My client is a housing finance company and has created a special reserve. How much is deductible under s.36(1)(viii), what caps it, and what happens if the reserve is later withdrawn?
Section 36(1)(viii) allows a "specified entity" a deduction for a special reserve created and maintained by it, of an amount not exceeding twenty per cent of the profits derived from an "eligible business" computed under the head "Profits and gains of business or profession" (before any deduction under this clause) and actually carried to that reserve account. A proviso caps the cumulative benefit: where the aggregate of the amounts carried to the reserve account from time to time exceeds twice the amount of the paid up share capital and of the general reserves of the specified entity, no allowance is made in respect of the excess. And section 41(4A) supplies the sting — where the deduction has been allowed, any amount subsequently withdrawn from the special reserve is deemed to be profits and gains of business or profession and is charged to tax in the year of withdrawal, and by the Explanation to that sub-section it is charged even if the business is no longer in existence.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text), reported as Section 36(1)(viii) of the Income-tax Act, 1961, as amended up to 2025. It bears on section 36(1)(viii), section 41(4A), section 80-IA, section 80-IA(4), section 80-IB(10), section 80P(4), section Rule 6ABAA of the Income Tax Act 1961, in Deductions & Disallowances and How Tax Law Is Read matters.
The clause is narrow in three ways that are easy to miss. First, the deduction is not twenty per cent of total profits; it is twenty per cent of the profits derived from the ELIGIBLE BUSINESS, and "eligible business" is defined differently for each class of specified entity. For a financial corporation specified in s.4A of the Companies Act, 1956, a financial corporation which is a public sector company, a banking company, or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, it is the business of providing long-term finance for industrial or agricultural development, for development of infrastructure facility in India, or for development of housing in India. For a housing finance company it is narrower still — long-term finance for the construction or purchase of houses in India for residential purposes. For "any other financial corporation including a public company" it is narrowest of all — long-term finance for development of infrastructure facility in India only. Second, "long-term finance" is defined: a loan or advance whose terms provide for repayment together with interest during a period of not less than five years. A five-year test failed on the loan documentation defeats the claim whatever the accounts show. Third, the amount must actually be carried to the reserve account; this is a reserve-creation deduction, and the proviso then looks at the AGGREGATE carried from time to time against twice the paid up share capital plus general reserves, so a company that has been claiming for years can hit the ceiling without any change in its current-year profit. Section 41(4A) is what makes the reserve a lock: the money is taxed when it comes out, and the Explanation removes the discontinuance escape.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Clause (viii) of section 36(1) allows a deduction "in respect of any special reserve created and maintained by a specified entity, an amount not exceeding twenty per cent 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 such reserve account". Its proviso reads: "Provided that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid up share capital and of the general reserves of the specified entity, no allowance under this clause shall be made in respect of such excess." The Explanation defines, in clause (a), "specified entity" as (i) a financial corporation specified in section 4A of the Companies Act, 1956; (ii) a financial corporation which is a public sector company; (iii) a banking company; (iv) a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank; (v) a housing finance company; and (vi) any other financial corporation including a public company. Clause (b) defines "eligible business" as: for the entities in sub-clauses (i) to (iv), the business of providing long-term finance for (A) industrial or agricultural development, (B) development of infrastructure facility in India, or (C) development of housing in India; for a housing finance company, the business of providing long-term finance for the construction or purchase of houses in India for residential purposes; and for "any other financial corporation including a public company", the business of providing long-term finance for development of infrastructure facility in India. Clause (c) defines "banking company" as a company to which the Banking Regulation Act, 1949 applies, including any bank or banking institution referred to in section 51 of that Act. Clause (d) picks up "co-operative bank", "primary agricultural credit society" and "primary co-operative agricultural and rural development bank" from the Explanation to section 80P(4). Clause (e) defines "housing finance company" as a public company formed or registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes. Clause (f) picks up "public company" from section 3 of the Companies Act, 1956. Clause (g) defines "infrastructure facility" by reference to the Explanation to section 80-IA(4)(i) and to undertakings referred to in clauses (ii), (iii), (iv) and (vi) of section 80-IA(4) and in section 80-IB(10). Clause (h) defines "long-term finance" as "any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years". Section 41(4A) provides that where a deduction has been allowed in respect of any special reserve created and maintained under clause (viii) of section 36(1), any amount subsequently withdrawn from such special reserve shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as the income of the previous year in which the amount is withdrawn; its Explanation provides that where the amount is withdrawn in a previous year in which the business is no longer in existence, the sub-section applies as if the business were in existence in that previous year.
Not applicable — this entry states statutory text, not a holding.
Not applicable — this entry states statutory text, not a court's reasoning.
Provided that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid up share capital and of the general reserves of the specified entity, no allowance under this clause shall be made in respect of such excess.
