IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT:- THE HONOURABLE THE CHIEF JUSTICE MR.H.L.DATTU & THE HONOURABLE MR. JUSTICE A.K.BASHEER TUESDAY, THE 7TH OCTOBER 2008 / 15TH ASWINA 1930 I.T.A.No.95 of 2008 ---------------------------------- I.T.A.NO.227(COCH)/1999 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN (ORDER DATED 20TH JUNE, 2003) (ASSESSMENT YEAR 1996-97) .................... APPELLANT/APPELLANT/REVENUE:- ------------------------------------------------------- THE COMMISSIONER OF INCOME-TAX, THIRUVANANTHAPURAM. BY ADV. SRI.P.K.R.MENON,SR.COUNSEL,GOI(TAXES) SRI.GEORGE K. GEORGE, SC FOR IT SRI.JOSE JOSEPH, SC FOR IT. RESPONDENT/RESPONDENT/ASSESSEE:- ---------------------------------------------------------------- M/S.KERALA FINANCIAL CORPORATION, VELLAYAMBALAM, THIRUVANANTHAPURAM. THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSION ON 07/10/2008, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:- H.L.Dattu,C.J. & A.K.Basheer, J. ------------------------------------------- I.T.A.No.95 of 2008 -------------------------------------------- Dated, this the 7th October, 2008 JUDGMENT H.L.Dattu,C.J. The Revenue is before us, being aggrieved by the orders passed by the Income Tax Appellate Tribunal, Cochin Bench, in I.T.A.No.227(Coch)/1999, dated 20.06.2003. (2). The brief facts are - The assessee is Kerala Financial Corporation, established under the State Financial Corporation Act. It is engaged in the business of financing industries in the State. The assessment year is 1996-97. (3) The assessee, in the returns filed, had claimed for deductions under Section 36(1)(viii) of the Income Tax Act (“Act” for short), in respect of 'special reserve' created by the assessee. The claim so made by the assessee was disallowed by the assessing authority. In his order, the assessing authority has noticed that the assessee has created as a reserve of Rs.450,05,629/- during the previous year, relevant to the assessment year, and this reserve was transferred to the provision for bad and doubtful debts account before the close of the accounting year and, thus, the assessee has not satisfied the statutory requirement of creating a reserve. The submission of the assessee before the assessing authority was, that, there is no requirement as such to maintain the reserve created. I.T.A.No.95 of 2008 - 2 - The assessing authority has not accepted this thinking of the assessee. (4) Aggrieved by the orders passed by the assessing authority, the assessee was before the first appellate authority. (5) Before the first appellate authority, it was the stand of the assessee, that, the conditions regarding maintenance of reserve was incorporated only with effect from 1.4.1998 and, therefore, there was no reason for the assessing authority to reject the claim of the assessee. The submissions so made by the assessee was accepted by the first appellate authority and, therefore, in his order has stated that there was no reason for the assessing authority to deny the claim of the assessee. (6) Aggrieved by the said order passed by the first appellate authority, the Revenue was before the Tribunal in I.T.A.No.227 of 1999. The Tribunal, following the decision of this Court in I.T.A.No.191 of 2000, for the assessment year 1994-95, has rejected the Revenue's appeal. (7) For the previous assessment year, the Tribunal had passed an order, in favour of the Revenue. That order had been called in question by the assessee before this Court in I.T.A.No.191 of 2000. This Court had accepted the assessee's claim and, accordingly, had allowed the assessee's appeal. (8) The findings and conclusions reached by this Court in the case of Kerala Financial Corporation v. The Commissioner of Income I.T.A.No.95 of 2008 - 3 - Tax [I.T.A.No.191 of 2000, decided on 14th February, 2003] are as under: “18. Therefore, we find considerable force in the submission made by the learned counsel for the appellant that though the amounts were transferred to “bad and doubtful debts” there was not any existing liability or that there was any known liability. The question is not whether the assessee can anticipate or reasonably anticipate on the date when the balance sheet prepared about a “bad and doubtful debts” and therefore, the amounts continued to be as a “reserve” and not a “provision”. 19. As we have seen the condition for availing the benefit under Section 36(1)(viii) of the Income tax Act, as it stood at the relevant time, is that a reserve fund should be created and that there is no dispute that such a fund was created. In the absence of any condition that it should be continued to be maintained, there is no warrant to think that the legislature intended to confer the benefit of the provision only if it continued to maintain the reserve. In the absence of any expression indicating of such a requirement by the assessee and in view of the fact that such a requirement was made expressly clear by an amendment brought about by the Finance Act, 1997, we have no hesitation to hold that such a requirement made explicitly clear both by amendment to Section 36(1)(viii) as well as by insertion of Section (4A) of Section 41 of the Income Tax Act, that any retrospective effect cannot be presumed to be a condition for granting the benefit as per the provisions which stood prior to the amendment in question. I.T.A.No.95 of 2008 - 4 - In the above circumstances, we hold that the decision of the Tribunal holding that the assessee is not entitled for the benefit of Section 36(1)(viii) is erroneous in law. We set aside the order of the Tribunal as well as that of the Commissioner of Income tax and confirm the decision of the Income Tax Officer. The question raised before us is answered in the affirmative, i.e. in favour of the assessee and against the Revenue”. (9) In view of the observations made by this Court in the aforesaid appeal, in our opinion, the questions of law raised by the Revenue requires to be answered against the Revenue and in favour of the assessee. We do so. Ordered accordingly. H.L.Dattu Chief Justice A.K.Basheer Judge vku/-