Can Fin Homes Ltd., Bangalore V. DCIT, Bangalore

ITA 894/BANG/2011

• Counselvise Citation: 89421114 RSA 2011
• Duration Of Justice: 10 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-09-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 22-08-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 17-10-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: S K AMBUSTHA
• Assessee Lawyers: B N BALAKRISHNA
• Keywords: Depreciation; Principle of natural justice
• Section: 143(3); 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH A BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T.A. NO.894/BANG/2011 (ASSESSMENT YEAR : 2007-08) M/S. CAN FIN HOMES LTD., 29/1, SIR M N KRISHNA RAO ROAD, BASAVANAGUDI, BANGALORE-560 004 . APPELLANT. PAN AAACC 7241A VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 11(2), BANGALORE-560 004. . . RESPONDENT. APPELLANT BY : SHRI B.N. BALAKRISHNA. RESPONDENT BY : SHRI S.K. AMBUSTHA. DATE OF HEARING : 22.8.2012. DATE OF PRONOUNCEMENT : 07.09.2012. O R D E R PER SHRI JASON P. BOAZ : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-I, BANGALORE DT.8.8..2011. FOR ASSESSMENT YEAR 2007-08. 2. THE FACTS OF THE CASE, IN BRIEF, ARE AS UNDER: THE ASSESSEE IS A HOUSING FINANCE COMPANY REGISTER ED WITH THE NATIONAL HOUSING BANK WHICH IS WHOLLY OWNED BY THE RESERVE BANK OF I NDIA. THE ASSESSEE FILED ITS RETURN OF INCOME FOR ASSESSMENT YEAR 2007-08 ON 29.10.2007 DE CLARING TOTAL INCOME OF RS.28,75,38,930 FROM THE BUSINESS OF HOUSING FINANC E AFTER CLAIMING OF RS.17,65,67,935 UNDER SECTION36(1)(VIII) OF THE INCOME TAX ACT, 196 1 (HEREIN AFTER REFERRED TO AS 'THE ACT'). THE ASSESSING OFFICER EXAMINED THE BALANCE SHEET OF THE ASSESSEE IN THE LIGHT OF 2 ITA NO.894/BANG/11 THE PROVISO TO SECTION 36(1)(VIII). THE ASSESSING OFFICER NOTICED THAT THE PAID UP CAPITAL WAS RS.20,48,52,500 AND THE GENERAL REVENUE WAS RS. 33,89,00,000 AND OBSERVED THAT THE ASSESSEE HAD ALSO CONSIDERED SHARE PREMIUM OF RS.5, 25,00,000 AND ACCUMULATED PROFITS OF RS.6,96,58,233 AS PART OF THE GENERAL RESERVES. AC CORDING TO THE ASSESSEES CLAIM TWICE THE AMOUNT OF PAID UP SHARE CAPITAL AND GENERAL RES ERVES WAS RS.133,18,67,366 (VIZ. 2X69,59,33,683) AND THE AGGREGATE AMOUNTS CARRIED T O SPECIAL RESERVE AS PER THE ASSESSEES BOOKS OF ACCOUNTS WAS RS.113,19,00,000. THE ASSESSEE COMPARED THE SPECIAL RESERVE AMOUNT WITH TWICE THE AMOUNT OF PAID UP CAP ITAL AND GENERAL RESERVES AND SINCE THE SPECIAL RESERVES HAD NOT EXCEEDED TWICE THE AMO UNT OF PAID UP CAPITAL AND GENERAL RESERVES, CLAIMED IT WAS ELIGIBLE TO CLAIM RS.17,65 ,67,935 AS STATUTORY DEDUCTION UNDER SECTION 36(1)(VIII) OF THE ACT. THE ASSESSING OFFI CER AS IN ASSESSMENT YEAR 2003-04 AND 2006-07 DID NOT ACCEPT THE CLAIM OF THE ASSESSEE. TO DECIDE THIS ISSUE, THE