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Handle my notice → Ask a CA on WhatsAppSection 36(1)(viii) allows a "specified entity" a deduction for a special reserve created and maintained by it, of an amount not exceeding twenty per cent of the profits derived from an "eligible business" computed under the head "Profits and gains of business or profession" (before any deduction under this clause) and actually carried to that reserve account. A proviso caps the cumulative benefit: where the aggregate of the amounts carried to the reserve account from time to time exceeds twice the amount of the paid up share capital and of the general reserves of the specified entity, no allowance is made in respect of the excess. And section 41(4A) supplies the sting — where the deduction has been allowed, any amount subsequently withdrawn from the special reserve is deemed to be profits and gains of business or profession and is charged to tax in the year of withdrawal, and by the Explanation to that sub-section it is charged even if the business is no longer in existence. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 36(1)(viii), section 41(4A), section 80-IA, section 80-IA(4), section 80-IB(10), section 80P(4), section Rule 6ABAA of the Income Tax Act 1961. It is reported as Section 36(1)(viii) of the Income-tax Act, 1961, as amended up to 2025. The clause is narrow in three ways that are easy to miss. First, the deduction is not twenty per cent of total profits; it is twenty per cent of the profits derived from the ELIGIBLE BUSINESS, and "eligible business" is defined differently for each class of specified entity. For a financial corporation specified in s.4A of the Companies Act, 1956, a financial corporation which is a public sector company, a banking company, or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, it is the business of providing long-term finance for industrial or agricultural development, for development of infrastructure facility in India, or for development of housing in India. For a housing finance company it is narrower still — long-term finance for the construction or purchase of houses in India for residential purposes. For "any other financial corporation including a public company" it is narrowest of all — long-term finance for development of infrastructure facility in India only. Second, "long-term finance" is defined: a loan or advance whose terms provide for repayment together with interest during a period of not less than five years. A five-year test failed on the loan documentation defeats the claim whatever the accounts show. Third, the amount must actually be carried to the reserve account; this is a reserve-creation deduction, and the proviso then looks at the AGGREGATE carried from time to time against twice the paid up share capital plus general reserves, so a company that has been claiming for years can hit the ceiling without any change in its current-year profit. Section 41(4A) is what makes the reserve a lock: the money is taxed when it comes out, and the Explanation removes the discontinuance escape. If it applies to you, the first step is this: Place your client in one of the six sub-clauses of "specified entity" and then read the matching definition of "eligible business" — they are not the same, and a housing finance company's eligible business does not include infrastructure or industrial lending.
Clause (viii) of section 36(1) allows a deduction "in respect of any special reserve created and maintained by a specified entity, an amount not exceeding twenty per cent 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 such reserve account". Its proviso reads: "Provided that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid up share capital and of the general reserves of the specified entity, no allowance under this clause shall be made in respect of such excess." The Explanation defines, in clause (a), "specified entity" as (i) a financial corporation specified in section 4A of the Companies Act, 1956; (ii) a financial corporation which is a public sector company; (iii) a banking company; (iv) a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank; (v) a housing finance company; and (vi) any other financial corporation including a public company. Clause (b) defines "eligible business" as: for the entities in sub-clauses (i) to (iv), the business of providing long-term finance for (A) industrial or agricultural development, (B) development of infrastructure facility in India, or (C) development of housing in India; for a housing finance company, the business of providing long-term finance for the construction or purchase of houses in India for residential purposes; and for "any other financial corporation including a public company", the business of providing long-term finance for development of infrastructure facility in India. Clause (c) defines "banking company" as a company to which the Banking Regulation Act, 1949 applies, including any bank or banking institution referred to in section 51 of that Act. Clause (d) picks up "co-operative bank", "primary agricultural credit society" and "primary co-operative agricultural and rural development bank" from the Explanation to section 80P(4). Clause (e) defines "housing finance company" as a public company formed or registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes. Clause (f) picks up "public company" from section 3 of the Companies Act, 1956. Clause (g) defines "infrastructure facility" by reference to the Explanation to section 80-IA(4)(i) and to undertakings referred to in clauses (ii), (iii), (iv) and (vi) of section 80-IA(4) and in section 80-IB(10). Clause (h) defines "long-term finance" as "any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years". Section 41(4A) provides that where a deduction has been allowed in respect of any special reserve created and maintained under clause (viii) of section 36(1), any amount subsequently withdrawn from such special reserve shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as the income of the previous year in which the amount is withdrawn; its Explanation provides that where the amount is withdrawn in a previous year in which the business is no longer in existence, the sub-section applies as if the business were in existence in that previous year. It was decided by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Not applicable — this entry states statutory text, not a holding.
Not applicable — this entry states statutory text, not a court's reasoning. In the words reproduced by the source cited on this page: "Provided that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid up share capital and of the general reserves of the specified entity, no allowance under this clause shall be made in respect of such excess."
