HIGH COURT OF HIMACHAL PRADESH AT SHIMLA ITA No. : 4 of 2001 With ITA No.: 5 of 2001 Decided on: 17.8.2009 ITA No.4 of 2001: H.P. State Industrial Development Corporation Ltd. ……… Appellant. Versus Commissioner of Income Tax, Shimla ………Respondent. ITA No.5 of 2001: H.P. State Industrial Development Corporation Ltd. ……… Appellant. Versus Commissioner of Income Tax, Shimla ………Respondent. Coram: The Hon’ble Mr.Justice Deepak Gupta, Judge. The Hon’ble Mr.Justice V.K. Ahuja, Judge. Whether approved for reporting? Yes. For the appellants in both the appeals: Mr.Vishal Mohan & Mr.Y.K. Thakur, Advocates. For the respondents in both the appeals: Mr.Vinay Kuthiala, Advocate. Deepak Gupta, J. (Oral): Both the aforesaid appeals are being disposed of by way of a common judgment. ITA No.4 of 2001 has been admitted on the following substantial questions of law: ______________________________________________ 1.Whether reporters of Local papers may be allowed to see the judgment? Yes. - 2 - 1. Whether the Tribunal was correct in law in upholding the action of the CIT(A) who has concurred with the Assessing Authority by withdrawing the claim u/s 36(1)(viii) to the extent of Rs.2115210/- to be calculated as 40% on total income of the appellant from all sources and not from profits of business of providing long term finance for A.Y.1987-88 and further upholding the action taken u/s 154, being mistaken apparent from record? 2. Whether the Tribunal was correct in law by not appreciating and interpreting the amendment in section 36(I)(viii) for calculating 40% of profit from providing long terms fiancé in place of 40% of total income w.e.f. 1.4.96 is only clarificatory in nature and retrospectively applicable? ITA No.5 of 2001 has also been admitted on similar substantial questions of law. Admittedly, the assessee i.e. the H.P. State Industrial Development Corporation Limited is engaged in the business of long terms industrial finance. It is also not disputed that the assessee is also engaged in some other businesses. For the two assessment years in question i.e. 1987-88 and 1988-89, the assessee claimed deduction of 40% on the income derived from the long term finance only and while claiming deduction, did not take into consideration the losses suffered by it in its other activities not related to long term finance. - 3 - For the year 1987-88, it is undisputed that the total income of the assessee from long term finance business was Rs.4,25,34,040/-. The expenses eligible for deduction were Rs.2,53,18,607/- and the net gross income from long term finance was Rs.1,72,15,433/-. The appellant claimed 40% deduction under Section 36(1)(viii) of the Income Tax Act, 1961, amounting to Rs.68,86,173/-. For the assessment year 1988-89, the gross income from financing business was Rs.5,33,30,183.33 and the deductions on account of expenses amounted to Rs.3,28,86,683.60 leaving a net income of Rs.2,04,44,129.73. On this amount, the assessee claimed deduction of 40% i.e. Rs.81,77,652/-. These returns were accepted by the Income Tax Officer. Thereafter, a notice was issued to the assessee under Section 154 of the Income Tax Act, in which the assessee was notified that according to the Department, the assessee had derived undue benefit because while calculating the deduction, the losses incurred by the assessee in respect of its other business had not been taken into consideration, which fact is not disputed. If the losses on account of other business are taken into consideration, the total net gross income for the years 1987-88 and 1988-89 would be Rs.1,19,27,406/- and Rs.1,22,89,185/-, respectively and consequently 40% deduction would amount to Rs.47,79,963/- and Rs.49,15,674/- respectively. This matter was contested by the assessee - 4 - but the assessee has lost throughout before the revenue authorities. Hence the present appeals. To appreciate the question involved, it would be relevant to refer to Section 36(1)(viii), as applicable for the assessment years in questions. The same reads as follows: “in respect of any special reserve created by a financial corporation which is engaged in providing long-term finance for industrial or agricultural development in India or by a public company formed and registered in India with the main object of carrying on the business of providing long- term finance for construction or purchase of houses in India for residential purposes, an amount not exceeding forty per cent of the total income (computed before making any deduction under this clause and Chapter VI- A) carried to such reserve account:” (emphasis supplied) It would be relevant to refer to Section 2(45) and Section 5 of the Income Tax Act, 1961: “2(45): “total income” means the total amount of income referred to in section 5, computed in the manner laid down in this Act;” “5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which – (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year; or (c) accrues or arises to him outside India during such year: xxxxxxx xxxxxxxxx xxxxxxxxxxx xxxxxx xx xxxxxxx xxxxxxxxxxx” - 5 - At this stage, it is pertinent to mention that in the year 1996, an amendment was brought in Clause (viii) of Section 36(1) and after the amendment, the said clause reads as follows: “in respect of any special reserve created and maintained by a financial corporation which is engaged in providing long-term finance for industrial or agricultural development or development of infrastructure facility in India or by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes, an amount not exceeding forty per cent of the profits derived from such business of providing long-term finance (computed under the head “Profits and gains of business or profession” before making any deduction under this clause) carried to such reserve account: XXXXXX XXXXXXX XXXXXXX XXXXXX XXXXXXX XXXXXXX” (emphasis supplied) There can be no manner of doubt that the deduction of 40% under the unamended provision was permissible from the total income of the assessee. Therefore, during the assessment years in question, the entire total income of the assessee had to be taken into consideration. The assessee was not permitted to bifurcate his income into two heads i.e. one from long term finance investments and the other from other categories of business. This meant that his entire income, which obviously included losses, would have to be taken into account and on this 40% deduction was to be allowed. In our opinion, there can be no doubt about the same. - 6 - Shri Vishal Mohan has urged that under Section 154 of the Income Tax Act, only an error apparent on the face of the record can be rectified and he submits that in this case, there were two interpretations possible to the Section and, therefore, the mistake, if any, cannot be said to be an error apparent on the face of record. There can be no manner of doubt that an error apparent on the record must be a glaring mistake which stares from the face of the record. In our considered view, this mistake was apparent from the record in the present case. Clause (viii) of Section 36(1), as it stood prior to its amendment, clearly envisaged that the deduction was to be made from 40% of the total income. Total income would obviously include income from businesses other than long term financing business and as such if the assessee had incurred losses in the other businesses, these were also required to be taken into consideration while assessing the total income. The Assessing Officer committed an error apparent on the face of the record by not taking the income/loss derived from other businesses while computing the total income. It is only after the amendment was brought about in the year 1996 that the assessee has been held entitled to deduction of 40% only on the income derived from long term financing business. Therefore, we are of the considered view that the revenue was entitled to rectify the error which had occurred because it was an error apparent on the record in terms of Section 154 of the Act. - 7 - In view of the above discussion, we decide both the questions in favour of the revenue and against the assessee. Therefore, we find no merit in the appeals, which are accordingly rejected. (Deepak Gupta), Judge. August 17, 2009. (V.K. Ahuja), (TILAK) Judge.