Holding

The deduction under Section 36(1)(viii) must be computed on the total income determined before allowing the deduction itself.

Summary

The Supreme Court considered appeals by certificate from the Kerala High Court concerning the assessment year 1978-79. The issue was whether the statutory deduction under Section 36(1)(viii) of the Income Tax Act, 1961, should be calculated on the total income before allowing that deduction. The Court examined earlier judgments, notably Cambay Electric Supply, and the views of several High Courts, finding a majority that the total income must be computed under Sections 30 to 43A, excluding the deduction itself. The dissenting view of the Karnataka High Court, which applied a mathematical formula, was rejected. The Court noted that the relevant sub‑section had been amended to align with the majority view. Consequently, the appeal was dismissed, affirming the High Court’s decision in favour of the assessee.

Issues considered

Whether the statutory deduction under Section 36(1)(viii) of the Income Tax Act should be calculated on the total income before deduction of the amount allowable under that section

Legislation cited

Income Tax Act, 1961s. 30-43A, s. 36(1)(viii)

Subjects

Income TaxStatutory deductionSection 36(1)(viii)Total income computationInterpretation of tax statutesHigh Court decisionsSupreme CourtAppealTax assessment

Judgment

COMMISSIONER OF INCOME TAX A
_ _,J. v.
'
KERELA STATE INDUSTRIAL DEVELOPMENT

FEBRUARY 12, 1998

[B.N. KIRPAL AND A.P. MISHRA, JJ.j B
-.-
Income Tax Act, 1961, Section 36(l)(viii)-Deduction-AY 1978-79-
Held, the statutory deduction under this section should be calculated on the
total income before deduction of the amount allowable under the section.
c
On a reference as to whether the Tribunal was right in holding that
the statutory deduction under Section 36(1)(viii) of the Income Tax Act
should be calculated on the total income before deduction of the amount
allowable under the section, the Keraia High Court answered the question
in the affirmative relying upon the observation of this Court in Cam bay
"-- D
~
Electric*. The view was also in consonance with the view taken by the Patna
High Court in three decisions the Madhya Pradesh High Court in two
decisions and the Kerela High Court in an earlier decision. Only the
Karnataka High Court had expressed a dissenting view. Revenue has preferred
the present appeal.
E
Dismissing the appeal, this Court

HELD : The impunged decision of the High Court following its earlier
decision in CITv. Kerela State Industrial Development Corporation Ltd,. is
::. unexceptionable. Karnataka High Court has tried to work out the sub-
)-'
section on the basis of a mathematical formula and has dissented from the F
~·I decision of the Patna High Court in C/Tv. Bihar State Financial Corporation,
It may here be mentioned that the appeal against the aforesaid judgment
reported in Bihar State Financ!al Corporation, was dismissed by this Court
on 20.1.1995 thereby affirming the view of the Patna High Court. It may here
be noticed that not only the preponderance of the judicial opinion of the
G
various High Courts is in line with the view expressed by the Kerela High
" Court but the relevant sub-section (viii) of Section 36(1) of the Income Tax
~,_r
Act has subsequently been amended so as to bring it in line with the view
of the Patna and Kerala High Courts. The decision of the Karnataka High
Court does not appear to be correct, being contrary to the decision of the
Patna High Court which stands affirmed by its affirmation by this Court on H
871
872 SUPREME COURT REPORTS [1998] 1 S.C.R.

A 20-1-1995. The view of the other High Court is in consonance with relevant
provisions of the Act. This Court, therefore, agrees with the decision of the
High Court in answering the question of law in affirmative and in favour of
the assessee. (873-C-F]

CIT v. Kerela State Industrial Development Corporation Ltd., (1990)
B 182 ITR 67 (Ker.); CIT v. Bihar State Financial Corporation, (1983) 142
ITR 518 (Pat.), approved.

Karnataka State Financial Corporation v. CIT, (1988) 174 ITR 2~6
(Kant), oveni.Iled.

C *Comboy Electric Supply Industrial Company Ltd v. CIT, (1978) 113
ITR 84, referred to.

CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 3315-16 of
1993.

D From the Judgment and Order dated 29th Sept., 1989 of the Kerala High
Court in ITR Nos. 571 & 572/85. ...
J. Ramamurthi, Rajiv Nanda and B. Krishna Prasad for the Appellant.

Roy Abraham and M.M. Kashyap for the Respondent.
E
. The Judgment of the Court was delivered by

KIRPAL, J. In these appeals by certificate granted by ihe Karala High
Court, the following question of law has been referred in respect of the
assessment year 1978-79:-
F
"Whether, the Tribunal was right in law in holding that the statutory
deduction under Section 36 (i) (viii) of the LT. Act, 1961 should be
calcnlated on the total income before deduction of the amount allowable
under the section?"

G The Kerala High Court came to the conclusion that in computing the
total income for the pmpose of Section 36 (1) (viii) of the Income Tax Act,
1961, the total income has to be computed in accordance with the provisions
of Sections 30 to 43A except Section 36 (i) (viii). In arriving at this decision,
the High Court relied upon the observations of this Court in Cambay Electric
H Supply Industrial Co. Ltd. v. Commissioner ofIncome Tax, (1978) 113 ITR 84.
C.I.T. v. KERELA STATE INDUSTRIAL DEVELOPMENT [KIRPAL, JJ.] 873
The view which was taken by the Kerala High Court was in consonance A
with the view taken by the Patna High Court in three decisions, Madhya
Pradesh High Court in two decisions and Kerala High Court itself in an earlier
decision. It is stated that sudsequent to the decision under appeal, other High
Courts have also taken the same view. The only dissenting view which has
been expressed is by the Kamataka High Court in Karnataka State Financial B
Corporation v. Commissiner of Income Tax, (1988) 174 !TR 206.

Having gone through the decisions cited at the Bar, we find that the
decision the High Court following its earlier decision in Commissioner of
Income Tax v. Kera/a State Industrial Development Corproration Ltd, (No.
2). (1990) 182 !TR 67, is unceptionable. The Karanataka High Court has tried C
to work out the sub-section the basis of a mathematical formula and has
dissented from the decision of the Patna High Court in Commissioner of
Income Tax, Bihar v. Bihar State Financial Corporation, (I 983) 142 !TR 518.
It may here be mentioned that Civil Appeal No. 3695 of 1982 against the
aforesairl judgment reported in 142 !TR 518 was dismissed by this Court on
20th January, 1995 thereby affirming the view of the Patna High Court. It may D
here be noticed that not only the preponderance of the judicial opinion of the
various High Courts is in line with the view expressed by the Kerala High
Court but the relevant sub-clause (viii) of Section 36(1) has subsequently
been amended so as to bring it in line with the view of the Patna and Kerala
High Courts. The decision of the Karnataka High Court does not appear to E
be correct being contrary to the aforesaid decision of the Patna High Court
which stands affirmed by its affirmation by this Court on 20th January, I 995.
The view of the other High Courts is in consonance with relevant provisions
of the Act. We, therefore, agree with the decision of the High Court in
answering the question of law in the affirmative and in favour of the assessee.
F
r The appeals are dismissed. No order as to costs.

R.K.S. Appeal dismissed.