Income Tax Appellate Tribunal - Bangalore
Canfin Homes Ltd.,, Bangalore vs Assessee on 24 January, 2012
ITA.861/Bang/2010 Page - 1
IN THE INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCH 'A', BANGALORE
BEFORE SHRI. N. BARATHVAJA SANKAR, VICE PRESIDENT
AND
SMT. P. MADHAVI DEVI, JUDICIAL MEMBER
I.T.A No.861/Bang/2010
(Assessment Year : 2006-07)
Canfin Homes Ltd.,
No.29/1, 1st floor, M. N. Krishna Rao Road,
Basavanagudi, Bangalore -41 .. Appellant
PAN : AAACC7241A
v.
Deputy Commissioner of Income-tax,
Circle - 11(5), Bangalore .. Respondent
Appellant by : Shri. B. N. Balakrishna, CA
Respondent by : Shri. G. V. Gopala Rao, CIT - I
Date of hearing : 24.01.2012
Date of pronouncement :
ORDER
PER N. BARATHVAJA SANKAR, VICE PRESIDENT :
This is an appeal preferred by the assessee, Canfin Homes Ltd., Bangalore, for the assessment year 2006-07, against the appellate order dated. 29.04.2010 of the Commissioner of Income-tax (Appeals)-I, Bangalore.
ITA.861/Bang/2010 Page - 2
02. The facts of the case are as follows. The assessee company is a housing finance company. This is a registered housing finance company with the National Housing Bank which is wholly owned by the Reserve Bank of India. The assessee company has accrued an amount of Rs.35,10,88,358/- as profits from housing finance business.
In the statement of income it had made the adjustments as per the Income-tax Act. Being a housing finance company, it had claimed deduction u/s.36(1)(viii) of the Act. Before claiming this deduction, the income from housing finance business was Rs.37,16,06,408/-. On this income the assessee claimed deduction u/s.36(1)(viii) of Rs.14,79,41,734/-. The Assessing Officer examined the balance sheet of the assessee in the light of the proviso to Section 36(1)(viii) and it was noticed that the paid up capital was Rs.20,48,52,500/- and the general reserve-1 was Rs.29,89,00,000/-. The assessee was asked to explain as to whether it had complied with the proviso to section 36(1)(viii), to which the assessee submitted that it had paid up capital of Rs.20,48,75,450/-, general reserves -1 of Rs.29,89,00,000/-, share premium of Rs.5,25,00,000/- and profit and loss account balance of Rs.4,85,44,330/-, which would total to Rs.60,48,19,780/-, and pleaded that all these four amounts should be considered for computing the aggregate specified in the proviso to Section 36(1)(viii). By this the intention of the assessee was to increase the figure of "twice the ITA.861/Bang/2010 Page - 3 amount of paid up share capital and of general reserves.". It was observed by the Assessing Officer that in the assessment year 2003-04 also the assessee had taken the same stand. According to the assessee, it was eligible for claim of Rs.14,79,41,734/-. To decide this, the Assessing Officer went on to analyse as follows :
"The expression "Reserves" has not been defined in the IT Act. It has, therefore, to be understood in the manner in which it is used in commercial practice. A reserve by its very nature is a fund which is created and maintained for the purpose of being drawn up in future. The assessee has intended to bring share premium and profit and loss account balance into the definition of reserve. A mass of undistributed profits cannot automatically become a reserve and somebody possessing the requisite authority must clearly indicate that a portion thereof has been earmarked or separated from the general mass of profits with a view to constituting it either as a general reserve or as a specific reserve. In order to constitute a reserve, however, there must be a conscious act by the company withholding an amount and the word reserve can have no application to profits with respect to the application of which there is as yet, neither a proposal nor a decision. A Reserve may be a general reserve or a specific reserve, but in order to constitute a reserve, there must be a clear indication to show that it was a reserve either of the one or the other kind. A mass of undistributed profit is not a reserve even though it is shown in the balance sheet as a reserve. In drawing the above conclusion, support ITA.861/Bang/2010 Page - 4 is derived from CIT v. Gordon Wood Roffee and Co., (Madras) Pvt. Ltd (183 ITR 465) and Indian Steel and Wire Products v. CIT (33 ITR 579)."
