The main legal point established in the judgment is that the deduction under section 36(1)(viii) of the Income Tax Act, 1961 should be computed before making any deduction under Chapter VI-A.

Puttaswamy, J.—For default of appearance of the assessee and his learned counsel, this court, on December 4, 1984, disposed of this reference declining to answer the question. On an application made by the assessee, this Court later recalled the said order, restored the reference to its original file and has heard the same on merits and that is how this order has come to be made by us.

2. In this reference made under section 256(1) of the Income Tax Act, 1961 (Central Act 43 of 1961) ("the Act"), the Income Tax Appellate Tribunal, Bangalore Bench, Bangalore ("the Tribunal"), at the instance of the assessee, has referred the following question of law for the opinion of this court :

"Whether, on the facts and in the circumstances of the case, the assessee is entitled for deduction under section 36(1)(viii) of 2/7ths of Rs. 51,29,454 as held by the Tribunal or 40% of the same, as claimed by the assessee ?"

3. In order to appreciate the question referred to us, it is necessary to notice the facts that are not in dispute in the first instance.

4. For the assessment year 1975-76, relevant to the accounting year ending on March 31, 1975, the assessee, a financial corporation, established and functioning under the State Financial Corporations Act, 1951 (Act LXII of 1951), filed its return before the Income Tax Officer, Company Circle-IV, Bangalore, inter alia, declaring that it had created a sum of Rs. 19,97,806 as special reserve and for appropriate deduction on the said sum by including the same in its total income for the said assessment year. On September 16, 1975, the Income Tax Officer completed the assessment allowing the permissible deduction or, the said special reserve at the rate admissible thereto computing the same in terms of the Act, but without giving reasons in support of the same.

5. Aggrieved by the order of the Income Tax Officer, the assessee filed an appeal before the Appellate Assistant Commissioner of Income Tax, Bangalore Range, Bangalore, who by his order dated September 28, 1976, allowed the said appeal in these words :

"5. Regarding ground No. (v), the Income Tax Officer is directed to calculate the allowance under section 36(1)(viii) at 40% of the total income before allowing deduction under Chapter VI-A and not under section 36(1) of the Income Tax Act. This point has been clarified by the Central Board of Direct Taxes in a letter to the Ministry of Finance, Department of Banking in their letter F. No. 204/35/73/ITA II dated 12-11-1973."

6. Aggrieved by this order of the Appellate Assistant Commissioner, the Revenue filed a second appeal before the Tribunal which by its order dated December 24, 1977, allowed the same, reversed the order of the Appellate Assistant Commissioner and restored the order of the Income Tax Officer. Hence, this reference.

7. Sri T. V. Natarajan, learned advocate of the Madras Bar, assisted by Sri Kalimulla Sheriff of Bangalore Bar, appeared for the assessee; Sri K. Srinivasan, learned senior standing counsel for the Income Tax Department, assisted by Sri H. Raghavendra Rao, junior standing counsel, appeared for the Revenue.

8. Sri Natarajan has urged that the construction placed by the Tribunal on the term "total income" occurring, in the Act vis-a-vis the special reserve created by the assessee was erroneous and unsound and the question must be answered in the negative and in favour of the assessee.

9. Sri Srinivasan has urged that the construction placed by the Tribunal on the term "total income" was the proper construction and a sound one and, therefore, we must answer the question in the affirmative and in favour of the Revenue.

10. In disallowing the claim of the assessee, while the Income Tax Officer did not give reasons, the Appellate Assistant Commissioner, in allowing the same, exclusively based it on the opinion furnished by the Central Board of Direct Taxes to which it did not later subscribe. In that view, the Tribunal independently examined the question and e