TMI Blog2001 (9) TMI 817X X X X Extracts X X X X X X X X Extracts X X X X ..... e Companies Act for computing deduction under section 32AB irrespective of the heads under which such income is assessable under the Income-tax Act?" 2. Before adverting to the facts in the cases under consideration, it is desirable to note the circumstances which led to the constitution of this Special Bench. The Chandigarh Benches of the Tribunal were allowing deduction under section 32AB of interest income, rent and miscellaneous income by following consistently the decision of the Cochin Bench in case of Apollo Tyres Ltd. v. Dy. CIT [1992] 44 TTJ 534/[1992] 43 ITD 464 (Coch.). This was done in the case of Highway Cycle Industries Ltd. v. Asstt. CIT in ITA No. 1039/Chd/1991 for assessment year 1987-88 vide order dated 14th January, 1997, and in other cases, some of which are mentioned below : ( i ) M/s. Munjal Castings v. Asstt. CIT ITA No. 1145 of 1992 for assessment year 1989-90, order dated 31st May, 1999; ( ii ) Majestic Auto Ltd. v. Dy. CIT ITA Nos. 1055 1356 of 1992 for assessment years 1987-88 1988-89, order dated 14th June, 2000; and ( iii ) Highway Cycle Inds. v. Asstt. CIT ITA No. 1777 of 1992 for assessment year 1989-90 order, dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered by the Special Bench. 3. The relevant facts, in the case of Highway Cycle Industries Ltd. are that the assessee claimed deduction under section 32AB at Rs. 26,69,541 supported by an audit report in the prescribed form as required by the rules. The Assessing Officer allowed deduction at Rs. 25,29,466. The difference between the deduction claimed and allowed was on account of the following items : Rs. ( i ) Rent 1,05,204 ( ii ) Profit on sale of investment 5,000 ( iii ) Interest 2,40,991 ( iv ) Misc. income 2,07,066 ( v ) Lease rent 1,20,000 6,79,261 Deduction at 20 per cent thereof 1,35,852 The Assessing Officer was of the view that rent, profit on sale of investment, interest received, miscellaneous income and lease rent were not business income but income assessable under the head other sources . Therefore, the deduction under section 32AB was not permissible on these items. 4. The ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tative raised an objection relating to the constitution of the Special Bench pointing out that one of the Members (Shri R.K. Bali) has already expressed an opinion on the points at issue in the case of Highway Cycle Industries in ITA No. 1039/Chd/1991, dated 14th Jan., 1997, and, therefore, he should not be part of the Special Bench. This objection is without any merit as in the decision dated 14-1-1997, the Chandigarh Bench merely followed the decision of the Cochin Bench of the Tribunal in the case of Apollo Tyres Ltd. ( supra ). Several other Benches followed suit and throughout the country, Apollo Tyres case ( supra ) had been followed. That way, the other Member (Shri Vimal Gandhi, Vice President) was also a party in the case of Phoenix Overseas Ltd. in ITA No. 5177/ Del/1990 which has been included in the paper book and was later cited by the learned Departmental Representative in support of his arguments. The third Member might have also considered the issue in some other context. The case are decided on the basis of facts pleaded and legal propositions advanced by the parties and the Bench is required to take an objective view of the issue. No bias was alleged. We, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofits as computed according to well-settled commercial or accounting principles, even though such income is assessable under a head other than Business [Contrast section 80HHC(3)]. In exercise of the powers conferred by sub-section (1) the Central Government has framed the Investment Deposit Account Scheme 1986. Rule 5AB prescribes the Form in which the report of audit of the accounts is to be furnished under sub-section (5)." Shri Subhash Aggarwal further contended that provisions of section 32AB are in pari materia with provision of section 115J of the IT Act and interpretation placed on the latter provision is applicable to the former. In this connection, he invited our attention to the decision of the Hon ble Bombay High Court in the case of CIT v. Veekaylal Investment Co. (P.) Ltd. [2001] 166 CTR (Bom.) 96/[2001] 249 ITR 597 (Bom.) therein their Lordships observed that for computing book profit, income from capital gains on sale of capital investment was liable to be included. Their Lordships did not agree with the view taken by the Special Bench of the Tribunal in the case of Sutlej Cotton Mills Ltd. v. Asstt. CIT [1993] 46 TTJ (Cal.)(SB) 310/[1993] 199 ITR ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ossible, the view in favour of the assessee be adopted as per the settled law. 10. Shri P.K. Srivastava, the learned Departmental Representative, op-posed the arguments of Shri Aggarwal. Referring to the questions set up before the Special Bench, and submitted that basic question was the second question. If the same is answered in the affirmative, the other question becomes irrelevant. He read out the provisions of section 32AB and pointed out that sub-section (1) of the above section talks of profits and gains included in the total income. If there is no profit in computed total income, no deduction is to be allowable. There is no dispute on this proposition, but if profit is even Re. 1, the assessee must get full deduction disproportionate to the business income included in the total income. Such an interpretation cannot be accepted as it is repugnant and would create a anomalous situation. He, therefore, submitted that profits and gains of business for purposes of all sub-sections of section 32AB can only mean profit and gains as understood under the Income-tax Act. Income not assessable under the above-referred to head was not entitled to any deduction. He then drew our att ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to be confined to business profit. In the case of Diners Club India Ltd. ( supra ), the Hon ble Bombay High Court had held that items on which deductions