The Assessing Officer has also examined the extracts of the budget speech of the Hon'ble Finance Minister made on 28.02.2007, in support of his claim. The Assessing Officer reduced the claim of the assessee of eligible amount at Rs.14,79,41,734/- to Rs.2,36,50,900/- by observing in his assessment order, as under:
"The existing provisions of clause (viii) of sub-section (1) of section 36 of the Act, provided for a deduction in respect of any special reserve created and maintained by :
(i) a financial corporation engaged in providing long-term finance for industrial or agricultural development or development of infrastructure facility in India ; or
(ii) 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.
The provisions regarding this special deduction also existed in the IT Act, 1922 and were retained in the IT Act, 1961. The scope of the provisions of the said clause was later on widened by the Finance (No.2) Bill, 1971 to include in its ambit the approved financial corporations engaged in providing long term finance for agricultural development in India. The objective of this deduction originally was to stimulate industrial development of the country. The benefit of this deduction was also intended to ITA.861/Bang/2010 Page - 5 enable corporations to augment their initial low equity base on account of limited accessibility to capital market. In the wake of liberalization, from the beginning of the 90's there has been considerable expansion and deepening of the capital market. Accessibility to capital market has markedly improved. The Finance Act 2007, therefore, has limited the deduction to 20% of the profits derived from the business of providing long term finance. Considering the provision for outer limit to the deduction, which is twice the amount of the paid up share capital and of the general reserves, the reduction in the level of deduction to 20% will have the effect of elongating the time period during the deduction. Effectively, therefore, the specified entities are not adversely affected in the long term. The amendment made by the Finance Act, 2007 also provides definitions of certain expressions. This amendment will take effect from 1.4.2008 and will accordingly apply in relation to the AY 2008-09 and subsequent assessment years. In view of the above discussion, it can be said that the version of the assessee company that the Hon'ble Finance Minister's speech is directly helpful in substantiating its claim is unfound. Hence, this plea of the assessee is rejected.
The proviso to sec.36(1)(viii) lays down a condition that where the aggregate of the amounts carried to the Special Reserve exceeds twice the amount of the Paid up Share Capital and of the General Reserves, no allowance shall be made in respect of such excess. To verify this condition, the aggregate of the amounts carried to Special Reserve, Paid up Share Capital and General Reserves were verified from annual report of the assessee company. It was found that the aggregate of amounts ITA.861/Bang/2010 Page - 6 carried to the Special Reserve as on 01.04.2005 stood at Rs.98,39,00,000/-. Whereas, twice the amount of Paid up Capital and General Reserves totaled to Rs.100,75,50,90/-. In view of this, the assessee is eligible only for an amount of Rs.2,36,50,900/- instead of its claim of Rs.14,79,41,734/-." Being aggrieved with the above finding of the Assessing Officer the assessee went in appeal before the Commissioner of Income-tax (Appeals).
03. The Commissioner of Income-tax (Appeals) in his detailed order did not accept the contentions of the learned counsel for the assessee and confirmed the addition made by the Assessing Officer. Still aggrieved, the assessee is in appeal before us.
04. The following concise effective grounds of appeal are as under :
i) The learned Commissioner of Income-tax (Appeals)-1 has grossly erred in not appreciating the facts of the case and has erred in coming to the conclusions while upholding disallowance of statutory deduction u/s.36(1)(viii) of Rs.12,42,90,834/- without properly applying the principles of Income-tax Act, and as well as various provisions of Income- tax law.
ii) The learned Commissioner of Income-tax (Appeals)-1 has grossly erred in not appreciating the fact the word "PAID UP CAPITAL + GENERAL RESERVES" has to be read as a ITA.861/Bang/2010 Page - 7 single coined word and not separately which affects the very fundamental purpose of providing the relief under the provisions of Sec.36(1)(viii) and further the learned Commissioner of Income-tax (Appeals)-1 has failed to appreciate the fact that the Coined Word "PAID UP CAPITAL + GENERAL RESERVES" is already defined as NET WORTH under other laws and the learned Commissioner of Income-tax (Appeals)-1 ought to have considered the arguments made by the appellant in this regard and the Learned Commissioner of Income-tax (Appeals)-I, has erred in not appreciating the written arguments made by the appellant regarding the meaning of "PAID UP CAPITAL + GENERAL RESERVES".
iii) The learned Commissioner of Income-tax (Appeals)-1 has grossly erred in not considering the Budget Speech made by the Honorable Finance Minister which clearly established the meaning of the Coined Word ("PAID UP CAPITAL + GENERAL RESERVES") as NET WORTH.
iv) The learned Commissioner of Income-tax (Appeals)-1 has grossly erred in not considering the written arguments and as well as material placed before him during the course of appeal and further failed to appreciate that the guidance notes issued by the Institute of Chartered Accountants of India, referred to by the Learned Commissioner of Income-tax (Appeals) have no relevance to the case.
