Canfin Homes Ltd.,, Bangalore v. DCIT, Bangalore

ITA 861/BANG/2010 | 2006-2007
Pronouncement Date: 24-02-2012 | Result: Dismissed

Appeal Details

RSA Number 86121114 RSA 2010
Assessee PAN AAACC7241A
Bench Bangalore
Appeal Number ITA 861/BANG/2010
Duration Of Justice 1 year(s) 7 month(s) 23 day(s)
Appellant Canfin Homes Ltd.,, Bangalore
Respondent DCIT, Bangalore
Appeal Type Income Tax Appeal
Pronouncement Date 24-02-2012
Appeal Filed By Assessee
Order Result Dismissed
Bench Allotted A
Tribunal Order Date 24-02-2012
Date Of Final Hearing 24-01-2012
Next Hearing Date 24-01-2012
Assessment Year 2006-2007
Appeal Filed On 01-07-2010
Judgment Text
ITA.861/BANG/2010 P AGE - 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 : O R D E R PER N. BARATHVAJA SANKAR VICE PRESIDENT : THIS IS AN APPEAL PREFERRED BY THE ASSESSEE CANFI N HOMES LTD. BANGALORE FOR THE ASSESSMENT YEAR 2006-07 AGAINST THE APPELLATE ORDER DATED. 29.04.2010 OF THE COMMISSIONER OF INCO ME-TAX (APPEALS)-I BANGALORE. ITA.861/BANG/2010 P AGE - 2 02. THE FACTS OF THE CASE ARE AS FOLLOWS. THE ASSE SSEE COMPANY IS A HOUSING FINANCE COMPANY. THIS IS A REGISTERED HOUS ING FINANCE COMPANY WITH THE NATIONAL HOUSING BANK WHICH IS WHO LLY OWNED BY THE RESERVE BANK OF INDIA. THE ASSESSEE COMPANY HA S ACCRUED AN AMOUNT OF RS.35 10 88 358/- AS PROFITS FROM HOUSING FINANCE BUSINESS. IN THE STATEMENT OF INCOME IT HAD MADE THE ADJUSTME NTS AS PER THE INCOME-TAX ACT. BEING A HOUSING FINANCE COMPANY I T HAD CLAIMED DEDUCTION U/S.36(1)(VIII) OF THE ACT. BEFORE CLAIM ING 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 SECT ION 36(1)(VIII) AND IT WAS NOTICED THAT THE PAID UP CAPITAL WAS RS.20 48 5 2 500/- AND THE GENERAL RESERVE-1 WAS RS.29 89 00 000/-. THE ASSES SEE WAS ASKED TO EXPLAIN AS TO WHETHER IT HAD COMPLIED WITH THE PROV ISO TO SECTION 36(1)(VIII) TO WHICH THE ASSESSEE SUBMITTED THAT I T 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 ACC OUNT 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 FO R COMPUTING THE AGGREGATE SPECIFIED IN THE PROVISO TO SECTION 36(1) (VIII). BY THIS THE INTENTION OF THE ASSESSEE WAS TO INCREASE THE FIGUR E OF 'TWICE THE ITA.861/BANG/2010 P AGE - 3 AMOUNT OF PAID UP SHARE CAPITAL AND OF GENERAL RESE RVES.'. IT WAS OBSERVED BY THE ASSESSING OFFICER THAT IN THE ASSES SMENT YEAR 2003-04 ALSO THE ASSESSEE HAD TAKEN THE SAME STAND. ACCORD ING 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 MA NNER IN WHICH IT IS USED IN COMMERCIAL PRACTICE. A RESERVE BY ITS VERY NATURE IS A FUND WHICH IS CREATED AND MAINTAINED FO R 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 MUS T CLEARLY INDICATE THAT A PORTION THEREOF HAS BEEN EARMARKED OR SEPARATED FROM THE GENERAL MASS OF PROFITS WITH A V IEW 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 AM OUNT AND THE WORD RESERVE CAN HAVE NO APPLICATION TO PRO FITS WITH RESPECT TO THE APPLICATION OF WHICH THERE IS AS YET NEITHER A PROPOSAL NOR A DECISION. A RESERVE MAY BE A GENERA L RESERVE OR A SPECIFIC RESERVE BUT IN ORDER TO CONSTITUTE A RESERVE THERE MUST BE A CLEAR INDICATION TO SHOW THAT IT WA S A RESERVE EITHER OF THE ONE OR THE OTHER KIND. A MASS OF UND ISTRIBUTED PROFIT IS NOT A RESERVE EVEN THOUGH IT IS SHOWN IN THE BALANCE SHEET AS A RESERVE. IN DRAWING THE ABOVE CONCLUSIO N SUPPORT ITA.861/BANG/2010 P AGE - 4 IS DERIVED FROM CIT V. GORDON WOOD ROFFEE AND CO. (MADRAS) PVT. LTD (183 ITR 465) AND INDIAN STEEL AN D WIRE PRODUCTS V. CIT (33 ITR 579).' THE ASSESSING OFFICER HAS ALSO EXAMINED THE