ASSESSING OFFICER WENT ON TO ANALYSE THE CLAIM OF THE ASSESSE E, IN THE ORDER OF ASSESSMENT, AS UNDER: IT IS NOTICED THAT THE ASSESSEE HAS INCLUDED THE F OLLOWING ITEMS UNDER THE CATEGORY OF PAID UP SHARE CAPITAL AND GENERAL RESER VES OF THE ENTITY. PAID UP CAPITAL (SCHEDULE 1 OF THE SCHEDULES ANNEXED TO AND FORMING PART OF THE ACCOUNTS.) RS. 20,48,75,450 GENERAL RESERVE (SCHEDULE 2 OF THE SCHEDULES ANNEXED TO AND FORMING PART OF THE ACCOUNTS) RS. 33,89,00,000 SHARE PREMIUM (SCHEDULE 2 OF THE SCHEDULES ANNEXED TO AND FORMING PART OF THE ACCOUNTS) RS. 5,25,00,000 PROFIT AND LOSS ACCOUNT (SCHEDULE 2 OF THE SCHEDULES ANNEXED TO AND FORMING PART OF THE ACCOUNTS) RS. 6,96,58,233 TOTAL : RS. 66,59,33,683 3 ITA NO.894/BANG/11 7. THE ASSESSEE COMPANY HAS CONSIDERED THE SHARE PR EMIUM AND PROFITS ACCUMULATED ALSO AS PART OF THE GENERAL RESERVES. ACCORDING TO ITS CONTENTION, TWICE THE AMOUNT OF PAID UP SHARE CAPITAL AND GENER AL RESERVES AS PROVIDED IN THE ABOVE SAID PROVISO WOULD BE RS. 133,18,67,366 (2 X6 6,59,33,683). THE AGGREGATE OF THE AMOUNTS CARRIED TO SPECIAL RESERVES ACCORDIN G TO COMPANY BOOKS IS RS. 113,19,00,000. THE ASSESSEE COMPARED THE SPECIAL R ESERVE AMOUNT WITH TWICE THE AMOUNT OF PAID UP CAPITAL AND GENERAL RESERVES AND HELD THAT SINCE THE SPECIAL RESERVE HAS NOT EXCEEDED TWICE THE AMOUNT OF PAID U P CAPITAL AND GENERAL RESERVES, IT IS ELIGIBLE TO CLAIM RS. 17,65,67,935 AS STATUTORY DEDUCTION UNDER SECTION 36(1)(VIII) OF THE ACT. THE MOOT AND MOST IMPORTANT POINT TO BE EXAMINED HERE IS WHAT FORMS PAID UP CAPITAL AND GENERAL RESE RVES AS PER THE PROVISO REFERRED ABOVE. IN CONNECTION WITH THIS, THE SUBMI SSIONS MADE BY THE ASSESSEE COMPANY DURING THE DISCUSSIONS ON 11.12.2009 AND 17 .12.2009 WERE CAREFULLY HEARD AND EXAMINED. THE ARGUMENTS EXTENDED BY THE ASSESS EE COMPANY FOR INCLUDING SHARE PREMIUM ACCOUNT AND PROFIT AND LOSS ACCOUNT I N THE AMBIT OF GENERAL RESERVES FOR THE PURPOSES OF PROVISO OF SECTION36( 1)(VIII) ARE NOT ACCEPTABLE FOR THE FOLLOWING REASONS : 7.1(A) THE EXPRESSION RESERVES HAS NOT BEEN DE FINED IN THE I T ACT. IT HAS, THEREFORE, TO BE UNDERSTOOD IN THE MANNER IN WHICH IT IS USED IN COMMERCIAL PRACTICE. A RESERVE BY ITS VERY NATURE, A FUND WHI CH IS CREATED AND MAINTAINED FOR THE PURPOSE OF BEING DRAWN UP IN FUTURE. THE ASSES SEE HAS INTENDED TO BRING SHARE PREMIUM AND PROFIT AND LOSS ACCOUNT BALANCE I NTO THE DEFINITION OF RESERVE. 7.1(B) A RESERVE IS SURPLUS SET ASIDE FOR FUTUR E USE OR FOR CERTAIN UNSPECIFIED PURPOSES. LIKEWISE, GENERAL RESERVE IS A REVENUE R ESERVE WHICH IS NOT EAR MARKED FOR ANY SPECIFIC PURPOSE. 