ITA.861/Bang/2010 Page - 8
v) The learned Commissioner of Income-tax (Appeals)-1
failed to appreciate the fact that while interpreting the provision giving allowance or relief to an assessee, the provision has to be interpreted in a liberal manner.
05. At the time of hearing, the learned Chartered Accountant appearing for the assessee placed on record two paper books consisting of various materials relevant to the issue and copies of the decisions of various Courts. By placing the above paper books on record, the learned chartered accountant submitted as under :
"On appeal, the learned CIT (Appeals) also heavily relied on the definition or meaning of General Reserve as provided under the compendium of opinion by the Institute of Chartered Accountants of India, without considering the fact that, such a term is not defined under either the Provisions of Income-tax and or the Companies Act, 1956, and thereby dismissed the appeal of the appellant."
The learned representative for the assessee in his written submissions, brought out he provisions of S. 36(1)(viii), which is reproduced as under :
S.36 (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 S. 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 ITA.861/Bang/2010 Page - 9 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 percent of the profits derived from such business of providing Long-
term finance (Computed under the head "Profits & Gains of business or profession" [before making any deduction under this clause]), carried to such reserve account] PROVISO TO S. 36(1)(Viii) :
Provided : that where the aggregate of the amounts carried to such reserve account from time to time exceeds [ twice the amount of] the paid up share capital and [ of the general reserves ] of the corporation [or as the case may be, the company], no allowance under this clause shall be made in respect of such excess. The said proviso before its amendment in 1997, (as applicable up to Assessment year 1996 -97) stated as under;
"Provided further that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid-up share capital [Excluding the amounts capitalized from reserves] The learned representative submitted that from the above proviso to s. 36(1)(viii) read with the proviso before its amendment in 1997, brings the following two things.
1. The proviso as applicable upto Asst.year 1996 -97 restricted the total deduction upto twice the Paid up capital -- and such paid up ITA.861/Bang/2010 Page - 10 capital was one that has been allotted for wholly for a consideration of cash, and the bonus shares issued out of capitalization of Capital reserves were not to be considered.
In other words, the proviso has been made more liberal, and W.E.F. assessment year 1997 - 98, the paid up capital amount as appearing in the financial statements of a company which interalia included the capitalized reserves in the form of bonus shares also came to be considered, thereby restriction placed for consideration of Capital reserves were removed or deleted. In addition to this, the word "THE GENERAL RESERVES" to be summed up with such paid up capital came to be added to the existing word "Paid up capital", which had become more liberal, made it very clear that, the Honorable Parliament intended to give effect to the total Share Holders Investment (which is always represented by the Paid up Share Capital and as well as Reserves and Surplus) in such a Company for purposes of computation of the limit specified under the said new proviso to S. 36(1)(viii).
2. The definition of the word "sum of Paid up Capital and Free Reserves" was also introduced into the Companies Act, 1956, W.E.F. 2003, wherein the definition of such Free Reserve was also provided.
ITA.861/Bang/2010 Page - 11 The learned representative further submitted that there is no dispute between the Appellant and the Assessing officer in so far as it relates to the Provisions of S. 36(1)(viii), but the issue is in respect of interpretation of the word "GENERAL RESERVES" as is appearing in the said proviso to S. 36(1)(viii).
The learned representative proceeded to submit the following :
1. The Proviso to S. 36(1)(viii) speaks about two important classes of items appearing in the financial statements of a Company - Paid Up Capital and General Reserves, and the words used are [twice the amount of] the paid up share capital and [of the general reserves] of the corporation (or as the case may be, the company]. Accordingly it can be seen from the above that the words used with reference to the term "GENERAL RESERVES" is "THE GENERAL RESERVES"
and not just "GENERAL RESER VES".