EXTRACT S OF THE BUDGET SPEECH OF THE HON'BLE FINANCE MINISTER MADE ON 28.0 2.2007 IN SUPPORT OF HIS CLAIM. THE ASSESSING OFFICER REDUCE D 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-SE CTION (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-T ERM FINANCE FOR INDUSTRIAL OR AGRICULTURAL DEVELOPMENT OR DEVELOPMENT OF INFRASTRUCTURE FACILITY IN INDIA ; O R (II) A PUBLIC COMPANY FORMED AND REGISTERED IN INDIA WIT H THE MAIN OBJECT OF CARRYING ON THE BUSINESS OF PROVIDIN G LONG TERM FINANCE FOR CONSTRUCTION OR PURCHASE OF HOUSES IN I NDIA FOR RESIDENTIAL PURPOSES. THE PROVISIONS REGARDING THIS SPECIAL DEDUCTION ALS O EXISTED IN THE IT ACT 1922 AND WERE RETAINED IN THE IT ACT 1 961. THE SCOPE OF THE PROVISIONS OF THE SAID CLAUSE WAS LATE R ON WIDENED BY THE FINANCE (NO.2) BILL 1971 TO INCLUDE IN ITS AMBIT THE APPROVED FINANCIAL CORPORATIONS ENGAGED IN PROVIDIN G LONG TERM FINANCE FOR AGRICULTURAL DEVELOPMENT IN INDIA. THE OBJECTIVE OF THIS DEDUCTION ORIGINALLY WAS TO STIMULATE INDUSTRI AL DEVELOPMENT OF THE COUNTRY. THE BENEFIT OF THIS DEDUCTION WAS ALSO INTENDED TO ITA.861/BANG/2010 P AGE - 5 ENABLE CORPORATIONS TO AUGMENT THEIR INITIAL LOW EQ UITY BASE ON ACCOUNT OF LIMITED ACCESSIBILITY TO CAPITAL MARKET. IN THE WAKE OF LIBERALIZATION FROM THE BEGINNING OF THE 90'S THER E HAS BEEN CONSIDERABLE EXPANSION AND DEEPENING OF THE CAPITAL MARKET. ACCESSIBILITY TO CAPITAL MARKET HAS MARKEDLY IMPROV ED. THE FINANCE ACT 2007 THEREFORE HAS LIMITED THE D EDUCTION TO 20% OF THE PROFITS DERIVED FROM THE BUSINESS OF PRO VIDING 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 L EVEL OF DEDUCTION TO 20% WILL HAVE THE EFFECT OF ELONGATING THE TIME PERIOD DURING THE DEDUCTION. EFFECTIVELY THEREFOR E THE SPECIFIED ENTITIES ARE NOT ADVERSELY AFFECTED IN THE LONG TER M. THE AMENDMENT MADE BY THE FINANCE ACT 2007 ALSO PROVID ES 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 VIE W OF THE ABOVE DISCUSSION IT CAN BE SAID THAT THE VERSION O F THE ASSESSEE COMPANY THAT THE HON'BLE FINANCE MINISTER'S SPEECH IS DIRECTLY HELPFUL IN SUBSTANTIATING ITS CLAIM IS UNFOUND. HE NCE THIS PLEA OF THE ASSESSEE IS REJECTED. THE PROVISO TO SEC.36(1)(VIII) LAYS DOWN A CONDITI ON THAT WHERE THE AGGREGATE OF THE AMOUNTS CARRIED TO THE S PECIAL RESERVE EXCEEDS TWICE THE AMOUNT OF THE PAID UP SHA RE 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 SHA RE CAPITAL AND GENERAL RESERVES WERE VERIFIED FROM ANNUAL REPO RT OF THE ASSESSEE COMPANY. IT WAS FOUND THAT THE AGGREGATE OF AMOUNTS ITA.861/BANG/2010 P AGE - 6 CARRIED TO THE SPECIAL RESERVE AS ON 01.04.2005 STO OD AT RS.98 39 00 000/-. WHEREAS TWICE THE AMOUNT OF PA ID UP CAPITAL AND GENERAL RESERVES TOTALED TO RS.100 75 5 0 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 4 1 734/-.' BEING AGGRIEVED WITH THE ABOVE FINDING OF THE ASSES SING 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 ASS ESSING OFFICER. STILL AGGRIEVED THE ASSESSEE IS IN APPEAL BEFORE U S. 04. THE FOLLOWING CONCISE EFFECTIVE GROUNDS OF APPE AL 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 UPHOLD ING DISALLOWANCE OF STATUTORY DEDUCTION U/S.36(1)(VIII) OF RS.12 42 90 834/- WITHOUT PROPERLY APPLYING THE PRI NCIPLES OF INCOME-TAX ACT AND AS WELL AS VARIOUS PROVISIONS O F 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 P AGE - 7 SINGLE COINED WORD AND NOT SEPARATELY WHICH AFFECTS THE VERY FUNDAMENTAL PURPOSE OF PROVIDING THE RELIEF UNDER T HE PROVISIONS OF SEC.36(1)(VIII) AND FURTHER THE LEARN ED COMMISSIONER OF INCOME-TAX (APPEALS)-1 HAS FAILED T O APPRECIATE THE FACT THAT THE COINED WORD ' PAID UP CAPITAL + GENERAL RESERVES ' IS ALREADY DEFINED AS NET WORTH UNDER OTHER LAWS AND THE LEARNED COMMISSI ONER 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 (APPEAL S)-1 HAS GROSSLY ERRED IN NOT CONSIDERING THE BUDGET SPE ECH MADE BY THE HONORABLE FINANCE MINISTER WHICH CLEARLY EST ABLISHED THE MEANING OF THE COINED WORD (' PAID UP CAPITAL + GENERAL RESERVES ') AS NET WORTH. IV) THE LEARNED COMMISSIONER OF INCOME-TAX (APPEAL S)-1 HAS GROSSLY ERRED IN NOT CONSIDERING THE WRITTEN AR GUMENTS AND AS WELL AS MATERIAL PLACED BEFORE HIM DURING THE CO URSE OF APPEAL AND FURTHER FAILED TO APPRECIATE THAT THE GU IDANCE NOTES ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA REFERRED TO BY THE LEARNED COMMISSIONER OF INCOME-T AX (APPEALS) HAVE NO RELEVANCE TO THE CASE. ITA.861/BANG/2010 P AGE - 8 V) THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS )-1 FAILED TO APPRECIATE THE FACT THAT WHILE INTERPRETI NG 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 A CCOUNTANT APPEARING FOR THE ASSESSEE PLACED ON RECORD TWO PAP ER BOOKS CONSISTING OF VARIOUS MATERIALS RELEVANT TO THE ISS UE AND COPIES OF THE DECISIONS OF VARIOUS COURTS. BY PLACING THE AB OVE PAPER BOOKS ON RECORD THE LEARNED CHARTERED ACCOUNTANT SUBMITT ED AS UNDER : 'ON APPEAL THE LEARNED CIT (APPEALS) ALSO HEAVILY RELIED ON THE DEFINITION OR MEANING OF GENERAL RESERVE AS PRO VIDED 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 DISMISS ED 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 FOLLO WING CLAUSES SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WITH THE REIN IN COMPUTING THE INCOME REFERRED TO IN S. 28 (VIII) IN RESPECT OF ANY SPECIAL RESERVE CREATED [A ND 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 P AGE - 9 INFRASTRUCTURE FACILITY IN INDIA OR BY A PUBLIC COM PANY FORMED AND REGISTERED IN INDIA WITH THE MAIN OBJECT OF CARRYIN G ON THE BUSINESS OF PROVIDING LONG-TERM FINANCE FOR CONSTRUCTION OR PUR CHASE OF HOUSES IN INDIA FOR RESIDENTIAL PURPOSES AN AMOUNT NOT EX CEEDING FORTY PERCENT OF THE PROFITS DERIVED FROM SUCH BUSINESS O F PROVIDING LONG- TERM FINANCE (COMPUTED UNDER THE HEAD PROFITS & GA INS OF BUSINESS OR PROFESSION [BEFORE MAKING ANY DEDUCTION UNDER T HIS CLAUSE]) CARRIED TO SUCH RESERVE ACCOUNT] PROVISO T O S. 36(1)(VIII) : PROVIDED : THAT WHERE THE AGGREGATE OF THE AMOUNTS CARRIED T O 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] N O 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 A MOUNTS CARRIED TO SUCH RESERVE ACCOUNT FROM TIME TO TIME EXCEEDS TWIC E THE AMOUNT OF THE PAID-UP SHARE CAPITAL [EXCLUDING THE AMOUNTS CA PITALIZED FROM RESERVES] THE LEARNED REPRESENTATIVE SUBMITTED THAT FROM THE ABOVE PROVISO TO S. 36(1)(VIII) READ WITH THE PROVISO BEFORE ITS AMENDM ENT IN 1997 BRINGS THE FOLLOWING TWO THINGS. 1. THE PROVISO AS APPLICABLE UPTO ASST.YEAR 1996 -9 7 RESTRICTED THE TOTAL DEDUCTION UPTO TWICE THE PAID UP CAPITAL AN D SUCH PAID UP ITA.861/BANG/2010 P AGE - 10 CAPITAL WAS ONE THAT HAS BEEN ALLOTTED FOR WHOLLY F OR A CONSIDERATION OF CASH AND THE BONUS SHARES ISSUED OUT OF CAPITALIZA TION OF CAPITAL RESERVES WERE NOT TO BE CONSIDERED. IN OTHER WORDS THE PROVISO HAS BEEN MADE MORE LIBE RAL AND W.E.F. ASSESSMENT YEAR 1997 - 98 THE PAID UP CAPITAL AMOU NT AS APPEARING IN THE FINANCIAL STATEMENTS OF A COMPANY WHICH INTERAL IA INCLUDED THE CAPITALIZED RESERVES IN THE FORM OF BONUS SHARES AL SO CAME TO BE CONSIDERED THEREBY