Upendralal Waghray, J.
1. At the instance of the Revenue, the following four questions have been referred for the opinion of this court. They are :
'1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is justified in holding that the later instructions of the Board, i.e., 1275 in F. No. 204/72/75-IIA. II dated 13-8-1970, are not to be applied even though the assessment was made after the receipt of such instructions
2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is justified in holding that the percentage of deduction under section 36(1)(viii) of the Income-tax Act, 1961, should be applied before the deduction and not after the deduction
3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is justified in holding that for the purpose of disallowance of perquisites under section 40A(5) of the Income-tax Act, 1961, cash allowances should not be included
4. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is justified in holding that house rent allowance, conveyance allowance and ex gratia payments in excess of 20% of the salary and dearness allowance are not disallowable by application of the provisions of section 40A(5) of the Income-tax Act ?'
2. The Andhra Pradesh State Financial Corporation, Hyderabad, is the assessee and the relevant assessment year is 1976-77. The first two question are inter-related. Before taking up question No. 1 about the effect of the instructions, we would like to examine the controversy raised in question No. 2 regarding the interpretation to be placed on the provisions of section 36(1)(viii) of the Income-tax Act. The Tribunal has taken the view that for the purpose of allowing a deduction under section 36(1)(viii), the total income of the assessee has to be computed before giving any deduction under the said section. But, according to the Revenue, for the purpose of grant of deduction, total income is to be calculated after giving effect to all deductions including the one under this section. It is useful to extract the said provision, viz., section 36(1)(viii) :
'36. (1) The deductions provided for in following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28, - ......
(viii) 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, an amount not exceeding -
(a) in the case of a Financial Corporation or a Joint Financial Corporation established under the State Financial Corporations Act, 1951(63 of 1951), or an institution deemed under section 46 of that Act to be Financial Corporation established by the State Government for the State within the meaning of that Act, forty per cent.,
(b) in the case of any other financial corporation. -
(i) where the paid-up share capital of the corporation does not exceed three crores, twenty-five per cent.,
(ii) where the paid-up share capital of the corporation exceeds three crores of rupees, ten per cent.,
of the total income (computed before making any deduction under Chapter VI-A) carried to such reserve account :
Provided that the corporation is, for the time being, approved by the Central Government for the purposes of this clause : Provided further that where the aggregate of the amounts carried to such reserve account from time to time exceeds the paid-up share capital (excluding the amounts capitalised from reserves) of the Corporation, no allowance under this clause shall be made in respect of such excess.'
3. The controversy can be illustrated by giving an example : Assuming the total income before applying this provision to be Rs. 1,000, according to the assessee, for calculating the deduction under this section (and if this sum of Rs. 1,000 is put in a reserve fund), 40 per cent. should be calculated on Rs. 1,000 and a deduction of Rs. 400 is to be given. According to the Revenue, the deduction at 40 per cent. should be calculated on the figure of total income arrived at after this deduction also is applied for which a notional calculation is to be done by adding 40 per cent., to the total income and then calculating the deduction to be allowed at 40 per cent. of Rs. 1,400. The Income-tax Officer has adopted the method urged by the Revenue, but the first appellate authority and the Tribunal have not accepted it and reliance was placed on the instructions of the Board, which were in vogue during the relevant accounting and assessment year. The applicability of the said instructions is the subject-matter of question No. 1. We have considered it appropriate to examine this question without reference to any of the circulars of the Board.
4. Learned Counsel for the Revenue has placed reliance on the definition of 'total income' in section 2(45) of the Act and contented that for the purpose of giving any deduction, the income as computed in accordance with the Act alone will have to be taken into account, that is, after giving effect to the deduction mentioned in this section and he supported the calculation adopted by the Income-tax Officer. He has not been able to cite any authority in support of this contention. According to learned counsel for the assessee, the definition in section 2(45) will have to be read in the context of the language used in the present section. Instead of adopting a circuitous method, a simple deduction calculated at 40 per cent. of the total income arrived at that stage is to be taken into consideration for applying this section. Any notional addition to the income for calculation of a statutory deduction is not justified. He has relied upon two decisions of the Patna High Court in CIT v. Bihar State Financial Corporation : [1983]142ITR518(Patna) and CIT v. Bihar State Financial Corporation been : [1986]159ITR275(Patna) . In the earlier decision, the aforesaid provision has been considered at length and a similar contention of the Revenue has been negatived. In our view also, this is a correct approach. Our answer to question No. 2 is in the affirmative and in favour of the assessee.
Question No. 1 : The Central Board of Direct Taxes have issued a Circular F. No. 204/35/73-ITA-II dated November 12, 1973, where it was clarified that 40 per cent. deduction under this section was to be applied on the income arrived at after giving deductions under other provisions. This circular was in force during the accounting year as well as the assessment year in this case till it was withdrawn by the Board by a circular dated August 13, 1979. However, when the matter was reopened by the Income-tax Officer, the earlier circular was withdrawn. The Tribunal has taken the view that the circular of the Board which was in force at the relevant period ought to be followed. However, this question has become academic, in view of our answer to the second question.
5. It is not disputed that questions Nos. 3 and 4 are covered by a decision of this court in CIT v. Warner Hindustan Ltd. : [1984]145ITR24(AP) and following the said decision, they have to be answered in the affirmative and in favour of the assessee.
6. The reference is answered accordingly. We make no order as to costs.