7.1(C) A PROVISION IS AN AMOUNT SET ASIDE OR WRIT TEN OFF TOWARDS DEPRECIATION, RENEWALS OR DIMINUTION IN THE VALUE OF ASSETS. THA T IS TO SAY, BASICALLY A GENERAL RESERVE IS CAPABLE OF BEING DISTRIBUTED TO THE PROF IT AND LOSS ACCOUNT AND THEREFORE, IS NOT A CAPITAL RESERVE. THUS, EVERY G ENERAL RESERVE HAS TO HAVE THE CHARACTER OF A REVENUE RESERVE AND A FREE RESERVE. UNDER SECTION 372A OF THE COMPANIES ACT, 1956, A FREE RESERVE MEANS A RESERVE WHICH AS PER THE LATEST AUDITED BALANCE SHEET OF THE COMPANY IS FREE FOR DI STRIBUTION AS DIVIDED AND SHALL INCLUDE BALANCE TO THE CREDIT OF THE SECURITIES PRE MIUM ACCOUNT BUT SHALL NOT INCLUDE SHARE APPLICATION MONEY. 7.1(D) A GENERAL RESERVE IS CAPABLE OF BEING DI STRIBUTED TO THE PROFIT AND LOSS ACCOUNT. IN THE TERMS OF THE COMPANIES ACT, THE BA LANCE IN SHARE PREMIUM ACCOUNT CANNOT BE DISTRIBUTED TO THE PROFIT AND LOS S ACCOUNT. DUE TO THIS, THE SHARE PREMIUM ACCOUNT CANNOT FORM PART OF OR CAN TA KE NATURE OF GENERAL 4 ITA NO.894/BANG/11 RESERVE. HENCE, THE ARGUMENT OF THE ASSESSEE COMPA NY THAT SHARE PREMIUM ACCOUNT SHOULD BE CONSIDERED AS GENERAL RESERVE IS NOT ACCEPTABLE. 7.2(A) A MASS OF UNDISTRIBUTED PROFITS CANNOT A UTOMATICALLY BECOME A RESERVE AND SOMEBODY POSSESSING THE REQUISITE AUTHORITY MUS T CLEARLY INDICATE THAT A PORTION THEREOF HAS BEEN EARMARKED OR SEPARATED FRO M 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 R ESERVE CAN HAVE NO APPLICATION TO PROFITS WITH RESPECT TO THE APPLICAT ION OF WHICH THERE IS AS YET, NEITHER A PROPOSAL NOR A DECISION. A RESERVE MAY B E A GENERAL RESERVE OF SPECIFIC RESERVE, BUT IN ORDER TO CONSTITUTE A RESERVE, THER E 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 I T IS SHOWN IN THE BALANCE SHEET AS A RESERVE. IN DRAWING THE ABOVE CONCLUSION, SU PPORT IS DERIVED FROM CIT VS. GORDON WOOD ROFFE AND CO. (MADRAS) PVT. LTD. (183 I TR 465) AND INDIAN STEEL AND WIRE PRODUCTS LTD. VS. CIT (33 ITR 579). 7.2(B) A RESERVE IS APPROPRIATED OUT OF PROFITS . THE BALANCE UNDER P & L ACCOUNT IN THE BALANCE SHEET CANNOT BE CALLED RESER VE SINCE THE AMOUNT IS NOT TRANSFERRED TO THE RESERVE ACCOUNT. ITEMS 4 & 5 UN DER RESERVES & SURPLUS (SCHEDULE 6 OF THE COMPANIES ACT) RELATE TO OTHER R ESERVES AND SURPLUS, I.E. BALANCE IN THE P & L ACCOUNT. THIS INDICATES THAT BALANCE IN P & L ACCOUNT IS DISTINCT FROM RESERVES. THE AMOUNT IN THE PROFIT A ND LOSS ACCOUNT CANNOT BE CONSIDERED AS A RESERVE. HENCE, THE ATTEMPT OF THE ASSESSEE TO INCLUDE PROFIT & LOSS ACCOUNT IN THE UMBRELLA OF GENERAL RESERVE IS NOT ACCEPTABLE. IN VIEW OF THE ABOVE, IT CANNOT BE CONSTRUED THAT ANY SPECIAL RESE RVES, PROFIT AND LOSS ACCOUNT, SHARE PREMIUM ACCOUNT, CAN BE TAKEN FOR THE PURPOSE S OF DETERMINING PAID UP CAPITAL AND GENERAL RESERVES AS MENTIONED IN THE P ROVISO TO SECTION 36(1)(VIII). 