2. The word "THE" preceding the word "GENERAL RESERVES' must be given a special meaning as already held by the Honorable Supreme Court of India in the matter of ; Commissioner Of Income- Tax Vs Vegetable Products Ltd; reported in (1973) 88 ITR 192 (SC), wherein their learned Lordships have held as under:
ITA.861/Bang/2010 Page - 12 "Next come the question what is the meaning to be attached to the words "the tax" found in the latter part of that provision. It may be noted that the expressed used is not "tax" but "the tax". The definite article "the" must have a refrrence to something said earlier. It can only refer to the tax, if any payable by the assessee mentioned in the first part of S. 271(1)(a)(i). The expression used is not "tax" but "the tax". That expression can be reasonably understood as referring to the expression earlier used in the provision, namely, "the amount of the tax, if any, payable" by the assessee." He further submitted that in the present case of the appellant also, in the proviso to s.36(1)(viii) the word "the General Reserves" appear after the word "Paid Up Share Capital" and by applying the ratio held by their Honorable Lordships of the Supreme Court of India, it becomes very clear that the words, "PAID UP CAPITAL" AND "
GENERAL RESERVES" are inseparable and have to be read and understood together, and not separately as separate words carrying different meanings and or expressions.
3. The combined word - "SUM OF PAID UP CAPITAL AND FREE RESERVE" has already been defined under the Companies Act, 1956, ITA.861/Bang/2010 Page - 13 as "NET WORTH" and for the purposes of the said definition, the explanation to the said provision states that "Free Reserves" means all reserves created out of the profits and share premium account but does not include reserves created out of revaluation of assets, write back of depreciation provisions and amalgamation;
The Provisions of S. 29(A) of the Companies Act, 1956, states as under;
"net Worth" means the sum total of the paid-up capital and free reserves after deducting the provisions or expenses as may be prescribed.
Explanation: - For the purposes of this clause, "free Reserves" means all reserves created out of the profits and share premium account but does not include reserves created out of revaluation of assets, write back of depreciation provisions and amalgamation;
4. The word "GENERAL RESERVE' is also defined and or referred to as 'FREE RESERVE", even as per the Para 3.4 at Page 18 of the order of the learned Commissioner of Income-tax ( Appeals) - ( Please refer Page 23 of the Appeal Memo filed). The learned CIT (Appeals) ITA.861/Bang/2010 Page - 14 at para 3.4 of page 18 of his order has stated as under;
"it is in this background the treatment that the claim of the appellant that balances under other heads in the balance sheet should be treated as general reserve has to be examined. Basically a general reserve is capable of being distributed though the profit and loss account and therefore is not a capital reserve. Thus, every general reserve has to have the character of revenue reserve and a free reserve."
5. The words "THE GENERAL RESERVES" used under the proviso to S.36(1)(viii) is in Plural and not singular, and hence definitely the plural nature of the words used along with the prefix "THE' must carry special meaning, as already held by the Honorable Supreme Court of India in the above mentioned Judgment. It definitely means that more than One reserve, which forms part of Share Holders funds, and accordingly all those reserves which are covered under the definition of "FREE RESERVES" as defined under the word "NET WORTH" under the Companies Act, 1956, has to be considered as the said definition is given under an Central Enactment and passed by the Honorable Parliament, and further this definition is applicable and binding on all Companies registered under the Companies Act, 1956, and the Appellant also is clearly covered by the said provision.
ITA.861/Bang/2010 Page - 15
6. The Honorable Finance Minister in his budget speech made on February 28, 2007 before the Honorable Parliament while presenting his budget for the year 2007 -- 08, and in respect of proposing an amendment to the very provisions of S. 36(1)(viii) has mentioned as under; Reference: Finance Minister Budget Speech -- ITR -Sl.No:
172:
"I also propose to partially modify a deduction that is available to certain companies. Without altering the overall limit of the special reserve equal to twice the Net worth under section 36(1)(viii) of the Income-tax act, I propose to stretch the period by restricting the deduction to 20% of the profits each year and limit the benefit to banks and certain financial corporations."
