for deduction u/s.36(1)(viii) of the Act. Whereas in the assessment order only Rs.2,68,94,244/- was disallowed and added to the total income. Hence the balance amount of Rs.65,14,656/- ought to have been disallowed and added back to the total income, but the AO has failed to do so. The assessee before PCIT explained in detail that the total reserves of Rs.32.34 crores (including additional reserve of Rs.3.34 crores created in the subsequent financial year) were created much before the completion of assessment for the relevant assessment year i.e., 21.04.2021. Hence according to assessee, the claim of deduction u/s.36(1)(viii) of the Act amounting to Rs.32,34,08,900/- made in the return of income is within the parameters of law because such additional reserve created in subsequent financial year is allowable claim u/s.36(1)(viii) of the Act for the succeeding assessment year. But, the PCIT was not convinced and he set aside the order of AO directing him vide para 10.13 as under:- 10.1.3 In this case, the assessee has only carried an amount Rs.29,00,00,000 to the Special reserve account. However, it claimed Rs.32,34,08,900/- being 20% of the Profits from the eligible business as deduction u/s 36(1)(vii) of the Income-tax Act,1961. The accounts of the assessee shows that as on 31.03.2018, the assessee has only carried an amount of Rs.29,00,00,000/- to the special reserve. The balance sheet as at 31.03.2019 also shows that the assessee company created and maintained only the amount of Rs.29,00,00,000 under special reserve. The other condition also states the deduction shall not exceed twenty percent of the profit from the eligible business. The assessee claimed the deduction at Rs. 32,34,08,900 stating that this represents 20% of the profit from the business. However, it had not carried this twenty percent profit to the special reserve account as evident from its financials. Hence, the other two conditions, namely i) Profit carried to such special reserve & ii) special reserve created and maintained comes into operation. The twenty percent profit limit is the upper limit and it is not the de facto limit when the assessee has not carried such profit to the Special Reserve. This is amplified by the term the amount not exceeding the twenty percent of profit...". When the assessee has not carried the profit to the extent of 20% of the profit from the eligible business, he is entitled to the deduction only to the extent of the profit which he had carried to the Special reserve carried and maintained for the purpose. As the assessee has only created and maintained the special reserve of Rs.29,00,00,000/-, he is entitled to deduction to the extent of Rs.29 crores only u/s 36(1)(viii) of the Income-tax Act, 1961. The Assessing Officer has already disallowed the deduction to the extent of Rs. 2,68,94,244/-and allowed the deduction to the extent of Rs.29,65,14,656/- as against the claim of Rs.32,34.08,900/-. Therefore, the balance claim of exceeding the special reserve created and maintained of Rs.29,00,00,000/- is to be disallowed and added to the total income of the assessee. Accordingly, the Assessing Officer is directed to disallow the balance amount of Rs.65,14,656/- and restrict the deduction u/s36(1)(vii) of the Income-tax Act, 1961. In respect of the disallowance of Rs.2,68,94,244/- made by the Assessing Officer, the assessee is in appeal before the CIT(A).
Thus, it is clarified that the deduction disallowed in this order is only to the extent of Rs.65,14,656/- which has not been considered by the Assessing Officer in his order as per the provisions of Section 36(1)(vii) of the Income-tax Act, 1961. Aggrieved, assessee came in appeal before the Tribunal.
Before us, the ld.counsel for the assessee argued and drawn our attention to the computation of total income that an amount of Rs.32,34,08,900/- was claimed u/s.36(1)(viii) of the Act, whereas only an amount of Rs.29 crores was appropriated to the special reserve account created u/s.36(1)(viii) of the Act for financial year 2017-18 as is evident from Note No.3 under the head ‘Reserves & Surplus’ of the annual accounts. It was explained that in the annual report for financial year 2018-19, the assessee has also transferred a sum of Rs.5.17 crores relating to earlier years which includes the short fall for this year amounting to Rs.3.34 crores as under:- As per IT return - Rs.32.34 crores Reserve created - Rs.29 crores Shortfall - Rs.3.34 crores In view of the above, the assessee contended the total reserve of Rs.32.34 crores including additional reserve of Rs.3.34 crores created in the subsequent financial year were created much before the allowability of claim in the assessment order dated 21.04.2021. It was argued that the claim of deduction u/s.36(1)(viii) of the Act amounting to Rs.32,34,08,900/- made in the return of income includes such additional reserve created in subsequent financial year, which was not considered for the allowability of claim u/s.36(1)(viii) of the Act for the succeeding assessment year and hence, this is allowable claim.
