Ita/540/2009 Of M/S.the Federal Bank Ltd v. The Assistant Commissioner Of Incometax

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE M.L.JOSEPH FRANCIS WEDNESDAY, THE 5TH JANUARY 2011 / 15TH POUSHA 1932 ITA.No. 540 of 2009() --------------------- ITA.459/C/2006 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/RESPONDENT: -------------------- M/S THE FEDERAL BANK LTD., FEDERAL TOWERS, 4TH FLOOR,MARINE DRIVE. COCHIN -31. BY ADV. SRI.JOSEPH KODIANTHARA, SENIOR ADVOCATE SRI.TERRY V.JAMES RESPONDENT/APPELLANT: --------------- 1. THE ASSISTANT COMMISSIONER,OF INCOMETAX, CIRCLE -1, ALWAYE. 2. COMMISSIONER OF INCOME TAX, ERNAKULAM. ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 05/01/2011, THE COURT ON 05/01/2011 DELIVERED THE FOLLOWING: C.N.RAMACHANDRAN NAIR &M.L.JOSEPH FRANCIS, JJ.....................................................................I.T. Appeal No.540 of 2009.................................................................... Dated this the 5th day of January, 2011. C.R. JUDGMENT Ramachandran Nair, J. The appellant is a Scheduled Bank governed by the provisions ofthe Banking Regulation Act. In the income tax return filed for theassessment year 2004-2005, the appellant claimed deduction underSection 36(1)(viii) of the Income Tax Act (hereinafter called "the Act")contending that it falls within the definition of "financial corporation"entitling it for deduction provided therein. However, the AssessingOfficer disallowed the claim for the reason that appellant being aScheduled Bank does not fall within the meaning of "financialcorporation" referred to in Section 36(1)(viii) of the Act. In the appealfiled against assessment, the CIT(Appeals) agreed with the assessee,declared the assessee as a "financial corporation" and allowed thededuction claimed. However, on appeal by the Revenue, the IncomeTax Appellate Tribunal reversed the order of the CIT(Appeals) and ITA 540/2009 held that assessee being a Scheduled Bank is not entitled to be treatedas a "financial corporation" within the meaning of that term containedin Section 36(1)(viii) of the Act and so much so, it is not entitled todeduction claimed under the said Section. It is against this order of theTribunal the assessee has filed this appeal. We have heard Seniorcounsel Sri.Joseph Markose appearing for the assessee and SeniorStanding Counsel appearing for the Revenue. 2. Admittedly appellant is a public limited company registeredunder the Companies Act and it is a Scheduled Bank governed by theprovisions of the Banking Regulation Act. The deduction admissibleunder Section 36(1)(viii) is a percentage of profit earned from thebusiness of providing long term finance for industrial or agriculturaldevelopment or development of infrastructure by financialcorporations. Since the deduction admissible under Section 36(1)(viii)during the relevant period is only to financial corporations, the questionto be considered is whether assessee answers the description of"financial corporation" within the meaning of that term contained underthe abovereferred provision of the Act. Before proceeding to consider ITA 540/2009 assessee's case, we have to necessarily consider the amendment laterintroduced to Section 36(1)(viii) by Finance Act, 2006 with effect from1.4.2007, wherein among other financial institutions BankingCompanies are also granted the benefit of deduction under the saidprovision. Admittedly the amendment extending the benefit ofdeduction under Section 36(1)(viii) is given only prospective effectfrom 1.4.2007 and so much so, if the specific inclusion of BankingCompanies through the amendment in 2007 only entitles ScheduledBanks for claiming deduction, then certainly the assessee would not beentitled to the benefit of deduction for the year 2004-2005. For easyreference we extract hereunder Section 36(1)(viii) as it stood at therelevant time: ITA 540/2009 assessee's case, we have to necessarily consider the amendment laterintroduced to Section 36(1)(viii) by Finance Act, 2006 with effect from1.4.2007, wherein among other financial institutions BankingCompanies are also granted the benefit of deduction under the saidprovision. Admittedly the amendment extending the benefit ofdeduction under Section 36(1)(viii) is given only prospective effectfrom 1.4.2007 and so much so, if the specific inclusion of BankingCompanies through the amendment in 2007 only entitles ScheduledBanks for claiming deduction, then certainly the assessee would not beentitled to the benefit of deduction for the year 2004-2005. For easyreference we extract hereunder Section 36(1)(viii) as it stood at therelevant time: "S.36. Other deductions:-(1) The deductionsprovided for in the following clauses shall be allowed inrespect of the matters dealt with therein, in computing theincome referred to in section 28-- ........... (viii) in respect of any special reserve created andmaintained by a financial corporation which is engaged inproviding long-term finance for industrial or agriculturaldevelopment or development of infrastructure facility inIndia or by a public company formed and registered in India with the main object of carrying on the business ofproviding long-term finance for construction or purchaseof houses in India for residential purposes, an amount notexceeding forty per cent of the profits derived from suchbusiness of providing long-term finance(computed underthe heard "Profits and gains of business or profession"before making any deduction under