R.C. Mankad, Actg. C.J.
1. The assessee is a State Financial Corporation established under section 3 of the State Financial Corporations Act, 1951. The assessment year under reference is 1977-78, the year of account being the financial year ending on March 31, 1977. In the course of assessment for the assessment year under reference, the assessee claimed deduction under section 36(1)(viii)(a) of the Income-tax Act, 1961 ('the Act' for short). According to the assessee, such deduction was to be allowed before deduction is allowed under the said provision and under Chapter VI-A of the Act. The Income-tax Officer, however, held that the deduction under section 36(1)(viii)(a) of the Act was to be allowed only before deduction under chapter VI-A of the Act. In other words, according to the Income-tax Officer before granting deduction under the said provision, all deductions, including deduction under the said provision allowable under the Act except deduction under chapter VI-A of the Act were to be allowed in working out the total income for the purpose of such deduction. It is not disputed that, in the assessment year under reference, the assessee was entitled to deduction equivalent to 40 per cent of the total income. The controversy is with regard to the computation of total income, 405 per cent of which is allowed as deduction. The Income-tax Officer, therefore, allowed deduction under section 36(1)(viii) of the Act to the extent of Rs. 58,52,184.
2. The other question which arose for consideration before the Income-tax officer was with regard to the expenditure which the assessee had incurred in providing tea and refreshments to the members of its staff and visitors/customers, and entertaining customers at hotels. The total of such expenditure incurred by the assessee came to Rs. 64,576. The Income-tax Officer held that, out of the said expenditure, the assessee had incurred expenditure of Rs. 4,832 in giving parties to different persons is post hotels. Such expenditure, being entertainment expenditure, its deduction was not admissible. The Income-tax Officer, further held that, out of the remaining expenditure of Rs. 59,744, the assessee had incurred expenditure of Rs. 9,744 in providing tea and refreshments to its staff members. This expenditure, according to the Income-tax Officer, was allowable as deduction. So far as the remaining expenditure of Rs. 50,000 was concerned, the Income-tax Officer held that, under the provisions of section 37(2A) of the Act, expenditure of only Rs. 5,000 was admissible. He, therefore, allowed expenditure of Rs. 5,000 and disallowed the assessee's claim for deduction to the extent of Rs. 45,000. Thus the total disallowance of expenditure referred to above came to Rs. 49,832.
3. Being aggrieved by the order passed by the Income-tax Officer, the assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals) ('the commissioner' for short). So far as the assessee's claim for deduction under section 36(1)(viii) of the Act was concerned, the Commissioner observed that the Income-tax officer had restricted such deductions in effect to 28.5 per cent. instead of 40 per cent. The Commissioner observed that the Reserve Bank of India had, in its communication to all State Financial Corporations, clarified the position by referring to the opinion given to it by the Central Board of Direct Taxes by which it was clarified deduction under section 36(1)(viii), has to be given on the basis of total income before making any deduction under chapter VI-A as also under the said section 36(1)(viii). The Commissioner further observed that, in the earlier year, his predecessor had granted such deduction before making deduction under Chapter VI-A of the Act and under the said provision, i.e. Section 36(1)(viii). Under the circumstances, the Commissioner allowed the assessee's claim in full and directed the Income-tax Officer to give deduction accordingly.
4. So far as the expenditure of Rs. 49,832 disallowed by the Income-tax Officer as entertainment expenditure was concerned, the Commissioner observed that the assessee was advancing monies to the extent of over Rs. 100 crores and it had a dozen offices spread all over Gujarat. Having regard to the magnitude of the business of the assessee, the total expenditure of about Rs. 65,000 in providing tea, coffee, refreshments, etc., to the members of its staff and its constituents could not be considered to be high. According to the Commissioner, no part of the said expenditure could be considered to be lavish. Therefore, following the decision of this court in CIT v. Patel Brothers and Co. Ltd. : [1977]106ITR424(Guj) , disallowance of Rs. 49,832 made by the Income-tax Officer was deleted.
5. Being aggrieved by the order of the Commissioner, the Revenue carried the matter in appeal before the Income-tax Appellate Tribunal ('the Tribunal', for short). The Tribunal, following its earlier decisions, confirmed the view taken by the Commissioner on the aforesaid two claims made by the assessee, namely, (i) deduction under section 36(1)(viii), and (ii) deduction of the expenditure a part of which was held to be entertainment expenditure by the Income-tax Officer. It is in the background of the above facts that the Tribunal has, at the instance of the Revenue, referred to us, for our opinion, the following two questions :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the relief under section 36(1)(viii) of the Income-tax Act, 1961, should be worked out on the basis of 40 per cent. of the total income before deduction (a) under section 36(1)(viii) and (b) under chapter VI-A
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the sum of Rs. 49,832 was not disallowable as entertainment expenditure under section 37(2B) of the Income-tax Act, 1961 ?'