On the other hand, the ld.CIT-DR relied on the revision order passed by PCIT.
After hearing rival contentions and going through the facts of the case, we noted from the accounts of the assessee that the total reserve of Rs.32.34 crores includes additional reserve of Rs.3.34 crores created in the subsequent financial year 2018-19 relevant to assessment year 2019-20. Admittedly, the accounts were finalized for the year ending 31.03.2019 as on 21.05.2019 and assessment was completed on 28.12.2019, it means that the assessment for assessment year 2017-18 was pending as on the date of finalization of accounts for financial year 2018-19 relevant to assessment year 2019-20. For this proposition, as pointed out by ld.counsel for the assessee, the order of Chandigarh Bench of this Tribunal in the case of The State Bank of India & others in dated 09.02.2018, wherein exactly same issue was considered and the issue reads as under:-
“1. The Ld.CIT(A) failed to appreciate that for creation of reserve u/s 36(1)(viii) no time limit was prescribed in the Act, when the same was created before the completion of assessment, the deduction u/s 36(1)(viii) should have been granted by the AO."
The Tribunal has considered that once the assessee has made claim of deduction where the reserve is created in subsequent years, ITAT held that the words used in section “before making any deduction under this clause carry to such reserve account” means that the creation of reserve should be considered at the time of considering the claim of deduction made by the assessee and not before making any deduction. The Tribunal considered this issue in paras 9 to 14 as under:- 9. We find merit in the contention of the Ld. counsel for assessee that the issue is squarely covered by the decision of the Coordinate Benches in the case of Power Finance Corporation Limited (supra) and Bank of Baroda (supra). On perusing the order of the Delhi Bench of the I.T.A.T. in the case of Power Finance Corporation Limited (supra) we find that the issue before it was identical to the impugned case whether the creation of special reserve at the time of finalization of accounts is imperative for the purpose of claiming deduction on account of the same as per the provision of section 36(1)(viii) of the Act. As per the facts of the said case the assessee had created special reserve of Rs.76.72 crores during the year under consideration but had claimed deduction 36(1)(viii) of the Act on account of higher amount of Rs.130.47 crores on the basis that the reserve of the balance amount of Rs.53.27 crores had been created in the succeeding year. The tax authorities restricted the claim to the extent of reserve created during the year only denying the balance for the reason that the same was not created by the assessee in the books of account for the impugned year but was created in the subsequent year. The I.T.A.T. held that as per the plain reading of section 36(1)(viii) no time limit is indicated for the 36(1)(viii) of the Act. The I.T.A.T. held that, therefore, there was no force in the contention of the Revenue that section does not permit deduction in cases where the reserve is created in subsequent years. The I.T.A.T. held that the words used in section "before making any deduction under this clause carried to such reserve account" meant that the creation of the reserve should be considered at the time of considering the claim of deduction made by the assessee and not before making any deduction. The I.T.A.T. drew support for its findings from the decision of he Delhi High Court in the case of CIT Vs. Orient Express Co. Pvt. Ltd. Vs. IAC (1985) 14 ITD 506 (Delhi), the decision of the Special Bench of the ITAT Chandigarh Bench in the case of M/s Punjab State Industrial Corporation Ltd. Vs. DCIT, 102 ITD 1 (Chd)(SB) and the decision of the Hon'ble Apex Court in the case of Karimjee Pvt. Ltd vs DCIT (2005) 193 CTR (SC) 55. The I.T.A.T., therefore, held that the assessee is entitled to deduction u/s 36(1)(viii) of the Act though the reserve is created in the subsequent year provided the same is created before the claim of the assessee is considered and also provided that the same is made out of the profits for the concerned year and not out of the profits of the subsequent year. The relevant findings of the I.T.A.T. in this regard at paras 20 to 25 are as under:
"
A plain reading of s. 36(1)(viii) does not indicate any time- limit for creation of special reserve for claiming deduction under s. 36(1)(viii) of the Act, hence, the contention of learned Departmental Representative for the Revenue that this provision does not permit the deduction in case the special reserve is created in subsequent year, has no force as it does not find support from the plain language of s. 36(1)(viii) of the Act. Perhaps, the words "......... (before making any deduction under this clause) carried to such reserve account" prompt such inference by the learned Departmental Representative for the Revenue but to our mind answer to such inference drawn by the learned Departmental Representative for the Revenue is that before making any deduction does not mean before making any claim but means at the time of considering such deduction claimed by the assessee.
