The Karnataka High Court held that the assessee, Vijaya Bank is a ‘Financial Company’ and is entitled to avail the benefit of deduction under Section 36(1)(viii) of the Income Tax Act.
The assessee, M/s Vijaya Bank is a Banking Company. The Assessing Officer disallowed the deduction claimed under Section 36(1)(viii) of the Act in respect of special reserve created from the profit earned from long term finance for industrial or agricultural development or development of infrastructure facility in India on the ground that the assessee is not engaged in providing long term finance for sectors mentioned therein.
The Assessing Officer added a sum of Rs.143,12,69,349 being excess provision claimed under Section 36(vii-a) of the Act. The Assessing Officer disallowed the depreciation claimed on securities classified as ‘Held to Maturity’ and further held that the assessee had earned an aggregate sum of Rs.68,65,73,177, which is exempt under various subsections of Section 10 of the Act and disallowed the aforesaid amount in terms of Section 14A of the Act. A sum of Rs.3,43,28,658 being 5% thereof was estimated as expenditure incurred for earning such income.
The issue raised in this case was whether the assessee is eligible for deduction under section 36(1)(viii) of the Act even though the assessee is not an eligible entity under the provisions of the Act prior to amendment w.e.f. April 1, 2008.
The revenue contended that provisions of Section 36(1)(viii) of the Act were amended with effect from April 1, 2008 and are applicable to the Assessment Year 2008-09. The revenue highlighted the amended provisions of Section 36(1)(viii) of the Act and has invited attention to the expression ‘specified entity’ which includes Banking Company. Therefore, it was submitted that the assessee is not entitled to claim the deduction under Section 36(1)(viii) of the Act.
On the other hand, the assessee submitted that Section 36(1)(vii) of the Act, as it was in existence prior to its amendment with effect from April 1, 2008, confined the benefit of Financial Corporation and the expression ‘Financial Corporation’ included the Government Company as well as Public Company.
The division bench of Justice Alok Aradhe and Justice H.T. Nagendra Prasad agreed to the contention of the assessee and noted that 51% of the shares of Vijaya Bank are held by the Government of India and therefore, the same is a Government Company within the meaning of Section 617 of the Companies Act, 1956.
The court, therefore, while answering against the revenue said that the assessee is squarely covered within the meaning of the expression ‘Financial Corporation’ and is entitled to benefit of deduction under Section 36(1)(viii) of the Act.
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