2004 (11) TMI 35 - HC - Income Tax

Deduction under section 32AB - Whether Tribunal was right in holding that interest and dividend income credited in the profit and loss account will form part of eligible business income under section 32AB ? - Having regard to the content of section 32AB(3) and the scheme of the whole section, it is clear that it is the computation made in terms of Schedule VI of the Companies Act that has to be the starting point, and all the things included in that computation are required to be taken note of and not to be disregarded except to the extent specifically provided for in section 32AB(3) - there is no infirmity in the order of the Tribunal.

Summary

Issues:
1. Interpretation of section 32AB of the Income-tax Act regarding the treatment of interest and dividend income in the calculation of eligible business income.

Analysis:
The judgment revolves around the interpretation of section 32AB of the Income-tax Act concerning the treatment of interest and dividend income in the calculation of eligible business income for the assessment year 1989-90. The main contention was whether interest and dividend income credited in the profit and loss account should form part of the eligible business income under section 32AB. The appellate authority initially rejected this argument, stating that receipts from interest and dividends from investments of profits of ineligible business would not constitute part of eligible business profit. However, the Tribunal disagreed and directed the Assessing Officer to recalculate the deduction under section 32AB by including interest and dividend incomes.

The respondent argued that once a company derives income from eligible business, other receipts should automatically be considered part of such business. The court analyzed section 32AB, which outlines deductions for investment deposit accounts, and noted that the calculation of eligible business profits should start with figures computed according to the Companies Act's requirements, specifically Parts II and III of the Sixth Schedule. The court emphasized that the calculation should adhere to the Companies Act provisions rather than the Income-tax Act, and any profits should reflect all company activities as per the profit and loss account.

The court highlighted that the appellate authority erred by excluding dividend and interest income related to eligible business profits, contrary to the mandate of section 32AB(3). Citing a previous case, the court emphasized that the computation based on the Companies Act's Schedule VI should be the starting point, with all included items considered unless specifically provided otherwise in section 32AB(3). Consequently, the court dismissed the appeal, affirming the Tribunal's decision that interest and dividend income should be included in the calculation of eligible business income under section 32AB.

In conclusion, the judgment clarifies the interpretation of section 32AB of the Income-tax Act, emphasizing that the calculation of eligible business profits should begin with figures complying with the Companies Act's requirements. It underscores that interest and dividend income should be considered part of eligible business income unless expressly excluded by section 32AB(3), and decisions should align with the statutory provisions to ensure accurate deductions and additions under the Act.