Even from the above budget speech of the Honorable Finance Minister it can be seen that the word used is "Net Worth", which is in turn defined as a" Sum of Paid up Capital and Free Reserves", which is very similar or same as used under the provisions of S. 36(1)(viii). It has been held by their Honorable Lordships of the Supreme Court of India in; [A] K.P.Verghese Vs Income-Tax Officer & Anr (1981)131 ITR 597 (SC) ITA.861/Bang/2010 Page - 16 "1NTERPRETATION OF STATUTES - RULE OF INTERPRETATION - TASK OF INTERPRETATION OF STATUTORY ENACTMENT -- NOT A MECHANICAL ONE - IS MORE THAN MERE READING OF MATHEMATICAL FORMULAE - IS ALSO AN ATTEMPT TO DISCOVER THE LEGISLATIVE INTENT FROM THE LANGUAGE USED -
INTERPRETATION NOT TO BE SOLELY BASED ON PURELY LITERAL REA SING - PLAIN LITERAL INTERPRETAION OF STATUTORY PROVISION, IF IT RESULTS IN ABSURD AND UNREASONABLE CONSEQUENCES, NOT IN CONSONANCE WITH THE LEGISLATIVE INTENT, MUST BE AVOIDED -
SUCH AVOIDANCE IS NECESSARY TO ARRIVE AT THE OBVIOUS INTENTION OF THE LEGISLATURE AND PRODUCE A RATIONAL CONSTRUCTION."
The learned representative further submitted that from the above judgment of the Supreme Court of India, it becomes clear that, while interpreting, the intent of the Honorable Legislature has to be taken into consideration. It is a well settled principle that the, intention of the Honorable Legislature is made known through the Budget Speech of the Honorable Finance Minister, made while presenting the Budget with proposed amendments for motion in the Honorable Parliament. The Supreme Court of India in the matter of Kerala State Industrial ITA.861/Bang/2010 Page - 17 Development Vs. Commissioner of Income-Tax - Reported in -- (2003) 259 ITR 51 (SC), have held that:
"That the Finance Minister's Speech can be relied upon to through the light on the object and purpose of the particular provisions introduced by the Finance Bill has been recognized by this court in K.P. Varghese Vs. ITO (1981) 131 ITR 597 (SC) at page 609".
If at all there is deemed to be an ambiguity in the proviso to S. 36(1)(viii), it is about the how the word "GENERAL RESERVES" to be defined and or the meaning of such word" General Reserves" used in the said proviso.
The Honorable Supreme Court of India, in the case of CIT Vs Vegetable Products Ltd (1973) 88 ITR 192 (SC) have already held that when a word is prefixed by the word "the" then, such word which is prefixed by the said word "the" shall be read with reference to the previous word used in such enactment.
In the instant case, the Word "THE GENERAL RESERVES" is Preceded by the word "PAID UP CAPITAL" and accordingly by applying the ratio of the decision of their Honorable Lordships of the Honorable Supreme Court of India, in the above mentioned case, it ITA.861/Bang/2010 Page - 18 becomes very clear that the Word "General Reserves" has to read along with the word "Paid up Share Capital" for purposes of interpretation of the said provision, and the said words cannot be separately interpreted.
The words used in the proviso to S. 36(1)(viii) is same as is used under the definition of the word "NET WORTH" under the Companies Act, 1956, which applies to all the Companies, and more so to the Appellant being a Company Incorporated under the Companies Act, 1956.
The speech of the Honorable Finance Minister also removes or clears all doubts in respect of such interpretation, since the word used by the Honorable Finance Minister in his above budget Speech also is "NET WORTH".
According to the learned representative, in other words, as the word "Sum of Paid Up Capital and of the Free Reserve (General Reserves)"
has already been defined under another Law governing the Companies, and the said word is not defined under the provisions of Income-Tax Act, 1961, the said definition squarely becomes applicable in the case of the Appellant.
ITA.861/Bang/2010 Page - 19 The provisions of S. 36(1)(viii) providing the statutory allowance of 40% of its profits from its business of Long term housing finance was provided with a social objective of providing a roof to every citizen of the Country, by providing him / her with funds towards purchase and or construction of a residential house at considerably low interest rates, and repayment spread over long periods even extending upto a period of 20 years.
The housing loans provided by every housing finance company and or Banks became highly competitive which enabled a large section of the population of this Country to own a roof / shelter. The very fact that Honorable Central Government introduced interest rate subsidy in respect of Housing loans of value Rs.10 Lakhs and below demonstrates the benefit the said provisions have done to the society at large and as well as the Wisdom of the Honorable Parliament in providing such a provision.
It has been held by the Honorable Supreme Court of India and as well as by various Honorable High courts on several occasions that while interpreting beneficial provisions providing allowances and or deductions, they have to be "LIBERALY CONSTRUED OR INTERPRETED".
