Commissioner of Income Tax vs Kerala Financial Corporation Ltd.

T.L. Viswanatha Iyer, J.—These are references at the instance of the Revenue. The assessee in all these cases is the same, namely, the Kerala Financial Corporation Limited. The question referred is whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction u/s 36(1)(viii) of the Income Tax Act, 1961, on the total income before making any deduction u/s 36(1)(viii) ?

This question is really concluded against the Revenue by the decisions in the assessee''s own cases in ITR Nos. 33 and 34 of 1985, and ITR No. 68 of 1989, pertaining to the assessment years 1977-78, 1978-79 and 1979-80 respectively. In answering those references, this court had followed the decision in Kerala State Industrial Development Corporation Ltd. Vs. Commissioner of Income Tax, as also the decision in ITR Nos. 205 to 208 of 1984 (subsequently reported in Commissioner of Income Tax Vs. Kerala State Industrial Development Corporation Ltd. (No. 2), ). The decision in the first of these cases, namely, Kerala State Industrial Development Corporation Ltd. Vs. Commissioner of Income Tax, , was approved and followed in Commissioner of Income Tax Vs. Kerala State Industrial Development Corporation Ltd. (No. 2), , after overruling an attempt made by the Revenue for a reconsideration of the earlier decision in view of the decision of the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad, . This court dealt with the matter in the light of the decision in Cambay Electric Supply Industrial Co. Ltd. Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad, and held that the decision in Kerala State Industrial Development Corporation Ltd. v. CIT [1989] 180 ITR 323 did not require reconsideration. On the other hand, this court noted that, subsequent to the earlier decision, the High Court of Madhya Pradesh had also rendered a decision in Commissioner of Income Tax Vs. M.P. Audyogik Vikas Nigam Ltd. (No. 1), in which it had taken the same view as that taken in Kerala State Industrial Development Corporation Ltd. Vs. Commissioner of Income Tax, . In rendering the earlier decision, this court followed the decisions of the Patna High Court in Commissioner of Income Tax Vs. Bihar State Financial Corporation, , Commissioner of Income Tax Vs. Bihar State Financial Corporation, and Commissioner of Income Tax Vs. Bihar State Financial Corporation, .

But, according to counsel for the Revenue, the decision of this court requires reconsideration in the light of the decision in Cambay Electric Supply Industrial Co. Ltd. Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad, and also in the light of the decision of the High Court of Karnataka in Karnataha State Financial Corporation v. CIT [1988] 174 ITR 206 besides with reference to the Statement of Objects and Reasons to the Finance Act, 1985. So far as the first ground is concerned, viz., that the decision of the Cambay Electric Supply Industrial Co. Ltd. Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad, (SO justifies a further look into the question, it does not appeal to us. In fact, the first attempt made by the Revenue to reconsider the decision in Kerala State Industrial Development Corporation Ltd. Vs. Commissioner of Income Tax, was with reference to this case and this court dealt with the matter afresh with reference to the contentions raised by the Revenue, but reaffirmed its earlier decision in Kerala State Industrial Development Corporation Ltd. v. CIT [1989] 180 ITR 323 in the subsequent decision in Commissioner of Income Tax Vs. Kerala State Industrial Development Corporation Ltd. (No. 2), . We are in agreement with the reasoning in Commissioner of Income Tax Vs. Kerala State Industrial Development Corporation Ltd. (No. 2), and do not find any reason to reconsider the earlier decision in the light of Cambay Electric Supply Industrial Co. Ltd. Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad, .