Hon'ble jurisdictional High Court of Delhi while interpreting similar wordings in the context of s. 32A of the Act in the case of CIT vs. Orient Express Co. (P) Ltd. (supra) while dealing with creation of reserve required under s. 32A of the Act at p. 896 held that section prescribes no point of time by which the reserve should be created and in this regard accepted that a reserve created after the closure of the accounts of the year qualifies by observing as under : "The second question which is raised only in ITC Nos. 44 and 45 of 1986 is whether the assessee is disentitled to the investment allowance scheme because no requisite reserve has been created by the assessee company before the close of books of the relevant previous year. On this, the finding is that the requisite 'reserve' has been created by holding a second annual general meeting of the members of the company and that the accounts had been duly amended so as to provide for the reserve before the assessment was completed. In view of the fact that the section prescribes no point of time by which the reserve should be created and in view of the various decisions also referred to by the Tribunal, we think, no question of law arises in regard to this aspect. We, therefore, decline to refer this question."
The observation made by the Hon'ble Delhi High Court in this regard is thus clearly applicable to the instant case under consideration also.
We further find that the Special Bench of Tribunal (Chandigarh) in the case of Punjab State Industrial Development Corporation Ltd. (supra) also clearly held that in case of claim under s. 36(1)(viii) of the Act further reserve could be created after closure of the account and AO should offer an opportunity to the assessee to do the same for claiming the deduction under s. 36(1)(viii) of the Act.
Similar view as taken by the apex Court in the case of Karimjee (P) Ltd. (supra) wherein while dealing with deduction under s. 80HHC of the Act, their Lordships observed that creation of reserve after closure of the accounts was construed as complying with the requirement of granting deduction under s. 80HHC of the Act and in this case the timing of creation of reserve was while the matter was being dealt with by the apex Court.
Respectfully following the case law (supra) as discussed hereinabove, we hold that a reserve created in subsequent years, however, before finalization of grant of deduction, is required to be considered while allowing assessee's claim of deduction made under s. 36(1)(viii) of the Act.
25. We further observe that for and from asst. yr. 1996-97, a financial corporation engaged in providing long-term finance for development of infrastructure facility in India has also become eligible assessee and for computing deduction under s. 36(1)(viii) of the Act in the hands of all eligible assessees, only the income derived from the business of providing long- term finance specified in s. 36(1)(viii) of the Act has to be taken into account and an amount not exceeding 40 per cent of the profits from such business is to be carried to such reserve account. This makes out a condition that the amount so transferred to such reserve account should be from such eligible business of providing long-term financing. In view thereof, we hold that the increase in reserve created on 31st March, 1998 i.e., in subsequent year/years is allowable subject to the same being from the profits of eligible business of the assessee of the asst. yr. 1997-98 and not of asst. yr. 1998-99."
The aforesaid decision of the Delhi Bench of the I.T.A.T. was followed by the Mumbai Bench of the I.T.A.T. in the case of Bank of Baroda (supra) wherein the issue was identical, the assessee having claimed deduction u/s 36(1)(viii) of the Act, though the special reserve for the purpose of the said claim had not been made during the impugned year but had been made in the subsequent year.
It is clear therefore that for claiming deduction u/s 36(1)(viii) of the Act on account of creation of special reserve, what is essential is that the same should be created out of the profits of the year only though not necessarily in the books for the impugned year and that the same can be created in the books of the subsequent year also. What is essential is the creation out of the profits of the impugned year, the point of time of creation being before the consideration of the claim of deduction and not before claiming the deduction as such.