ITA.861/Bang/2010 Page - 20 The definitions provided by the Institute of Chartered
Accountants of India, in the book of Compendium of Guidance Notes Volume I, (5th Edition) (as on January 1, 1988) is as under; a. General Reserve : A revenue Reserve which is not earmarked for a Specific Purpose.
b. Net Worth : (Net Assets): The excess of book value of assets (Other than Fictitious Assets) of an enterprise over its liabilities. This is also referred to as Net Worth or Share Holders Funds."
In the publication of the book titled "Accounting & Analysis" The Indian Experience -- Reference to 400 Listed Companies, published by M/s Global Data Services of India Ltd, a wholly owned subsidiary of "CRISIL", an enterprise accredited by Government of India, for purposes of conducting and awarding Credit Rating of Financial and other Institutions of the Country, at Chapter 8, defines "INTANGIBLES AND NET WORTH AS UNDER";
Common Sources of funds for companies are its shareholders, through the issue of shares ( Share Capital ) or in the form of plough back of profits (Reserves)- These represent the investments that shareholders ITA.861/Bang/2010 Page - 21 have made in the company and is commonly referred to as 'Shareholders funds' or 'Net Worth'.
Net worth is defined in the same book as under;
"Net Worth : is the residual interest in the assets of an enterprise, after deducting all its liabilities. Net worth is an important determinant of the value of a company, considering it is composed primarily of all the money that has been invested since its Inception, as well as the retained earnings for the duration of its operation. Gross Net worth is the sum of the Equity Capital and the Reserves (Excluding revaluation reserve ). Tangible Net Worth is Gross Net Worth less Intangibles, miscellaneous expenses not written off and debit balance in Profit and Loss Account."
Honorable Lordships, the appellant humbly submits that, the definition provided under the Companies Act, 1956 read with the Budget speech of the Honorable Finance Minister clearly establishes the fact that the word used in the proviso to S. 36(1)(viii) is nothing but "NET WORTH" and no other meaning can be assigned to the said words other than what is already defined under Company Law. The learned representative submitted that the definition to words provided under the laws promulgated by the Honorable Parliament ITA.861/Bang/2010 Page - 22 has to be given effect and as already held by the Honorable courts of India, that while interpreting beneficial provisions, the same has to be given a Liberal interpretation and as well as one that is beneficial to the Assessee has to be considered.
He finally submitted that he had already filed the list of cases relied by the appellant, and as well as definitions provided under the Companies Act, 1956, relevant pages of the definition provided under the book published by the wholly owned subsidiary of CRISIL, and as well as the relevant pages from the book of compendium of Guidance notes published by the ICAI, through a paper book during the course of hearing of the appeal on the 10th of May 2011, the said list is annexed herewith for reference.
He prayed that in the interest of Equity and Natural Justice, the definition of the word "SUM OF PAID UP CAPITAL AND FREE RESERVES" as defined under the Companies Act, 1956, as read with the Speech of the Honorable Finance Minister in the Honorable Parliament while proposing amendment to the very said provisions of S. 36(1)(viii) be applied and grant relief to the appellant.
ITA.861/Bang/2010 Page - 23
06. Per contra, the learned DR submitted as under :
"1. The assessee though eligible for deduction u/s 36(1)(viii) of the Income-tax Act but the dispute is regarding the calculation of quantum of deduction.
2. As per the 2nd proviso to section 36 (1)(viii) , the aggregate of amount of deduction carried to special reserve account from time to time should not exceed twice the amount of paid up share capital and general reserves.
3. Thus the basis is very clear and a simple mathematical formula as under :
PAIDUPCAPITAL+ GENERAL RESERVES
4. In the instant case the assessee considered the following amounts for the purpose of calculation of deduction 1 Paid up capital 20,48,75,450 2 General Reserve-i 29,89,00,000 3 Share Premium 5,25,00,000 4 P&L A./c balance 4,85,44,330 5 Special Reserve Opening Balance 60,48,19,780
5. As regards to item no.1 & 2, above there is no dispute between Assessing Officer and Assessee. The assessee claimed that the share premium account, P&L A/c Balance and Special Reserve Opening Balance also to be considered as General Reserves.
ITA.861/Bang/2010 Page - 24
6. Now the question to be decided is as to whether the items mentioned at slno.2,3&4 can be considered as items of general reserve.
7. There is no definition regarding term General Reserves under the Income tax Act. There is no positive definition also under the Companies Act.