were claimed were part of business income as held by the Tribunal. This being a finding of fact, their Lordships had held that no question of law arose from the order of the Tribunal. Likewise, in the other decisions of the High Court, the finding of fact arrived at by the Tribunal was upheld. These decisions, therefore, do not advance the case of the assessee. He relied on the Madras High Court decision in the case of Smt. B. Seshamma v. CIT [1979] 10 CTR (Mad.) 163/[1979] 119 ITR 314 (Mad.) where their Lordships hold that interest was income liable to be taxed under the head other sources as the assessee had failed to show that interest was earned on loans advanced in the course of business. Here also the same position prevailed as the assessees have failed to show that various items of income were earned in the course of business. With reference to the decision of the Hon ble Kerala High Court in the case of CIT v. Apollo Tyres Ltd. [1998] 149 CTR (Ker.) 538/[1999] 237 ITR 706 (Ker.), Shri Srivastava submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of leasing or hiring of machinery or plant to an industrial undertaking, other than a small-scale industrial undertaking as defined in section 80HHA, engaged in the business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule; (3) The profits of eligible business or profession of an assessee for the purpose of sub-section (1) shall: ( a )in a case where separate accounts in respect of such eligible business or profession are maintained, be an amount arrived at after deducting an amount equal to the depreciation computed in accordance with the provisions of sub-section (1) of section 32 from the amounts of profits computed in accordance with the requirements of Parts II and III of the Sixth Schedule to the Companies Act, 1956 (1 of 1956), as increased by the aggregate of: ( i )the amount of depreciation; ( ii )the amount of income-tax paid or payable, and provision therefore; ( iii )the amount of surtax paid or payable under the Companies (Profits) Surtax Act, 1964 (7 of 1964); ( iv )the amounts carried to any reserves by whatever name called; ( v )the amount or amounts set aside to provisions made for me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies that the profit has to be computed, taking into account only the depreciation for the current year, as admissible under the IT Act. Further, Part II of the Sixth Schedule to the Companies Act lays down the requirements as to P L a/c. These requirements, as per the provisions of section 32AB(3) of the Income-tax Act, will be applicable in the cases of corporate as well as non-corporate assessees." 14. On a plain reading of section and the scheme of investment deposit account, it is clear that sub-section (1) provides the qualifications for making claims for deduction. These qualifications may be summarised as follows: ( i )that total income of the assessee chargeable to tax should include income under the head Profits and gains of business or profession . ( ii )out of such income, the assessee should deposit any amount in an account maintained with the development bank within the time as provided in clause ( a ) or utilise any amount out of such income for purchase of new ship, new machinery as provided in clause ( b ); and ( iii )the deposit on utilisation of amount should be as per scheme framed by the Central Government. The assessee so qualified would be entitle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business or profession carried on by the assessee. 17. From an analytic reading of the combined provisions noted above it is clear that conditions for eligibility for deduction provided in sub-section (1) are different as explained hereinbelow. To qualify and be eligible for deduction, the assessee must have income chargeable under the head "Profits and gains of business or profession" forming part of the total income, and out of such income should make deposit with the development bank or utilise amount in the previous year for purchase of new ship, machinery or plant as per scheme framed by the Central Government. The expression "Profits and gains of business or profession" means profits and gains of business or profession as understood in the Income-tax Act. If no profit of business or profession is included in the total income as computed under the Income-tax Act, no deduction would be allowed. The deposit with the development bank and utilisation of amount for purchase of any new ship or machinery is also to be made out of above income. The qualifying condition flows from use of words "such income" in sub-section (1). Clause ( i ) relating to deduction under this secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regarding utilisation of the income from the business. The other is regarding the deduction available on the utilisation of such income. Regarding the utilisation of the income, in order to qualify for deduction under the said sub-section, the utilisation must be from out of the income chargeable to tax under the head Profits and gains of business or profession . It also provides that the utilisation of such income must be for the purchase of new machinery/plant during the previous year. The said sub-section itself contemplates that the total income of an assessee may consist of other income also. When it comes to the deduction part, such a distinction is not seen made. The deduction available under the said sub-section is an amount equal to twenty per cent of the profits of the eligible business. So, what is required for fixing the quantum of deduction is to find out the profits of eligible business from out of the total income. As already stated, by virtue of the definition contained in clause ( i ) of sub-section (2) of section 32AB, eligible business means business other than those provided in sub-clauses ( a ) and ( b ) thereof. Admittedly the activity of purchase and sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be assessed under the head "income from other sources. It is so stated in sub-section (1) of section 56 of the Act. Incomes falling under