Applying the aforesaid provision to the facts of the present case we find that the claim of the assessee amounts to Rs.120 crores for deduction u/s 36(1)(viii) of the Act. The said reserve had been created in financial year 2012-13,i.e before the completion of the assessment for the impugned year vide order passed u/s 143(3) dt.31- 03-2014 was . As per the audited annual report of the assessee of the said year placed before us, it is seen from the Profit & Loss Account for the year ending 31.3.2013, that an amount of Rs.120 crores was transferred from the general reserve out of the profit for the financial year 2010-11 relating to assessment year 2011-12, which is 36(1)(viii) of the Act for the assessment year 2011-12. Thus the assessee has duly demonstrated the creation of reserve out of the profits for the impugned assessment year only and also it is not denied that the same had been created before the finalization of the assessment for the impugned assessment year, meaning thereby while considering the claim of the assessee for deduction u/s 36(1)(viii) of the Act. In view of the above, since the assessee has fulfilled the requirement of section 36(1)(viii) of the Act as interpreted by two decisions of the Tribunal as cited above, we hold that the assessee is entitled to deduction u/s 36(1)(viii) of the Act to the extent of reserve created amounting to Rs.120 crores.
The reliance placed by the Ld. DR on the decision of the Hon'ble Madras High Court in the case of Tamil Nadu Industrial Investment Corporation Ltd. (supra), we find is of no help to the Revenue. In fact, we find that the ratio laid down in the said decision helps the assessee since the Hon'ble High Court held that for the purpose of claiming deduction u/s 36(1)(viii) of the Act, the creation of reserve out of the profits of the impugned year was imperative. In the case before the Hon'ble High Court the assessee had created reserve out of profits of earlier years which the Hon'ble High Court held would not entitle the assessee to claim deduction u/s 36(1)(viii) of, since the essential condition for claiming the said deduction was creation of reserve out of the profits of the impugned year itself. Since the same has been demonstrated in the present case, the decision of the Hon'ble Madras High Court in the case of Tamil Nadu Industrial Investment Corporation Ltd. (supra), in fact, we find helps the assessee's case. As for the decision relied upon by the assessee of the Hon'ble Kerala High Court in the case of Kerala Financial Corporation (supra), we fail to understand how the said decision is of any assistance to the Revenue since no decision was rendered by the Hon'ble High Court vis- à-vis the issue of point of time of creation of reserve and the only issue before it was whether after creation of reserve, writing off bad debts from the same would tantamount to not "maintaining" the reserve which was required u/s 36(1)(viii) of the Act. The decision of the Hon'ble Kerala High Court is, therefore, clearly distinguishable and we hold, therefore, does not apply to the facts and circumstances of the present case at all. As for the contention of the Ld. DR that the case laws relied upon by the assessee are for the period prior to assessment year 1998-99 and as per amended provisions of section 36(1)(viii) thereafter, the creation of reserve is essential pre-requisite, we find is mis-placed. The creation of reserve was always a condition both in pre-amended and post-amended section. What 1998 was the words "maintained". Therefore, even the decision rendered prior to the amendment brought about to section in 1998, applies to the issue at hand since the amendment had no impact on the condition of creation of reserve.
In view of the above, we hold that the assessee is entitled to claim deduction on account of creation of special reserve of Rs.120 crores u/s 36(1)(viii) of the Act since the said reserve has been created out of the profits of the impugned year before the claim was considered for the purpose of deduction. The ground of appeal No.1 raised by the assessee, therefore, stands allowed.
6.1 As the issue is squarely covered in favour of assessee by the decision of the Tribunal in the case of The State Bank of India, supra, we reverse the revision order passed by the PCIT u/s.263 of the Act and quash the same. Therefore, the appeal of the assessee is allowed.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 6th September, 2024 at Chennai.
Sd/- Sd/- (अिमताभ शु�ला) (महावीर �सह ) (AMITABH SHUKLA) (MAHAVIR SINGH) लेखा सद�य/ACCOUNTANT MEMBER उपा�य� /VICE PRESIDENT चे�ई/Chennai, �दनांक/Dated 6th September, 2024 RSR