7.3 THE ASSESSEE COMPANY HAS CLAIMED A DEDUCTIO N OF RS. 17,65,67,935. FOR DETERMINING WHAT EXACTLY SHOULD BE ALLOWED AS PER T HE ACT SECTION 36(1)(VIII) IS REPRODUCED ONCE AGAIN. SECTION 36(1)-- THE DEDUCTIONS PROVIDED FOR IN T HE FOLLOWING CLAUSES SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WITH THEREI N, IN COMPUTING THE INCOME REFERRED TO IN SECTION 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 INFRASTR UCTURE 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 CON STRUCTION OR PURCHASE OF 5 ITA NO.894/BANG/11 HOUSES IN INDIA FOR RESIDENTIAL PURPOSES, AN AMOUNT NOT EXCEEDING FORTY PER CENT OF THE PROFITS DERIVED FROM SUCH BUSINESS OF PROVID ING LONG TERM FINANCE (COMPUTED UNDER THE HEAD PROFITS AND GAINS OF BUSI NESS OR PROFESSION BEFORE MAKING ANY DEDUCTION UNDER THIS CLAUSE CARRIED TO S UCH RESERVE ACCOUNT. PROVIDED THAT WHERE THE AGGREGATE OF THE AMOUNTS CA RRIED 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 MA DE IN RESPECT OF SUCH EXCESS. 7.4 THE CEILING ON THE DEDUCTION TO BE ALLOWED IS CLEARLY MENTIONED IN ACT ITSELF, I.E. TWICE THE AMOUNT OF PAID UP CAPITAL AND GENERA L RESERVES. THE SPECIAL RESERVE CREATED CANNOT EXCEED TWICE THE AMOUNT OF PAID UP C APITAL AND GENERAL RESERVE. HENCE, INSTEAD OF ALLOWING RS. 17,65,67,935 ONLY AN AMOUNT OF RS. 8,00,00,000 IS ALLOWED TO THE ASSESSEE AS DEDUCTION UNDER SECTION 36(1)(VIII) AS PER THE RECOMPUTATION GIVEN BELOW : STATUTORY DEDUCTION U/S. 36(1)(VIII) OF THE I T ACT , 1961. PAID UP CAPITAL RS.20,48,75,450 GENERAL RESERVE 1 RS.33,89,00,000 (PLEASE SEE PARA 6) RS.54,37,75,450 TWICE THE AMOUNT OF PAID-UP CAPITAL & GENERAL RESER VE RS.108,75,50,900 SPECIAL RESERVE AS ON 31.3.2005 RS.98,39,00,000 ADD: RESERVE ALLOWED AS PER ASSESSMENT ORDER U/S 143(3) FOR AY 2006-07 RS.2,36,50 ,900 RS.100,75,50,900 DIFFERENCE : RS.8,00,00,000 IN THIS VIEW OF THE MATTER, THE ASSESSING OFFICER C OMPLETED THE ASSESSMENT BY AN ORDER UNDER SECTION 143(3) OF THE ACT DT.17.12.2009 HOLDI NG THAT THE ASSESSEE IS ELIGIBLE FOR DEDUCTION UNDER SECTION 36(1)(VIII) OF AN AMOUNT OF RS.8 CRORES INSTEAD OF RS.17,65,67,935 AS CLAIMED BY IT. 2.2 AGGRIEVED BY THE ORDER OF ASSESSMENT DT.17.12.2 009, THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A). THE LEARNED CIT(A) DISPOSED THE APPEAL BY ORDER DT.8.8.2011 6 ITA NO.894/BANG/11 DISMISSING THE ASSESSEES APPEAL THEREBY FOLLOWING THE DECISION OF THE CIT(A) FOR ASSESSMENT YEAR 2006-07 IN THE ASSESSEES OWN CASE. 3. AGGRIEVED BY THE ORDER OF THE LEARNED CIT(A) FOR ASSESSMENT YEAR 2007-08, THE ASSESSEE IS NOW IN APPEAL BEFORE US. THE GROUNDS O F APPEAL RAISED IN THIS APPEAL ARE AS UNDER : 1. TH E ORD E R PASSED B Y THE LEARNED COMMISSIONER OF IN C OM E- TA X , A PP E AL - I , I S OPPOSED TO ' TH E FACTS OF THE CASE AND A S WELL AS OPPOS E D T O E QUIT Y AND NATURAL JUSTICE . 