8. The CIT(A) in his order discussed these issues at page no 15-20.
After considering the provisions in the Companies Act, the CIT(A) came to the following findings "it is thus clear that a general reserve should be a revenue reserve and should be a free reserve in the sense that it should be capable of distribution as dividend freely through the profit and loss account."
9. The CIT(A) justified the above finding with various judicial decisions at Page no.17& 18 of his order.
10. As regards share premium A./c it is stated that it is not coming under general Reserves as it is not a free reserve and the same can't be distributed through P&L a/c( Page No. 19 and para 3.5.1 of CIT(A) order)
11. The P&L A/c can't be called as General Reserves since amount is not transferred to reserve a./c even as mentioned by Commissioner of Income-tax (Appeals) a mass of undistributed profit is not reserve even though it is shown as reserve in balance sheet 183 ITR 456(Madras). (Page No. 19 and para 3.5.2 of CIT(A) order) ITA.861/Bang/2010 Page - 25
12. Special Reserve:- The special reserve is for special purpose and it can't be distributed through P&L a/c as dividends or otherwise. (Page No. 19 and para 3.5.3 of CIT(A) order)
13. In view of the detailed discussion as mentioned above the items mentioned at sl no. 2,3&4 can't be categorized as coming under "general reserves".
14. The assessee's counsel heavily relied on various provision and decisions relating to the word "networth" which was not used in the said provision of section 36(1)(viii). The networth is defined in section 49,50, 503 and 50C of the Act for the purposes of those sections. The assessee's reliance on the Finance Minister's reference to networth while bringing the amendment 36(1)(Viii) in the budget speech 2007 can't be considered in this context as there is no ambiquity in the proviso to section 36 (1)(viii).
15. It is a settled law that when the provisions is very simple and the words used are very clear there is no need to rely on external tools like budget speech etc.
16. Networth may be inclusive of paidup share capital and general reserves. But the summation of paidup share capital and general reserves can't be taken as networth for the purpose because such word was never used. The Reverse may not be true always.
17. Even otherwise the word networth is defined in different sections in different contexts for the purpose of those sections alone as mentioned earlier and there is no need to import such meaning for the purpose of section u/s36( 1) (viii).
ITA.861/Bang/2010 Page - 26
18. The copies of various decisions filed by the assessee were also filed before the CIT(A) who had dealt with those decisions and come to the conclusion that those case laws were dealing with difference between a 'provision' and a 'reserve; and no way related to the present issue under consideration (Page 20 of para 3.5.4)
19. The reliance on the decision of Supreme Court in the do CIT Vs- Mahindra &others is of no use as the decision is relating to section 72A and 32 regarding carryforward of set off . There is a discussion about networth in said decision and the same can be at best can be regarded as an observation and not as a ratio laid down by the Supreme Court.
20. Similarly the decision CIT vs [ESKAYEF LTD 211 CTR (Kar) 31 rendered by Hon'ble High Court of Karnataka was in the context of companies(Profits) surtax act 1964 and there is a reference to the "reserve" but there is no discussion of distinction between reserve and general reserve.
21. As discussed by CIT(A) the word general reserve used with specific purpose and should give specific meaning and it can't be equated with either capital reserve or special reserve or ordinary reserve etc.
22. The reference to "general reserves" in plural do not envisage to bring into its scope of other items of share premium, P & L A/c balance and Special Reserve Opening Balance. Therefore the assessee's argument that use of plural in respect of general reserves does not help the assessee's case.
ITA.861/Bang/2010 Page - 27 In view of the above submissions, the learned DR submitted that the decision of CIT(A) deserves to be upheld and assessee's appeal may be dismissed.
07. We have heard the rival submissions and considered the facts and materials on record. The only issue for us to adjudicate upon is whether the term "General Reserve" includes share premium, P & L A/c balance and Special Reserve opening balance, for computing the eligible amount for claiming the deduction u/s.36(1)(viii) by the assessee. As rightly contended by the learned DR, there is no definition of the term "General Reserve" under the Income-tax and there is also no positive definition under the Companies Act, 1956.