the various clauses in sub-section (2) of section 56 are the exception to the above. It is by virtue of the specific provisions contained in sub-section (2) of section 56 that the assessee had excluded dividend income from the income chargeable to tax under the head "income from business" and the dividend income was assessed under the head "income from other sources". This does not mean that in the case of an assessee who is engaged in the business of buying and selling of units of the Unit Trust of India the dividend income received ceases to have the character of business income. On the other hand, the same will also form part of the business income. The only thing is that because of the specific provisions contained in sub-section (2) of section 56 of the Act the said income, namely, dividend income, cannot be included in the income chargeable to tax under the head income from business , nor can it be assessed as such. As already stated, the relevance of income chargeable to tax under the head income from business comes in only in the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the instant case, we have already held that the activity of buying and selling of the units of the Unit Trust of India will form part of the eligible business of the assessee and its income by way of dividend and profits arising from the sale of units all will form part of the profits of eligible business..." We, therefore do of find any force in the submission of the Revenue that eligible profits mean profits as computed under the Income-tax Act and any receipt assessed under the head "other sources" would not qualify for deduction under section 32AB. We further hold that the provisions of section 32AB are in pari materia with the provision of section 115J of the Income-tax Act and legal assistance can be derived from the decisions given under the said provisions as in the said provision "book profit" of the assessee is also to be computed as per Parts II and III of Schedule VI to the Companies Act, 1956. The relevant portion of section 115J introduced in assessment year 1988-89 to impose income-tax on prosperous zero-tax companies, is as under : "115J. Special provisions relating to certain companies. (1) Notwithstanding anything contained in any other provision of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erring to 1987 Budget Speech of the Finance Minister where the Minister justified levy of minimum 30 per cent of corporate tax on profit declared by prosperous companies in their accounts though no tax was paid by them as per provisions of the IT Act. Their Lordships further noted that the Minister did not wish to affect new projects that have just begun to make profits after some years of losses or sick companies. Therefore, the enactment proposed to allow past losses or unabsorbed depreciation, whichever was less, under section 205 of the Companies Act. Their Lordships after considering the purpose of the legislature adopted the following interpretations suggested by Justice G.P. Singh in "Principles of Statutory Interpretation" (7th Edn., 1999) : "Incorporation of an earlier Act into a later Act is a legislative device adopted for the sake of convenience in order to avoid verbatim reproduction of the provisions of the earlier Act into the later. When an earlier Act or certain of its provisions are incorporated by reference into a later Act, the provisions so incorporated become part and parcel of the later Act as if they had been bodily transposed into it . The effect of inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -section (5) of the section. If receipts, totally unconnected with profits of the business are included in the accounts purportedly prepared as per Parts II and III, the case would be governed by clause ( b ) and not clause ( a ) of sub-section (3) of the section. In that case the formula to be applied is totally different. The relief is to be computed on a proportionate basis. 23. In the case of CIT v. Veekaylal Investment Co. (P.) Ltd. [2001] 166 CTR (Bom.) 96/[2001] 249 ITR 597 (Bom.), their Lordships of Bombay High Court were concerned with the question whether "capital gains" should be included for purposes of computing book profits under section 115J of the Income-tax Act. It was held as under : ".....Further, under clause 2 of Part II of Schedule VI to the Companies Act where a company receives the amount on account of surrender of leasehold rights, the company is bound to disclose in the P L a/c the said amount as non-recurring transaction or a transaction of an exceptional nature irrespective of its nature i.e., whether capital or revenue. That, it would be inappropriate to directly transfer such amount to capital reserve [see Companies Act by A Ramaiya, p. 166 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel for the assessee including the decision of the Hon ble Kerala High Court in the case of Apollo Tyres (P.) Ltd. ( supra ) support such a view, which in our considered opinion, is the correct view. The decisions taking the contrary view are not correct. 26. Our discussion of the topic would be incomplete unless a reference is made to the decision of the Hon ble Guahati High Court in the case of CIT v. Dinjoye Tea Estate (P.) Ltd. ( supra ) on which the learned Departmental Representative had also relied upon. In that case, their Lordships were concerned with the question whether deduction under section 32AB was to be allowed an interest and dividend. At p. 266 of the report their Lordships have noted as under : "Mr. Joshi, on the other hand, submits that in order to come to a proper calculation the provisions of sub-section (3) of section 32AB of the Act is relevant. We are of the view that we cannot answer that question because there is no such question whether the income is calculated rightly or wrongly. We are required to answer whether under the facts and circumstances of the case the interest and dividend received by the assessee-company is from the investmen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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