2. THE LEARNED COMMISSIONER OF INCOM E -TAX , APPEALS-I, HA S G ROSSL Y E RR E D IN NOT APPR E CIATING THE FACTS OF THE CASE AND HAS ERRED IN COMI NG TO TH E CON C LU S ION S WHIL E UPHOLDING DISALLOWANCE OF STATUTOR Y DEDUCTI O N U / S 36(1 ) (VIII) OF R S . 9 ,6 5 , 6 7, 9 3 5/- , AS AGAIN S T S TATUTOR Y C LAIM OF RS. 17 , 65 , 67 , 935/- UNDER SECTION 3 6(1) ( V III) W ITH O UT PR O P ER L Y APPL Y ING THE PRIN C IPLES OF INCOME-TAX ACT , AND AS WELL A S VA RI O U S PRO V I S ION S OF INC O ME-TAX LAW . 3. THE LEARNED COMMISSIONER OF INCOME-TAX , APPEALS-I, HAS ER RED I N NOT APPR EC I A TIN G THE WRITTEN ARGUMENTS MADE B Y THE APPELLANT REGARDIN G TH E M EA NIN G O F 'PAID UP CAPITAL + GENERAL RESERVES'. 4. THE LEARNED COMMISSIONER OF INCOME-TAX, APPEALS -I , HAS FAIL E D T O APPR EC IAT E TH E FACT THAT THE COINED WORD 'PAID UP CAPITAL + GENERAL RESER V ES ' IS ALREAD Y DEFINED A S NET W OR TH UND E R OTHER LAWS AND TH E L E ARN E D C O MMIS S ION E R OF INC O M E TA X, A PPEALS-I OUGHT TO HA V E CONSIDERED TH E AR G UM E NT S MAD E B Y TH E APPELLANT IN THIS R E GARD. 5. TH E LEARNED COMMISSIONER OF INCOME-TAX, APPEALS-I HA S G R O S S L Y E RR E D IN N O T APPR EC IATING THE FACT THE WORD ' P AI D UP CAPITAL + GENERAL RESERVES' HA S TO BE READ AS A SINGLE COINED WORD AND NOT SEPARATE L Y W HI C H A FF EC T S TH E VE R Y FUNDAMENTAL PURPOSE OF PROVIDING THE RELIEF UNDER THE PROVISION S OF SECTION 36(1)(VII). 6. T HE LEARNED COMMISSIONER OF INCOME - TAX, APPEALS-I , HA S G R O S S L Y E RR E D I N N O T CONSIDERING THE BUDGET SPEECH WHILE PRESENTING FINA NC E BUDG E T MADE B Y TH E HON O RABL E FINANCE MI N ISTER ON 28.02.2007 WHICH CLEARL Y ESTABLISHED TH E ME A NIN G OF THE COINED WORD ( ' PAID UP CAPITAL ' + G E N E RA L R ESE RV ES') AS NET W OR TH. 7. TH E LEARNED COMMISSIONER OF INCOME-TA X , APPEALS - I FAIL E D TO APPR EC IAT E TH A T TH E G UID A N CE NOT E S ISSU E D B Y TH E INSTITUTE OF CHARTERED A CC OUNTANT S OF INDIA , HA VE N O REL EV ANC E TO THE CASE AND AS WELL AS HAS NO FORCE OF LAW, AS SU C H NOTE S C ANNOT B E APPLIED WHILE INTERPRE T ING TAX PROVISIONS UNDER INCOM E - TAX ACT, WHIL E PROVIDIN G RELIEF UNDER INCOME TAX AC T . 8 . TH E LEARNED COMMISSIONER OF INCOME-TA X, APPEALS-I FAIL E D T O APP REC I A T E TH E F AC T THAT W HIL E INTERPRETING THE PROVISION G IVIN G A LLOWANC E OR R E LIEF T O A N ASSESSEE, TH E PRO V I S I O N HAS TO B E INTERPRETED IN A LIBER A L MANNER . 9. TH E L E ARNED COMMISSIONER OF I N COME - TAX, APPEAL-I, HAS GROSSL Y ERRED IN NOT CON S IDERING THE WRITT E N ARGUM E NTS AND AS W E LL AS THE MATERIAL PLA CE D BEFOR E HIM DURING THE COURSE OF APPEAL. 10. THE APPELLANT CRAVES LEAVE TO ADD, AMEND AND OR A LTER ANY OF THE GROUNDS OF APPEAL AT 7 ITA NO.894/BANG/11 THE TIME OF HEARING OF THE APPEAL. 