6. So far as the first question is concerned, as already observed, the controversy is with regard to the computation of the total income of which 40 per cent. is to be allowed as deduction. The revenue contends that, to work out deduction under the said provision, all deductions including deduction under the said provision but except deductions under chapter VI-A of the Act have to made whereas, according to the assessee, such deduction has to be worked out before deduction is made under Chapter VI-A as well as under section 36(1)(viii). Section 36(1)(viii), as it stood at the relevant time, read as follows :
'36. (1) the deductions provided for in the 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 a State Government for the State within the meaning of the 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 of rupees, 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;'
7. The argument of the revenue is that section 2(45) defines 'total income' to mean the total income referred to in section 5 computed in the manner laid down in the Act. The assessee's income is chargeable to income-tax under section 28 of the Act, which deals with the profits and gains of the business or profession. Section 29 lays down the income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43A. Section 36(1)(viii) clearly provides for the deduction of a certain percentage of the total income computed before making the deductions under Chapter VI-A carried to the reserve account. Therefore, according to the Revenue, the only deduction excluded for the purpose of working out deduction under section 36(1)(viii) is deductions under Chapter VI-A. Therefore, for the purpose of working out deduction under section 36(1)(viii), what is required to be done is to compute the total income after making all the deductions as provided in section 29 which includes deduction under section 36(1)(viii) and apply the requisite percentage to such total income. When the Revenue was asked as to how it would work out deduction under section 36(1)(viii) for the purpose of computing the total income as urged by it, it was stated that, first the deduction had to be worked out by applying the requisite percentage to the total income computed after allowing all admissible deductions under all the provisions of the Act except those allowable under section 36(1)(viii) and Chapter VI-A. Deduction so worked out should then be deducted from the total income so computed. In other words, the total income so computed should be reduced by such deduction. Thereafter, the requisite percentage should be applied to the total income so reduced in order to arrive at the figure of deduction admissible under 36(1) (viii). An amount equal to that figure has to be carried to reserve account to be eligible for deduction. Thus, according to the Revenue, deduction under section 36(1)(viii) was to be done twice over, once for working out the total income and second time for the purpose of working out admissible deduction under the said provision by applying the requisite percentage. It is difficult to comprehend the submissions made on behalf of the Revenue. Once deduction under section 36(1)(viii) is worked out, that provision gets exhausted and there is no question of again working out the deduction under the said provision by again applying the requisite percentage to the total income, as reduced by the aforesaid deduction which has been already worked out. The opening part of the section 2 which contains various definitions clearly provides that, unless the context otherwise requires, different words and expressions will have the meanings given in that section. Definition of 'total income' in section 2(45) has to be given the meaning as defined unless the context otherwise requires. Now, when we come to section 36(1)(viii), it is not possible to read the expression 'total income' used therein to mean total income compute in accordance with the provisions contained in sections 30 to 43A, as provided in section 29, so as also to take into account deductions admissible under section 36(1)(viii). What we have to bear in mind is that, when we come to section 36(1)(viii), deduction under that provision has not been worked out and, therefore, there is no question of applying the requisite percentage to the total income as reduced by such deduction for the purpose of working out the admissible deduction under that provision. Since section 36(1)(viii) itself provides that the total income for the purpose of the said provisions is the total income before the deduction under Chapter VI-A, it would mean that, for the purpose of working out deduction under that provision, the total income would be the total income before deduction (1) under Chapter VI-A and (2) under that provision, (section 36(1)(viii)). It may also be mentioned here that, what was implicit in section 36(1)(viii) has now been made explicit by subsequent amendment of the said clause (viii) with effect from April 1, 1985, by which it was specifically provided that total income for the purpose of applying the requisite percentage is total income before any deduction under that clause and Chapter VI-A. The Revenue, however, strongly relied on the decision of the Karnataka High Court in Karnataka State Financial Corporation v. CIT 0043/1985 : [1988]174ITR206(KAR) , in support of the view canvassed by it. That was a case in which the assessee, a State Financial Corporation, established under the State Financial Corporations Act, 1951, filed a return for the assessment year 1975-76, declaring that it had created a sum of Rs. 19,97,806 as a special reserve and claimed deduction under section 36(1)(viii) of the Act. The Income-tax Officer allowed deduction at 2/7ths of the total income computed before making any deduction only under Chapter VI-A of the Act. On appeal, the Appellate Assistant Commissioner accepted the assessee's contention and directed the Income-tax Officer to allow deduction under section 36(1)(viii) at 40 per cent. of the total income before any deduction under chapter VI-A and that clause. On appeal by the Revenue, the Tribunal reversed the order of the Appellate Assistant Commissioner and restored the order of the Income-tax Officer. The Tribunal held that the only exception which had to be made under section 36(1)(viii) was that the total income for the purposes of that section must be the one 'computed before making any deduction under Chapter VI-A.' No other exception was made. Since no other exception was specifically made in that section itself, to make an exception in respect of the said deduction section 36(1)(viii) would be contrary to the language of the section. On a reference made to it, the Karnataka High Court held that the construction placed by the Tribunal on the provision of section 36(1)(viii), as it stood at the relevant year, with due regard to the scheme and object of the Act, was correct. Therefore, the assessee was entitled to the deduction under section 36(1)(viii) at 2/7ths of Rs. 51,29,454 as held by the Tribunal and not 40 per cent of the same, as claimed by the assessee.