It was decided by the CBDT Circulars & Instructions and is reported as Section 36(1)(viii) of the Income-tax Act, 1961, as amended up to 2025. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 36(1)(viii), section 41(4A), section 80-IA, section 80-IA(4), section 80-IB(10), section 80P(4), section Rule 6ABAA, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Not applicable — this entry states statutory text, not a holding. It arises in Deductions & Disallowances and How Tax Law Is Read matters, on section 36(1)(viii), section 41(4A), section 80-IA, section 80-IA(4), section 80-IB(10), section 80P(4), section Rule 6ABAA of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Segregate the profits of the eligible business from the rest of the business before taking twenty per cent; keep the segregation working papers, because this is where the Assessing Officer will press. Test every loan counted as long-term finance against the five-year definition, using the terms of the loan as documented, not the actual tenure run. Confirm the amount was in fact carried to the special reserve account in the books for that year; the clause allows a deduction for what is "carried to such reserve account", not for a computation entry. Run the cumulative test in the proviso: aggregate everything carried to the reserve from time to time, and compare it with twice the paid up share capital plus general reserves. Anything above that line gets no allowance. Before any drawdown, transfer or utilisation of the reserve, price the s.41(4A) charge — the withdrawn amount becomes business income of the year of withdrawal, and by the Explanation it is charged even if the business has ceased.
Still good law. The label rests on the text and not on judicial treatment. Clause (viii), its proviso and the whole of its Explanation have been read in two separate consolidations of the Act which agree word for word, and s.41(4A) in two further consolidations which also agree word for word. That agreement in each case is what supports the label. No judgment construing clause (viii) has been read. Decisions of the Karnataka High Court and of the Bangalore, Chennai, Pune, Ahmedabad and Kolkata Benches of the Tribunal on this clause have been identified but not examined, so this entry carries no statement about how any court has construed the twenty per cent limit, the twice-the-paid-up-capital ceiling, the five-year test in the definition of long-term finance, or the words "carried to such reserve account". Take the entry as a statement of the text and go to the authorities before the clause is argued. The commencement dates come from the departmental footnotes and not from the Finance Acts themselves. The present "specified entity" form of clause (viii) was substituted by the Finance Act, 2007 with effect from 1 April 2008, and s.41(4A) was inserted by the Finance Act, 1997 with effect from 1 April 1998. Neither Act has been read in its own text, so a reader who needs the enacting words rather than the consolidated text should go to the Acts. Two things limit how far the label should be taken. First, the Explanation still defines "specified entity", "public company" and the related descriptions by reference to the Companies Act, 1956, an Act since replaced, and clause (viii) has not been amended to follow; that is a defect in the provision rather than an error in the transcription, but it means the definitional limbs cannot be applied without a mapping this entry does not supply. Second, clause (g) defines "infrastructure facility" partly by reference to rule 6ABAA, which is not set out here; where the claim depends on a notified public facility of a similar nature, the conditions come from that rule and not from the clause. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
A DEFECT IN THE STATUTE THAT HAS NOT BEEN CURED. The definitions in the Explanation still refer to the Companies Act, 1956 - s.4A for a public financial institution, s.617 for a Government company and s.3 for a public company - even in the current text, although that Act has been replaced. Those references are reproduced on this page as printed, and no attempt is made to map them onto the Companies Act, 2013, because no source read here does that mapping. A reader who has to establish that his client is within one of those descriptions will have to do the mapping himself. ON THE DATES, and where they come from. The present 'specified entity' form of clause (viii) was substituted by the Finance Act, 2007 with effect from 1 April 2008; the footnote attached to the words 'specified entity' in a consolidation of 2009 vintage reads 'Substituted by the Finance Act, 2007, w.e.f. 1-4-2008'. The twenty per cent limit and the twice-the-paid-up-capital ceiling are part of that substituted text. Section 41(4A) was inserted by the Finance Act, 1997 with effect from 1 April 1998; the footnote in a consolidation of 2009 vintage reads 'Inserted by the Finance Act, 1997, w.e.f. 1-4-1998'. Neither Finance Act has been read in its own text, so the source for both dates is the footnote and not the Act. ON THE DATE FIELD. 'decided_on' is null rather than a commencement date, because this entry states two provisions with different commencements - clause (viii) in its present form from 1 April 2008 and s.41(4A) from 1 April 1998. ON THE CORROBORATION. Clause (viii), its proviso and the whole of its Explanation have been read in two consolidations, of 2025 and 2024 vintage, which agree word for word; s.41(4A) has been read in consolidations of 2019 and 2009 vintage, which also agree word for word. That two-text agreement in each case is what supports the label on this entry. ON THE CASE LAW. No judgment construing clause (viii) has been read. Two were located and not read: the Karnataka High Court in Pragathi Krishna Gramin Bank v. Joint Commissioner (28 May 2018) and the Chennai Bench in DCIT v. Repco Home Finance (17 June 2020). Read both before the clause is argued. ONE CROSS-REFERENCE WORTH CARRYING INTO PRACTICE. A footnote attached to 'infrastructure facility' in clause (g) of the Explanation reads 'See rule 6ABAA', which is where the conditions for a notified public facility of a similar nature are prescribed. This entry does not set that rule out. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Not applicable — this entry states statutory text, not a holding.
TaxSphere, “Statutory position — s.36(1)(viii): the special reserve, the twenty per cent limit, the twice-the-paid-up-capital ceiling, and the s.41(4A) charge when the reserve is drawn down”, https://taxnotice.vittsphere.com/caselaw/case/statutory-position-36-1-viii-special-reserve-twenty-per-cent-the-twice-paid-up-capital-ceiling-and-the-41-4a-withdrawal-charge/ (validity last checked 2026-09-09)
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