4. THE GROUNDS OF APPEAL AT S.NOS.1 AND 10 ARE GENERAL IN NATURE AND THEREFORE NO ADJUDICATION IS CALLED FOR THEREON. 5.1 THE EFFECTIVE GROUNDS OF APPEAL FROM 2 TO 9 ARE ALL IN RESPECT OF THE CLAIM FOR STATUTORY DEDUCTION UNDER SECTION 36(1)(VIII) OF TH E ACT IN THE RELEVANT PERIOD. THE ONLY ISSUE FOR US TO ADJUDICATE UPON IN THIS APPEAL IS W HETHER THE TERM GENERAL RESERVE INCLUDES (I) SHARE PREMIUM AMOUNT, AND (II) PROF IT AND LOSS ACCOUNT BALANCE FOR COMPUTING THE ELIGIBLE AMOUNT FOR CLAIM OF DEDUCTIO N UNDER SECTION 36(1)(VIII) AS CLAIMED BY THE ASSESSEE. 5.2 AT THE OUTSET, LEARNED DEPARTMENTAL REPRES ENTATIVE SUBMITTED THAT THE ISSUE FOR ADJUDICATION IN THIS APPEAL IS COVERED IN FAVOUR OF REVENUE BY THE ORDER OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL. THE LEARNED COUNSEL FOR TH E ASSESSEE FAIRLY CONCEDED THAT THIS ISSUE IS COVERED AGAINST THE ASSESSEE AND IN FAVOUR OF THE REVENUE BY THE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE ASSESSEE S OWN CASE FOR ASSESSMENT YEAR 2006- 07 IN ITA NO.861/BANG/2010 DT,24.2.2012. A COPY O F THIS JUDGMENT WAS PLACED ON RECORD. 5.3 WE HAVE HEARD BOTH PARTIES, PERUSED THE MA TERIAL ON RECORD AS WELL AS THE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE AS SESSEES OWN CASE FOR ASSESSMENT YEAR 2006-07, I.E. THE IMMEDIATELY PRECEDING YEAR (SUPRA ) AND FIND THAT THE VERY SAME ISSUE OF THE COMPUTATION OF THE QUANTUM OF ELIGIBLE DEDUCTIO N UNDER SECTION 36(1)(VIII) TO WHICH THE ASSESSEE IS ENTITLED WAS ADJUDICATED UPON THEREIN. FOR THE SAKE OF CLARITY, WE REPRODUCE 8 ITA NO.894/BANG/11 HEREUNDER THE OPERATIVE PORTION OF THE SAID JUDGMEN T AT PARAS 7 TO 10 ON PAGES 27 TO 31 THEREOF. 07. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONS IDERED THE FACTS AND MATERIALS ON RECORD. THE ONLY ISSUE FOR US TO A DJUDICATE 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, T HERE 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 CONSIDERING ALL THE CASE LAWS RELIED UPON BY THE ASSESSEE BEFORE HIM; HAS OBSERVED AS UN DER : '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 THE ISSUE, THE COMMISSIONER OF INCOME-TAX (APPEALS) DEALT WITH THE ARGUMENTS OF THE ASSESSEE AND THE RELEVANT PROVISIONS UNDER IT LAW A ND COMPANY LAW. THE COMMISSIONER OF INCOME-TAX (APPEALS) OBSERVED T HAT THERE IS NO DEFINITION OF 'RESERVE' IN ANY OF THE LAWS. H E RELIED ON THE FOLLOWING DECISIONS TO BRING OUT WHAT ALL CONSTITUTED 'RESERV E' 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 PRONOUN CEMENTS, THE COMMISSIONER OF INCOME-TAX (APPEALS) ANSWERED THE I SSUE IN SPECIFIC TERMS AS BELOW : 9 ITA NO.894/BANG/11 '3.5.1. SHARE PREMIUM ACCOUNT : AS MENTIONED EARLIE R 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 DIST RIBUTED THROUGH THE PROFIT AND LOSS ACCOUNT. DUE TO THIS INCAPACITY, IT IS NOT A REVENUE RESERVE. THEREFORE, IT IS NOT A GENERAL RESERVE. 