P.R.RAMAN, J. -
(1.) THE appellant is the Kerala Financial Corporation. The asst. yr. is 1994 -95.
(2.) THE assessee was assessed on a total income of Rs. 1,04,38,220 for the asst. yr. 1994 -95. While making the assessment under Section 143(3) of the IT Act, the assessee claimed deduction of an amount of Rs. 70,04,148 under Section 36(1)(viii) which was allowed in respect of the special reserve created by the appellant/assessee as a Financial Corporation engaged in providing long -term finances. The CIT, on a perusal of the records noticed that though reserve was created to the extent of Rs. 71,18,786 by the assessee by debiting the P&L; a/c, the amount was transferred immediately to the 'Provision for bad and doubtful debts account' and that there was no amount available in the special reserve account. In this view of the matter, the CIT was of the opinion that the assessee was not entitled to the deduction under Section 36(1)(viii) of the IT Act since the amount from the special reserve has been transferred to another account leaving no amount in the reserve as such. A notice was issued under Section 263 of the IT Act to the assessee proposing revision of the assessment. Though the assessee objected to the proposal, the same was overruled and by order, dt. 25th Nov., 1998, passed under Section 263 of the IT Act, the CIT directed the AO to withdraw the deduction granted under Section 36(1)(viii) of the Act. Against the said order, the appellant -assessee preferred an appeal before the Tribunal. The Tribunal also concurred with the view of the CIT and dismissed the appeal by its order in ITA No. 558/Coch./1998, dt. 24th Aug., 1999. Aggrieved thereby, the appellant has preferred this appeal, challenging the decision of the Tribunal confirming the view of the CIT.
The admitted facts are that the assessee financial corporation is constituted under the Kerala Financial Corporation Act and engaged in the business of providing long -term finances for industrial or agricultural development or development of infrastructure facility in India. The assessee has, for the asst. yr. 1994 -95 created the reserve of an amount of Rs. 71,18,786 by debiting the P&L; a/c and creating a special reserve account. But the assessee transferred the amount in the special reserve account to 'provision for bad and doubtful debts -account'. The question that arises for consideration is as to whether in the facts and circumstances of the case, the appellant is entitled to the deduction of Rs. 70,04,148 created in the special reserve under Section 36(1)(viii) while computing the total income of the appellant for the asst. yr. 1994 -95 ?
(3.) WE have heard Sri G. Sarangan, senior counsel appearing for the appellant and Sri P.K. Raveendranatha Menon, senior standing counsel appearing for the respondent -Revenue. The learned counsel appearing for the appellant strenuously contended before us that there is no requirement that the reserve should not be disturbed at all and that if there was a creation of a reserve in the accounting year that is sufficient compliance with the requirement under Section 36(1)(viii). He drew our attention to the amendment made to Section 36(1)(viii) by Finance Act, 1997, w.e.f. 1st April, 1998, by which it was made clear that the special reserve is not only to be created but also to be maintained, According to him, the word 'and maintained' was inserted for the first time w.e.f. 1st April, 1998, and as the section stood at the relevant point of time, there was no obligation nor was it a condition to claim the benefit of Section 36(1)(viii) to have the reserve created to be maintained by the assessee. In other words, the mere creation of a special reserve in its P&L; a/c is sufficient to entitle the assessee to claim the benefit under Section 36(1)(viii) of the IT Act during the assessment year in question. It was also contended that the Industrial Development Bank of India had issued guidelines and as per the guidelines so issued and produced as Annexure E, the State Financial Corporation has been permitted to create special reserve to avail of the benefit as permissible in terms of Section 36(1)(viii) of the IT Act, 1961. The cumulative balance of provisions available/made under this section is admissible for provision purposes. The reserve can, therefore, be utilized to create specific provision for assets classified as 'bad and doubtful debts'. The assets and liabilities should be reduced to the extent of provisions utilized from the cumulative balance of reserves under Section 36(1)(viii) i.e., to say, assets are to be shown as net of provisions. It is pursuant to these guidelines, contends appellant's counsel, that the appellant had transferred from the special reserve to the provisions for 'bad and doubtful debts' and that provision continued to be remained in the books of account. In these circumstances, counsel submits, the deductions claimed under Section 36(1)(viii) is supported by law, justified and allowable.;