08. The learned Commissioner of Income-tax (Appeals) while rejecting the plea of the assessee, after considering all the case laws relied upon by the assessee before him; has observed as under :
"The basic issue to be decided by him involved answering the question whether the word "General Reserves" included in it (i) Share premium amount of Rs.5,25,00,000/- and (ii) P & L A/c balance of Rs.4,85,44,330/-, while the Assessing Officer had not considered these as part of general reserves. In order to decide the issue, the Commissioner of Income-tax (Appeals) dealt with the arguments of the assessee and the relevant provisions under IT law and Company ITA.861/Bang/2010 Page - 28 law. The Commissioner of Income-tax (Appeals) observed that there is no definition of 'reserve' in any of the laws. He relied on the following decisions to bring out what all constituted "reserve" as per the judicial pronouncements :
• CIT v. Century Spinning (1953) 24 ITR 499 (SC) ; • Richardson v. CIT (1986) 162 ITR 753 (Bom) ;
• Metal Box v. Their workmen (1969) 39 Co cases 410, 425 (SC) • Lyallpur Cotton v. CIT(1958) 33 ITR 127 (lab) • CIT v. Gordan Woodroffe (1990) 183 ITR 465 (Mad) • CIT v. Matatial Chandulal (1977) ITR 489 (Guj) • CIT v. Industrial Credit (1989) 177 ITR 51 (Kar) The Commissioner of Income-tax (Appeals) observed that basically a general reserve is capable of being distributed through the profit and loss account and therefore is not a capital reserve. Thus, every general reserve has to have the character of a revenue reserve and a free reserve. In the light of the above judicial pronouncements, the Commissioner of Income-tax (Appeals) answered the issue in specific terms as below :
"3.5.1. Share Premium account : As mentioned earlier a general reserve is capable of being distributed through the profit and loss account. Therefore, it is a free reserve. In terms of the Companies Act, the balance in share premium account cannot be distributed through the profit and loss account. Due to this incapacity, it is not a revenue reserve. Therefore, it is not a general reserve.
ITA.861/Bang/2010 Page - 29 3.5.2. Balance in Profit and loss account : A reserve is appropriated out of profits. The balance under profit and loss account in the balance sheet cannot be called a reserve since the amount is not transferred to the reserve account. Items 4 & 5 under reserves and surplus (schedule 6 of the Companies Act) relate to other reserves and surplus is balance in profit and loss account. This indicates that balance in profit and loss account is distinct from reserves. The amount in the profit and loss account cannot be considered a reserve.
3.5.3. Special Reserve : It is contended that a special reserve is also one form of general reserve belonging to the company, retained and invested in the business of the company. It has all the characteristics of other reserves. This argument of the appellant does not conform to the meaning of special reserve u/s.36(1)(viii) of the Act. U/s.36(1)(viii) a special reserve has to be created to be eligible to claim deduction under that section.
It is not only necessary to create a special reserve but it also should be maintained. The requirement of the reserve to be maintained was introduced in section 36(1)(viii) by the Finance Act 1997 w.e.f.1.4.1998. A reserve created to meet a specific requirement under law is for a specific purpose. On the other hand as per the definition given by Institute of Chartered Accounts a general reserve should have no specific purpose. The special reserve is for a special purpose. It cannot be distributed freely through the profit and loss account as dividends or otherwise. It is therefore not a free reserve. Since it is not a free reserve and is for a specific purpose it cannot be called general reserve. In view of the foregoing it is held that ITA.861/Bang/2010 Page - 30 the Assessing Officer was justified in ignoring the balance in the following accounts :
1) Share premium account
2) Balance in profit and loss account
3) Special Reserve."
Being aggrieved with the above decision of the Commissioner of Income-tax (Appeals), the assessee is in appeal before this Tribunal.
09. Though the learned representative for the assessee was trying to rely upon the Budget Speech and other Acts like the Companies Act and the decisions rendered by the various High Courts in different contexts to drive his point, in our opinion, his exercise is merely an academic one and does not improve his case before us. On the other hand, we are of the view that the Commissioner of Income-tax (Appeals) has written a detailed order after considering all the submissions and case laws extracted as above, and we do not find any infirmity in the impugned order. As such, though we appreciate the effort of the learned representative for the assessee to bring home his point, we are unable to accept his contentions to reverse the impugned order, which is reasoned one with which we are in agreement. Hence, we confirm the order of the Commissioner of Income-tax (Appeals) and dismiss the assessee's appeal.
ITA.861/Bang/2010 Page - 31
10. In the result, the assessee's appeal is dismissed. Order pronounced in open court on 24.02.2012.
Sd/- Sd/- (SMT. P. MADHAVI DEVI) (N. BARATHVAJA SANKAR) JUDICIAL MEMBER VICE PRESIDENT