3.5.2. BALANCE IN PROFIT AND LOSS ACCOUNT : A RESER VE IS APPROPRIATED OUT OF PROFITS. THE BALANCE UNDER PROFIT AND LOSS ACCOU NT IN THE BALANCE SHEET CANNOT BE CALLED A RESERVE SINCE THE AMOUNT I S NOT TRANSFERRED TO THE RESERVE ACCOUNT. ITEMS 4 & 5 UNDER RESERVES AND SURPLUS (SCHEDULE 6 OF THE COMPANIES ACT) RELATE TO OTHER RESERVES AN D SURPLUS IS BALANCE IN PROFIT AND LOSS ACCOUNT. THIS INDICATES THAT BAL ANCE IN PROFIT AND LOSS ACCOUNT IS DISTINCT FROM RESERVES. THE AMOUNT IN TH E PROFIT AND LOSS ACCOUNT CANNOT BE CONSIDERED A RESERVE. 3.5.3. SPECIAL RESERVE : IT IS CONTENDED THAT A SPE CIAL RESERVE IS ALSO ONE FORM OF GENERAL RESERVE BELONGING TO THE COMPAN Y, 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 A CT. 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 CRE ATE A SPECIAL RESERVE BUT IT ALSO SHOULD BE MAINTAINED. THE REQUIREMENT O F 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 SP ECIFIC REQUIREMENT UNDER LAW IS FOR A SPECIFIC PURPOSE. ON THE OTHER H AND AS PER THE DEFINITION GIVEN BY INSTITUTE OF CHARTERED ACCOUNTS A GENERAL RESERVE SHOULD HAVE NO SPECIFIC PURPOSE. THE SPECIAL RESERV E IS FOR A SPECIAL PURPOSE. IT CANNOT BE DISTRIBUTED FREELY THROUGH TH E 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 SPECIFI C PURPOSE IT CANNOT BE CALLED GENERAL RESERVE. IN VIEW OF THE FOREGOING IT IS HELD THAT THE ASSESSING OFFICER WAS JUSTIFIED IN IGNORING THE BAL ANCE 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. 10 ITA NO.894/BANG/11 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 WE 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. 10. IN THE RESULT, THE ASSESSEE'S APPEAL IS DISMISS ED. RESPECTFULLY FOLLOWING THE DECISION OF THE CO-ORDIN ATE BENCH OF THIS TRIBUNAL IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2006-07 REN DERED ON 24.2.2012 IN ITA NO.861/BANG/2010, WE HOLD THAT IN COMPUTING THE ELI GIBLE DEDUCTION UNDER SECTION 36(1)(VIII) OF THE ACT IN THE ASSESSEES CASE (I) SHARE PREMIUM AMOUNT OF RS.5,25,00,000, AND (II) PROFIT AND LOSS ACCOUNT BALANCE OF RS.6, 96,58,233 WOULD NOT FORM PART OF GENERAL RESERVES AND ACCORDINGLY THE ASSESSEE WOULD BE ENT ITLED TO DEDUCTION OF AN AMOUNT OF RS.8 CRORES UNDER SECTION 36(1)(VIII) OF THE ACT AS COMPUTED BY THE ASSESSING OFFICER AND NOT RS.17,65,67,935 AS CLAIMED BY IT. IT IS ORDERE D ACCORDINGLY. 6. IN THE RESULT, THE ASSESSEES APPEAL IS DISMISSE D. ORDER PRONOUNCED IN THE OPEN COURT ON 7 TH SEPT., 2012. SD/- SD/- (N.V. VASUDEVAN) (JASON P BOAZ) JUDICIAL MEMBER ACCOUNTANT MEMB ER *REDDY GP 11 ITA NO.894/BANG/11 COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, - A BENCH. 6. GUARD FILE. (TRUE COPY ) BY ORDER SR. PRIVATE SECRETARY, ITAT, BANGALORE .