RESTRICTION PLACED FOR CONSIDER ATION OF CAPITAL RESERVES WERE REMOVED OR DELETED. IN ADDITION TO TH IS THE WORD THE GENERAL RESERVES TO BE SUMMED UP WITH SUCH PAID UP CAPITAL CAME TO BE ADDED TO THE EXISTING WORD PAID UP CAPI TAL WHICH HAD BECOME MORE LIBERAL MADE IT VERY CLEAR THAT THE H ONORABLE PARLIAMENT INTENDED TO GIVE EFFECT TO THE TOTAL SHA RE HOLDERS INVESTMENT (WHICH IS ALWAYS REPRESENTED BY THE PAID UP SHARE CAPITAL AND AS WELL AS RESERVES AND SURPLUS) IN SUCH A COMP ANY FOR PURPOSES OF COMPUTATION OF THE LIMIT SPECIFIED UNDER THE SAI D NEW PROVISO TO S. 36(1)(VIII). 2. THE DEFINITION OF THE WORD SUM OF PAID UP CAPIT AL AND FREE RESERVES WAS ALSO INTRODUCED INTO THE COMPANIES AC T 1956 W.E.F. 2003 WHEREIN THE DEFINITION OF SUCH FREE RESERVE W AS ALSO PROVIDED. ITA.861/BANG/2010 P AGE - 11 THE LEARNED REPRESENTATIVE FURTHER SUBMITTED THAT T HERE 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 IMPO RTANT CLASSES OF ITEMS APPEARING IN THE FINANCIAL STATEMENTS OF A CO MPANY - PAID UP CAPITAL AND GENERAL RESERVES AND THE WORDS USED AR E [TWICE THE AMOUNT OF] THE PAID UP SHARE CAPITAL AND [OF THE GE NERAL 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 ; COMMISSIO NER OF INCOME- TAX VS VEGETABLE PRODUCTS LTD; REPORTED IN (1973) 8 8 ITR 192 (SC) WHEREIN THEIR LEARNED LORDSHIPS HAVE HELD AS UNDER: ITA.861/BANG/2010 P AGE - 12 NEXT COME THE QUESTION WHAT IS THE MEANING TO BE A TTACHED TO THE WORDS THE TAX FOUND IN THE LATTER PART OF THAT PR OVISION. IT MAY BE NOTED THAT THE EXPRESSED USED IS NOT TAX BUT THE TAX. THE DEFINITE ARTICLE THE MUST HAVE A REFRRENCE TO SOMETHING SA ID EARLIER. IT CAN ONLY REFER TO THE TAX IF ANY PAYABLE BY THE ASSESS EE 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 UNDERS TOOD AS REFERRING TO THE EXPRESSION EARLIER USED IN THE PRO VISION NAMELY THE AMOUNT OF THE TAX IF ANY PAYABLE BY THE ASS ESSEE.' HE FURTHER SUBMITTED THAT IN THE PRESENT CASE OF TH E 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 APPLY ING THE RATIO HELD BY THEIR HONORABLE LORDSHIPS OF THE SUPREME COURT O F INDIA IT BECOMES VERY CLEAR THAT THE WORDS PAID UP CAPITAL AND GENERAL RESERVES ARE INSEPARABLE AND HAVE TO BE RE AD 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 COMPANI ES ACT 1956 ITA.861/BANG/2010 P AGE - 13 AS NET WORTH AND FOR THE PURPOSES OF THE SAID DEF INITION THE EXPLANATION TO THE SAID PROVISION STATES THAT FREE RESERVES MEANS ALL RESERVES CREATED OUT OF THE PROFITS AND SHARE PREMI UM 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 19 56 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 P REMIUM ACCOUNT BUT DOES NOT INCLUDE RESERVES CREATED OUT OF REVALUATIO N OF ASSETS WRITE BACK OF DEPRECIATION PROVISIONS AND AMALGAMATION; 4. THE WORD GENERAL RESERVE IS ALSO DEFINED AND O R REFERRED TO AS FREE RESERVE EVEN AS PER THE PARA 3.4 AT P AGE 18 OF THE ORDER OF THE LEARNED COMMISSIONER OF INCOME-TAX ( A PPEALS) - ( PLEASE REFER PAGE 23 OF THE APPEAL MEMO FILED). THE LEARNE D CIT (APPEALS) ITA.861/BANG/2010 P AGE - 14 AT PARA 3.4 OF PAGE 18 OF HIS ORDER HAS STATED AS U NDER; IT IS IN THIS BACKGROUND THE TREATMENT THAT THE CL AIM OF THE APPELLANT THAT BALANCES UNDER OTHER HEADS IN THE BALANCE SHEE T 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 PREF IX THE MUST CARRY SPECIAL MEANING AS ALREADY HELD BY THE HONOR ABLE SUPREME COURT OF INDIA IN THE ABOVE MENTIONED JUDGMENT. IT DEFINITELY MEANS THAT MORE THAN ONE RESERVE WHICH FORMS PART OF SHA RE HOLDERS FUNDS AND ACCORDINGLY ALL THOSE RESERVES