Counsel for the Revenue very staunchly pressed for our acceptance the contentions based on the Objects and Reasons to the Finance Act, 1985, by which Section 36(1)(viii) of the Act was amended by providing specifically that the deduction is to be 40% of the total income before making any deduction u/s 36(1)(viii) and Chapter VI-A. The inference attempted to be drawn is that the law was otherwise till April 1, 1985, when the amendment came into force and, therefore, the deduction u/s 36(1)(viii) has to be on the amount after deduction of the said amount from the total income, but without making the deductions under Chapter VI-A. This view is in accord with the decision of the Karnataka High Court in Karnataka State Financial Corporation Vs. Commissioner of Income Tax, . This matter was again the subject of consideration by the High Court of Gujarat in Commissioner of Income Tax Vs. Gujarat State Finance Corporation, . The court considered both the Karnataka decision as well as the inference to be drawn from the Objects and Reasons to the Finance Act, 1985. After an elaborate consideration of the point, the Bench refused to accept the Karnataka decision as correct besides holding that the Finance Act, 1985, was clarificatory and not amendatory. The Bench observed as follows (at page 828) :

"The opening part of Section 2 which contains various definitions clearly provides that, unless the context otherwise requires, different words and expressions will have the meanings given in that section. The definition of ''total income'' in Section 2(45) has to be given the meaning as defined unless the context otherwise requires. Now, when we come to Section 36(1)(viii), it is not possible to read the expression ''total income'' used therein to mean total income computed in accordance with the provisions contained in Sections 30 to 45A, as provided in Section 29, so as also to take into account deductions admissible u/s 36(1)(viii). What we have to bear in mind is that, when we come to Section 36(1)(viii), deduction under that provision has not been worked out and, therefore, there is no question of applying the requisite percentage to the total income as reduced by such deduction for the purpose of working out the admissible deduction under that provision. Since Section 36(1)(viii) itself provides that the total income for the purpose of the said provision is total income before the deduction under Chapter VI-A, it would mean that, for the purpose of working out deduction under that provision, the total income would be the total income before deduction (1) under Chapter VI-A, and (2) under that provision (Section 36(1)(viii)). It may also be mentioned here that, what was implicit in Section 36(1)(viii) has now been made explicit by subsequent amendment of the said Clause (viii) with effect from April 1, 1985, by which it was specifically provided that total income for the purpose of applying the requisite percentage is total income before any deduction under that clause and Chapter VI-A,"

After referring to the decision of the Karnataka High Court, the Bench proceeded to observe as follows (at page 829 ) :

"The decision of the Karnataka High Court, no doubt, fully supports the view canvassed on behalf of the Revenue, but, with respect, we find ourselves unable to agree with it. As already observed above, for the purpose of working out deduction u/s 36(1)(viii) total income can only mean total income computed after taking into consideration deductions admissible under all the provisions except Section 36(1)(viii) and Chapter VI-A. From the formula adopted by the Tribunal which was approved by the Karnataka High Court, it is clear that, initially, deduction u/s 36(1)(viii) was worked out by applying the appropriate percentage to total income computed before deduction under that clause and Chapter VI-A. Once that is done, as already observed, the provision gets exhausted and there is no question of again reducing the total income by such deduction and again applying the requisite or appropriate percentage for working out the admissible deduction. There is no justification for making the deduction twice over. The total income to which the appropriate percentage is to be applied to work out deduction u/s 36(1)(viii) would obviously mean the total income before such deduction. Therefore, the expression ''total income'', in the context in which it is used in Section 36(1)(viii), can only mean total income before deduction under that clause and Chapter VI-A. In our opinion, the provision is very clear and there is no need to evolve or apply any formula. Therefore, in our opinion, deduction u/s 36(1)(viii) has to be worked out by applying the proper percentage to the total income computed before making any deduction under that clause and Chapter VI-A."

We are in entire agreement with the view expressed by the Gujarat High Court. The definition of total income in Section 2(45) being subject to the context it has to be read in Section 36(1)(viii) as relating to the total income without making the deduction u/s 36(1)(viii) as well. That seems to be logical in the context in which the provision occurs. The matter has been dealt with exhaustively by the Gujarat High Court. We are in agreement with their view and the reasoning adopted by them.

In this view of the matter, the decisions of this court do not require reconsideration as contended by counsel for the Revenue. We are in agreement with those decisions which themselves are based on the decisions of the Patna and Madhya Pradesh High Courts where the matter has been discussed in full.

These references are, therefore, answered in the affirmative, that is, against the Revenue and in favour of the assessee.

A copy of this judgment under the seal of this court and the signature of the Registrar will be forwarded to the Income Tax Appellate Tribunal, Cochin Bench, for information and compliance.