Law:

Section:

Section 36(1)(viii) of the Income-tax Act, 1961 - Financial Corporation reserve created by - Assessment year 1965-66 - Whether deduction referred to in section 36(1)(viii) envisages 10 per cent of total income and not 10 per cent of total assessed income before deduction of amount so allowed - Held, yes Words and phrases : Expression 'total income' as occurring in section 36(1)(viii) of the Income-tax Act, 1961 FACTS The ITO by his first assessment order assessed the total income of the assessee corporation liable to tax to the tune of Rs. 7,74,835. According to the profit and loss account of the corporation, it had earned a net profit to the tune of Rs. 8,17,451. It had transferred 10 per cent of this sum to the extent of Rs. 81,745 to the special reserve fund. The ITO allowed the whole of this amount of Rs. 81, 745 as admissible deduction under s. 36(1)(viii) in order to arrive at the total assessable income. Later on, the ITO revised the amount of deduction allowable under said section to Rs. 77,871, which was exactly 10 per cent of ultimate total income assessed as chargeable to Income-tax. The AAC affirmed the revised order of assessment. The Tribunal held the revised order to be incorrect and bad and set it aside. On reference : HELD In the case of financial corporation of the kind enumerated in section 36(1)(viii), the amount carried to the special reserve fund by the corporation has got to be allowed as a deduction. If the amount falls short of the maximum limit provided in the clause, then the whole of the amount will be allowable as a deduction. But if the amount is in excess of the maximum limit, then, on account of the transfer of a portion of the income to the special reserve fund, an amount which will be equivalent to one-tenth of the total income will be allowed and the rest will be disallowed. However, in the process of computing the income all additions which can justifiably be made should be made; all deductions which are permissible to be allowed should be deducted. Then comes a figure of total income at a stage where the ITO proceeds to give a further deduction under section 36(1)(viii ) After amendment, by the Finance (No. 2) Act, 1967, it…

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