WHICH ARE COVERE D UNDER THE DEFINITION OF FREE RESERVES AS DEFINED UNDER THE WORD NET WORTH UNDER THE COMPANIES ACT 1956 HAS TO BE CON SIDERED AS THE SAID DEFINITION IS GIVEN UNDER AN CENTRAL ENACTMENT AND PASSED BY THE HONORABLE PARLIAMENT AND FURTHER THIS DEFINITI ON IS APPLICABLE AND BINDING ON ALL COMPANIES REGISTERED UNDER THE C OMPANIES ACT 1956 AND THE APPELLANT ALSO IS CLEARLY COVERED BY THE SAID PROVISION. ITA.861/BANG/2010 P AGE - 15 6. THE HONORABLE FINANCE MINISTER IN HIS BUDGET SPE ECH MADE ON FEBRUARY 28 2007 BEFORE THE HONORABLE PARLIAMENT W HILE PRESENTING HIS BUDGET FOR THE YEAR 2007 08 AND IN RESPECT O F 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 THA T IS AVAILABLE TO CERTAIN COMPANIES. WITHOUT ALTERING THE OVERALL LIM IT 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 PROVISION S OF S. 36(1)(VIII). IT HAS BEEN HELD BY THEIR HONORABLE LORDSHIPS OF TH E SUPREME COURT OF INDIA IN; [A] K.P.VERGHESE VS INCOME-TAX OFFICER & ANR (1981)131 ITR 597 (SC) ITA.861/BANG/2010 P AGE - 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 F ROM THE ABOVE JUDGMENT OF THE SUPREME COURT OF INDIA IT BECOMES CLEAR THAT WHILE INTERPRETING THE INTENT OF THE HONORABLE LEGISLATU RE 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 PRESE NTING THE BUDGET WITH PROPOSED AMENDMENTS FOR MOTION IN THE HONORABL E PARLIAMENT. THE SUPREME COURT OF INDIA IN THE MATTER OF KERALA STATE INDUSTRIAL ITA.861/BANG/2010 P AGE - 17 DEVELOPMENT VS. COMMISSIONER OF INCOME-TAX - REPORT ED IN (2003) 259 ITR 51 (SC) HAVE HELD THAT: THAT THE FINANCE MINISTERS SPEECH CAN BE RELIED U PON TO THROUGH THE LIGHT ON THE OBJECT AND PURPOSE OF THE PARTICUL AR 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 O F 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 WI TH 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 ACCORDIN GLY BY APPLYING THE RATIO OF THE DECISION OF THEIR HONORAB LE LORDSHIPS OF THE HONORABLE SUPREME COURT OF INDIA IN THE ABOVE MENT IONED CASE IT ITA.861/BANG/2010 P AGE - 18 BECOMES VERY CLEAR THAT THE WORD GENERAL RESERVES HAS TO READ ALONG WITH THE WORD PAID UP SHARE CAPITAL FOR PUR POSES 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 COMPA NIES AND MORE SO TO THE APPELLANT BEING A COMPANY INCORPORATED UN DER THE COMPANIES ACT 1956. THE SPEECH OF THE HONORABLE FINANCE MINISTER ALSO R EMOVES OR CLEARS ALL DOUBTS IN RESPECT OF SUCH INTERPRETATION SINCE THE WORD USED BY THE HONORABLE FINANCE MINISTER IN HIS ABOVE BUDGET SPEE CH ALSO IS NET WORTH. ACCORDING TO THE LEARNED REPRESENTATIVE IN OTHER W ORDS AS THE WORD SUM OF PAID UP CAPITAL AND OF THE FREE RESERVE (GE NERAL RESERVES)' HAS ALREADY BEEN DEFINED UNDER ANOTHER LAW GOVERNIN G THE COMPANIES AND THE SAID WORD IS NOT DEFINED UNDER T HE PROVISIONS OF INCOME-TAX ACT 1961 THE SAID DEFINITION SQUARELY BECOMES APPLICABLE IN THE CASE OF THE APPELLANT. ITA.861/BANG/2010 P AGE - 19 THE PROVISIONS OF S. 36(1)(VIII) PROVIDING THE STAT UTORY ALLOWANCE OF 40% OF ITS PROFITS FROM ITS BUSINESS OF LONG TERM H OUSING FINANCE WAS PROVIDED WITH A SOCIAL OBJECTIVE OF PROVIDING A ROO F TO EVERY CITIZEN OF THE COUNTRY BY PROVIDING HIM / HER WITH FUNDS TOWA RDS PURCHASE AND OR CONSTRUCTION OF A RESIDENTIAL HOUSE AT CONSIDERA BLY 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 LAR GE SECTION OF THE POPULATION OF THIS COUNTRY TO OWN A ROOF / SHELTER. THE VERY FACT THAT HONORABLE CENTRAL GOVERNMENT INTRODUCED INTEREST RA TE SUBSIDY IN RESPECT OF HOUSING LOANS OF VALUE RS.10 LAKHS