8. The decision of the Karnataka High Court, no doubt, fully supports the view canvassed on behalf of the Revenue, but, with respect, we find ourselves unable to agree with it. As already observed above, for the purpose of working out deduction under section 36(1)(viii), total income can only mean total income computed after taking into consideration deductions admissible under all the provisions except section 36(1)(viii) and chapter VI-A. From the formula adopted by the Tribunal which was approved by the Karnataka High Court, it is clear that, initially, deduction under section 36(1)(viii) was worked out by applying the appropriate percentage to total income computed before deduction under that clause and Chapter VI-A. Once that is done, as already observed, the provision get exhausted and there is no question of again reducing the total income by such deduction and again applying the requisite or appropriate percentage for working out the admissible deduction. There is no justification for making the deduction twice over. The total income to which the appropriate percentage is to be applied to work out deduction under section 36(1)(viii) would obviously mean the total income before such deduction. Therefore, the expression 'total income' in the context in which it is used in section 36(1)(viii), can only mean total income before deduction under that clause and Chapter VI-A. In our opinion, the provision is very clear and there is no need to evolve or apply any formula. Therefore, in our opinion, deduction under section 36(1)(viii) has to be worked out by applying the proper percentage to the total income computed before making any deduction under that clause and Chapter VI-A.
9. We are fortified in the view which we are taking by the decisions of the Patna High Court in CIT v. Bihar State Financial Corporation : [1983]142ITR518(Patna) , CIT v. Bihar State Financial Corporation : [1983]142ITR519(Patna) and CIT v. Bihar State Financial Corporation : [1986]159ITR275(Patna) ; the decision of the Andhra Pradesh High Court in CIT v. Andhra Pradesh State Financial Corporation : [1989]175ITR87(AP) ; the decision of the Madhya Pradesh High Court in CIT v. Madhya Pradesh Audyogik Vikas Nigam Ltd. (No. 1) : [1989]178ITR177(MP) and the decision of the Kerala High Court in Kerala State Industrial Development Corporation Ltd. v. CIT : [1989]180ITR323(Ker) . We, therefore, answer question No. 1 which has been referred to us, in the affirmative and against the revenue.
10. This brings us to question No. 2 with regard to the expenditure of Rs. 49,832, which had been disallowed by the Income-tax Officer. As already pointed out above, disallowance made by the Income-tax Officer was deleted by the Commissioner and the Tribunal confirmed the order of the Commissioner. The finding of the fact which has been recorded is to the effect that the expenditure which was incurred by the assessee was not high or lavish. It had incurred the expenditure which was disallowed by the Income-tax Officer in providing tea, coffee, and refreshments to its staff members and constituents or customers in the normal course of business. The expenditure not having been incurred for giving any lavish parties, it could not be considered to be an expenditure incurred for entertainment as held by this court in the case of CIT v. Patel Brothers and Co. Ltd. : [1977]106ITR424(Guj) . In our opinion, having regard to the findings of fact recorded by the lower authorities, the decision of this court in CIT v. Patel Brothers and Co. Ltd. : [1977]106ITR424(Guj) directly applies to the facts of this case and, therefore, as rightly held by the Tribunal, no part of the said expenditure of Rs. 49,832 could have been disallowed. In the result, we answer question No. 2 which has been referred to us in the affirmative and against the Revenue. Reference answered, accordingly, with no order as to costs.