this clause) carried tosuch reserve account: Provided that . . . . Explanation:- In this clause, (a) "financial corporation" shall include a publiccompany and a Government company; (b) "public company" shall have the meaningassigned to it in section 3 of the Companies Act, 1956(1of 1956); .............................. (e) "long-term finance" means any loan or advancewhere the terms under which moneys are loaned oradvanced provide for repayment along with interestthereof during a period of not less than five years." Even though assessee has no case that amendment is clarificatory and it has retrospective operation, the position canvassed is that since it is a public company falling within the definition under clause (b) ofExplanation to the abovereferred provision and is engaged in long term ITA 540/2009 financing of infrastructural facility, it is entitled to be treated as a"financial corporation" and so much so, it is entitled to deduction.Standing Counsel appearing for the respondent on the other handcontended that the definition clauses in Section 36(1)(viii) underwent asea change and it is only after the amendment various financialinstitutions like Banking Companies, Co-operative Banks etc. werebrought within the meaning of specified entity defined under the saidprovision. The contention of the Revenue is that unless the assesseeanswers the description of "financial corporation" as defined under theprovisions of the Act as it stood during the relevant assessment year,assessee is not entitled to the deduction claimed. 3. After hearing both sides and after going through the orders ofthe Tribunal, we feel the conclusion drawn by the Tribunal thatassessee is not a financial corporation falling under Section 36(1)(viii)of the Act during the relevant year is perfectly correct. In fact, if we gothrough the scheme of various deductions provided under sub-sectionsof Section 36(1), it would be seen the deductions are specificallyoriented to certain types of assessees. Even though Scheduled Banks ITA 540/2009 3. After hearing both sides and after going through the orders ofthe Tribunal, we feel the conclusion drawn by the Tribunal thatassessee is not a financial corporation falling under Section 36(1)(viii)of the Act during the relevant year is perfectly correct. In fact, if we gothrough the scheme of various deductions provided under sub-sectionsof Section 36(1), it would be seen the deductions are specificallyoriented to certain types of assessees. Even though Scheduled Banks ITA 540/2009 are also public companies registered under the Companies Act, theIncome Tax Act specifically refers to Scheduled Banks as such whichis clear from the provisions of Section 36(1)(viia). Section 36(1)(viia)deals with Scheduled Bank, Non-scheduled Bank and related termsapplicable to the Banks like rural branches, rural advances etc. In fact,special deduction provided to financial corporations was separatelybrought under the subsequent sub-section namely, clause (viii) ofSection 36(1) wherein financial corporation is given an inclusivedefinition covering public companies and Government companies. It isnot as if the Legislature was unaware of the fact that Scheduled Banksare registered under the Companies Act. When the Legislature makesspecial provisions for deductions admissible to different types ofassessees and when Scheduled Banks are specifically referred to in theSections made applicable to them, it cannot be assumed that theLegislature wanted to cover Scheduled Banks within the meaning ofpublic companies engaged in financing making them financialcorporations. If the assessee's contention that a Scheduled Bankengaged in long term financing including advance for infrastructural ITA 540/2009 development falls within the definition of public company and in turnfinancial corporation within the meaning of Section 36(1)(viii) isaccepted, then there was no need for the amendment introduced in 2007referred to above whereunder banking companies are also specificallygranted deduction under Section 36(1)(viii) of the Act. As alreadypointed out by us, the Legislature made specific provisions in Section36(1) (viia) for Scheduled Banks and made certain provision fordeduction exclusively for financial corporations under Section 36(1)(viii). Even though Scheduled Banks and financial corporationsengaged in business of analogous character, the Banking Companiesare not generally referred as financial corporations. Normally financialcorporations are either statutory corporations created under specificstatutes like State Financial Corporations Act, Industrial Credit andInvestment Corporation Act etc. which are public companies.However, these are obviously separate and distinct entities differentfrom Scheduled Banks which are covered by provisions of the BankingRegulation Act. The Legislature obviously did not want to extend thebenefit of deduction under Section 36(1)(viii) to Schedules Banks until ITA 540/2009 they amended the provisions by Finance Act, 2006 with effect from1.4.2007 covering Banking Companies also for the purpose ofdeduction provided therein. So much so, we feel the provisions ofSection 36(1)(viii) until it was amended by Finance Act, 2006 did notinclude Banking Companies governed by the provisions of the BankingRegulation Act. In this view of the matter, we uphold the order of theTribunal and dismiss the assessee's appeal. Sd/-C.N.RAMACHANDRAN NAIRJudge Sd/-M.L.JOSEPH FRANCISJudge True copy P.S. to Judge pms