AND B ELOW DEMONSTRATES THE BENEFIT THE SAID PROVISIONS HAVE D ONE 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 OCCA SIONS THAT WHILE INTERPRETING BENEFICIAL PROVISIONS PROVIDING ALLOWA NCES AND OR DEDUCTIONS THEY HAVE TO BE LIBERALY CONSTRUED OR INTERPRETED. ITA.861/BANG/2010 P AGE - 20 THE DEFINITIONS PROVIDED BY THE INSTITUTE OF CHARTE RED 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 OVE R 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 COMPANI ES 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 CRED IT 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 SHARE HOLDERS THROUGH THE ISSUE OF SHARES ( SHARE CAPITAL ) OR IN THE FOR M OF PLOUGH BACK OF PROFITS (RESERVES)- THESE REPRESENT THE INVESTMENTS THAT SHAREHOLDERS ITA.861/BANG/2010 P AGE - 21 HAVE MADE IN THE COMPANY AND IS COMMONLY REFERRED T O 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 ENT ERPRISE 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 S INCE ITS INCEPTION AS WELL AS THE RETAINED EARNINGS FOR THE DURATION OF ITS OPERATION. GROSS NET WORTH IS THE SUM OF THE EQUITY CAPITAL AN D THE RESERVES (EXCLUDING REVALUATION RESERVE ). TANGIBLE NET WORTH IS GROSS NET WORTH LESS INTANGIBLES MISCELLANEOUS EXP ENSES NOT WRITTEN OFF AND DEBIT BALANCE IN PROFIT AND LOSS ACCOUNT. HONORABLE LORDSHIPS THE APPELLANT HUMBLY SUBMITS T HAT THE DEFINITION PROVIDED UNDER THE COMPANIES ACT 1956 R EAD WITH THE BUDGET SPEECH OF THE HONORABLE FINANCE MINISTER CLE ARLY 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 ASSIGNE D TO THE SAID WORDS OTHER THAN WHAT IS ALREADY DEFINED UNDER COMP ANY LAW. THE LEARNED REPRESENTATIVE SUBMITTED THAT THE DEFIN ITION TO WORDS PROVIDED UNDER THE LAWS PROMULGATED BY THE HONORABL E PARLIAMENT ITA.861/BANG/2010 P AGE - 22 HAS TO BE GIVEN EFFECT AND AS ALREADY HELD BY THE H ONORABLE COURTS OF INDIA THAT WHILE INTERPRETING BENEFICIAL PROVISION S THE SAME HAS TO BE GIVEN A LIBERAL INTERPRETATION AND AS WELL AS ONE T HAT 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 PROVID ED UNDER THE COMPANIES ACT 1956 RELEVANT PAGES OF THE DEFINITI ON PROVIDED UNDER THE BOOK PUBLISHED BY THE WHOLLY OWNED SUBSIDIARY O F CRISIL AND AS WELL AS THE RELEVANT PAGES FROM THE BOOK OF COMPEND IUM OF GUIDANCE NOTES PUBLISHED BY THE ICAI THROUGH A PAPER BOOK D URING THE COURSE OF HEARING OF THE APPEAL ON THE 10TH OF MAY 2011 T HE SAID LIST IS ANNEXED HEREWITH FOR REFERENCE. HE PRAYED THAT IN THE INTEREST OF EQUITY AND NATURA L 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 SA ID PROVISIONS OF S. 36(1)(VIII) BE APPLIED AND GRANT RELIEF TO THE A PPELLANT. ITA.861/BANG/2010 P AGE - 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 CAL CULATION 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 ACCO UNT 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 MATHEM ATICAL 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 D ISPUTE BETWEEN ASSESSING OFFICER AND ASSESSEE. THE ASSESSEE CLAIME D THAT THE SHARE PREMIUM ACCOUNT P&L A/C BALANCE AND SPECIAL RESERV E OPENING BALANCE ALSO TO BE CONSIDERED AS GENERAL RESERVES. ITA.861/BANG/2010 P AGE - 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 RE SERVES UNDER THE INCOME TAX ACT. THERE IS NO POSITIVE DEFINITION ALS O UNDER THE COMPANIES ACT. 8. THE CIT(A) IN HIS ORDER DISCUSSED THESE ISSUES A T PAGE NO 15-20. AFTER CONSIDERING THE PROVISIONS IN THE COMPANIES A CT 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 S HOULD BE CAPABLE OF DISTRIBUTION AS DIVIDEND FREELY THROUGH THE PROFIT AND LOSS ACCOUNT. 