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[Section 36(1)(viii)] : Special Reserve Created and Maintained by Financial Corporation (Transfer to Special Reserve)

Deduction under this section is allowed to a specified entity of an amount not exceeding 20% of the profits derived from eligible business computed under the head profits and gains of business or profession (before making any deduction under this clause) carried to special reserve account created and maintained by such specified entity.

However where the aggregate of the amount carried to such reserve account from time to time exceeds 200% of the amount of the paid up capital and of general reserves of the specified entity, the excess amount is not deductible.

The specified entity and eligible business from which the profits should be derived by the specified entity for the purpose of creating a reserve are as under:

Who can Claim Deduction :

The following are eligible for deduction under the section :—

Specified Entity Eligible Business
(A)  
  1. a Finance Corporation specified in section 4A of the Companies Act, 1956

  2. a Finance Corporation which is a public sector company

  3. a banking company

  4. a co-operative bank other than a primary agricultural credit society or a primary cooperative agricultural and rural development bank

The business of providing long term finance for

  1. industrial or agricultural development or
  2. development of infrastructure facility in India or
  3. development of housing in India
(B)  
A Housing Finance Company

The business of providing long-term finance for the construction or purchase of houses in India for residential purpose

(C)  

Any other financial corporation including a public company

The business of providing long-term finance for development of infrastructure facility in India.

Amount withdrawn from Reserve Account: [Section 41(4A)]:

Where a deduction has been allowed in respect of any special reserve created and maintained under section 36(1)(viii), any amount subsequently withdrawn from such special reserve shall be deemed to be the profits and gains of business or profession and accordingly be chargeable to income-tax as the income of the previous year in which such amount is withdrawn.

Further, where any amount is withdrawn from the special reserve in a previous year in which the business is no longer in existence, the provisions of this sub-section shall apply as if the business is in existence in that previous year.

Amount of Deduction :

A financial corporation, banking company, co-operative bank and a housing finance company can claim deduction under section 36(1)(viii) as follows, if a few conditions are satisfied —

  1. the amount transferred during the previous year to the special reserve account created for the purpose of section 36(1)(viii); or

  2. 20 % of the profits derived from the business of providing long-term finance before claiming deduction under section 36(1)(viii); or

  3. 200 % of (paid-up share capital and general reserve as on the last day of the previous year) minus the balance of the special reserve account on the first day of the previous year,

    whichever is lower.

 

Topics...on ‘Profits and Gains of Business or Profession’

Define … ‘Profits and Gains of Business or Profession’ and its Computation (Section 28)
Method of Accounting for Computing Business Income (Section 145)
Principles for Allowing Business Deductions / Allowances from Profits and Gains of Business or Profession.
Expenses Allowed as Deductions against Profits and Gains of Business or Profession [Section-30-37]
[Section 37(1)] : General Or Allowable Deductions under Business or Professions
Business Losses Deductible under the head  'Profits and Gains of Business or Profession'.
Expenses Not Deductible under the head 'Profits and Gains of Business or Profession (Section 40, 40A, 43B)
DEEMED PROFITS Chargeable to Tax as Business Income Under Profits and Gains of Business or Professions [Section 41]
Taxation of Undisclosed Business Income/Investments from Undisclosed Sources
Deduction in respect of Expenditure incurred on setting up of a Specified Business [Section-35AD] :
When Maintenance of Books of Accounts becomes Compulsory (Section 44AA)
Compulsory Audit of Books of Accounts by Chartered Accountant (Section 44AB)
Computation of Income On Estimated Basis Under Sections 44AD, 44ADA and 44AE

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