9. THE CIT(A) JUSTIFIED THE ABOVE FINDING WITH VARI OUS 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 CANT BE DISTRIBUTED THROUGH P&L A/C( PAGE NO. 19 AND PAR A 3.5.1 OF CIT(A) ORDER) 11. THE P&L A/C CANT BE CALLED AS GENERAL RESERVES SINCE AMOUNT IS NOT TRANSFERRED TO RESERVE A./C EVEN AS MENTIONED B Y 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 P AGE - 25 12. SPECIAL RESERVE:- THE SPECIAL RESERVE IS FOR SP ECIAL PURPOSE AND IT CANT BE DISTRIBUTED THROUGH P&L A/C AS DIVIDENDS O R 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 CANT BE CATEGORIZED AS C OMING UNDER GENERAL RESERVES. 14. THE ASSESSEES COUNSEL HEAVILY RELIED ON VARIOU S 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 T HOSE SECTIONS. THE ASSESSEES RELIANCE ON THE FINANCE MINISTERS REFER ENCE TO NETWORTH WHILE BRINGING THE AMENDMENT 36(1)(VIII) IN THE BUD GET SPEECH 2007 CANT 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 CAPIT AL AND GENERAL RESERVES. BUT THE SUMMATION OF PAIDUP SHARE CAPITAL AND GENERAL RESERVES CANT BE TAKEN AS NETWORTH FOR THE PURPOSE BECAUSE SUCH WORD WAS NEVER USED. THE REVERSE MAY NOT BE TRUE AL WAYS. 17. EVEN OTHERWISE THE WORD NETWORTH IS DEFINED IN DIFFERENT SECTIONS IN DIFFERENT CONTEXTS FOR THE PURPOSE OF THOSE SECT IONS ALONE AS MENTIONED EARLIER AND THERE IS NO NEED TO IMPORT SU CH MEANING FOR THE PURPOSE OF SECTION U/S36( 1) (VIII). ITA.861/BANG/2010 P AGE - 26 18. THE COPIES OF VARIOUS DECISIONS FILED BY THE AS SESSEE WERE ALSO FILED BEFORE THE CIT(A) WHO HAD DEALT WITH THOSE DE CISIONS AND COME TO THE CONCLUSION THAT THOSE CASE LAWS WERE DEALING WITH DIFFERENCE BETWEEN A PROVISION AND A RESERVE; AND NO WAY RE LATED TO THE PRESENT ISSUE UNDER CONSIDERATION (PAGE 20 OF PARA 3.5.4) 19. THE RELIANCE ON THE DECISION OF SUPREME COURT I N THE DO CIT VS- MAHINDRA &OTHERS IS OF NO USE AS THE DECISION IS RE LATING TO SECTION 72A AND 32 REGARDING CARRYFORWARD OF SET OFF . THER E 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 HONBLE HIGH COURT OF KARNATAKA WAS IN THE CONTEXT OF COMPANIES(PROFITS) SURTAX ACT 1964 AND THERE IS A R EFERENCE 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 A ND IT CANT BE EQUATED WITH EITHER CAPITAL RESERVE OR SPECIAL RESE RVE OR ORDINARY RESERVE ETC. 22. THE REFERENCE TO 'GENERAL RESERVES' IN PLURAL D O NOT ENVISAGE TO BRING INTO ITS SCOPE OF OTHER ITEMS OF SHARE PREMIU M P & L A/C BALANCE AND SPECIAL RESERVE OPENING BALANCE. THERE FORE THE ASSESSEES ARGUMENT THAT USE OF PLURAL IN RESPECT O F GENERAL RESERVES DOES NOT HELP THE ASSESSEES CASE. ITA.861/BANG/2010 P AGE - 27 IN VIEW OF THE ABOVE SUBMISSIONS THE LEARNED DR SU BMITTED THAT THE DECISION OF CIT(A) DESERVES TO BE UPHELD AND ASSESS EES APPEAL MAY BE DISMISSED. 07. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONSIDE RED THE FACTS AND MATERIALS ON RECORD. THE ONLY ISSUE FOR US TO ADJUDICATE UPON IS WHETHER THE TERM 'GENERAL RESERVE' INCLUDES SHARE P REMIUM P & L A/C BALANCE AND SPECIAL RESERVE OPENING BALANCE FO R 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 COMP ANIES ACT 1956. 08. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS ) WHILE REJECTING THE PLEA OF THE ASSESSEE AFTER CONSIDERI NG ALL THE CASE LAWS RELIED UPON BY THE ASSESSEE BEFORE HIM; HAS OBSERVE D AS UNDER : 'THE BASIC ISSUE TO BE DECIDED BY HIM INVOLVED ANSW ERING 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 BALAN CE OF RS.4 85 44 330/- WHILE THE ASSESSING OFFICER HAD N OT CONSIDERED THESE AS PART OF GENERAL RESERVES. IN ORDER TO DECIDE TH E ISSUE THE COMMISSIONER OF INCOME-TAX (APPEALS) DEALT WITH THE ARGUMENTS OF THE ASSESSEE AND THE RELEVANT PROVISIONS UNDER IT L AW AND COMPANY ITA.861/BANG/2010 P AGE - 28 LAW. THE COMMISSIONER OF INCOME-TAX (APPEALS) OBSE RVED THAT THERE IS NO DEFINITION OF 'RESERVE' IN ANY OF THE LAWS. HE RELIED ON THE FOLLOWING DECISIONS TO BRING OUT WHAT ALL CONSTITUT ED '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 T HAT BASICALLY A GENERAL RESERVE IS CAPABLE OF BEING DISTRIBUTED THR OUGH THE PROFIT AND LOSS ACCOUNT AND THEREFORE IS NOT A CAPITAL RESERVE . THUS EVERY GENERAL RESERVE HAS TO HAVE THE CHARACTER OF A REVENUE RESE RVE AND A FREE RESERVE. IN THE LIGHT OF THE ABOVE JUDICIAL PRONOU NCEMENTS THE COMMISSIONER OF INCOME-TAX (APPEALS) ANSWERED THE I SSUE 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 P AGE - 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 UN DER RESERVES AND SURPLUS (SCHEDULE 6 OF THE COMPANIES ACT) RELAT E TO OTHER RESERVES AND SURPLUS IS BALANCE IN PROFIT AND LOSS ACCOUNT. THIS INDICATES THAT BALANCE IN PROFIT AND LOSS ACCOUNT I S DISTINCT FROM RESERVES. THE AMOUNT IN THE PROFIT AND LOSS ACCOUN T 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 COMPAN Y RETAINED AND INVESTED IN THE BUSINESS OF THE COMPANY. IT HA S ALL THE CHARACTERISTICS OF OTHER RESERVES. THIS ARGUMENT O F THE APPELLANT DOES NOT CONFORM TO THE MEANING OF SPECIA L RESERVE U/S.36(1)(VIII) OF THE ACT. U/S.36(1)(VIII) A SPEC IAL RESERVE HAS TO BE CREATED TO BE ELIGIBLE TO CLAIM DEDUCTION UNDER THAT SECTION. IT IS NOT ONLY NECESSARY TO CREATE A SPECIAL RESERV E BUT IT ALSO SHOULD BE MAINTAINED. THE REQUIREMENT OF THE RESER VE 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. O N THE OTHER HAND AS PER THE DEFINITION GIVEN BY INSTITUTE OF CH ARTERED ACCOUNTS A GENERAL RESERVE SHOULD HAVE NO SPECIFIC PURPOSE. THE SPECIAL RESERVE IS FOR A SPECIAL PURPOSE. IT C ANNOT BE DISTRIBUTED FREELY THROUGH THE PROFIT AND LOSS ACCO UNT AS DIVIDENDS OR OTHERWISE. IT IS THEREFORE NOT A FREE RESERVE. SINCE IT IS NOT A FREE RESERVE AND IS FOR A SPECIFIC PURP OSE IT CANNOT BE CALLED GENERAL RESERVE. IN VIEW OF THE FOREGOING I T IS HELD THAT ITA.861/BANG/2010 P AGE - 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 COMM ISSIONER OF INCOME-TAX (APPEALS) THE ASSESSEE IS IN APPEAL BEF ORE THIS TRIBUNAL. 09. THOUGH THE LEARNED REPRESENTATIVE FOR THE ASSES SEE WAS TRYING TO RELY UPON THE BUDGET SPEECH AND OTHER ACTS LIKE THE COMPANIES ACT AND THE DECISIONS RENDERED BY THE VARIOUS HIGH COUR TS IN DIFFERENT CONTEXTS TO DRIVE HIS POINT IN OUR OPINION HIS EX ERCISE IS MERELY AN ACADEMIC ONE AND DOES NOT IMPROVE HIS CASE BEFORE U S. ON THE OTHER HAND WE ARE OF THE VIEW THAT THE COMMISSIONER OF I NCOME-TAX (APPEALS) HAS WRITTEN A DETAILED ORDER AFTER CONSID ERING ALL THE SUBMISSIONS AND CASE LAWS EXTRACTED AS ABOVE AND W E DO NOT FIND ANY INFIRMITY IN THE IMPUGNED ORDER. AS SUCH THOUGH W E APPRECIATE THE EFFORT OF THE LEARNED REPRESENTATIVE FOR THE ASSESS EE TO BRING HOME HIS POINT WE ARE UNABLE TO ACCEPT HIS CONTENTIONS TO R EVERSE THE IMPUGNED ORDER WHICH IS REASONED ONE WITH WHICH WE ARE IN A GREEMENT. HENCE WE CONFIRM THE ORDER OF THE COMMISSIONER OF INCOME- TAX (APPEALS) AND DISMISS THE ASSESSEE'S APPEAL. ITA.861/BANG/2010 P AGE - 31 10. IN THE RESULT THE ASSESSEE'S APPEAL IS DISMISS ED. ORDER PRONOUNCED IN OPEN COURT ON 24.02.2012. SD/- SD/- (SMT. P. MADHAVI DEVI) (N. BARATHVAJA SANKAR) JUDICIAL MEMBER VICE PRESIDENT