2014 (6) TMI 890 - HC - Income Tax

Interpretations of provisions of section 32AB - Whether the customs duty paid under protest in pursuance of the interim order passed by the hon'ble High Court was to be charged off in the profit and loss account under Part II and Part III of Schedule 6 to the Companies Act which would reduce the book profit to be computed for the purpose of deduction to be granted under section 32AB? - Held that - While deciding the benefit to which the assessee is entitled to under section 32AB of the Act, the Assessing Officer has only power to examine whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. Therefore, he cannot apply the principles under the Income-tax Act for the purpose of determining the profit of the assessee from business or profession for the purpose of section 32AB. There cannot be two incomes one for the purpose of the Companies Act and another for the purpose of the Income-tax Act maintained under the same Act for the purpose of section 32AB. After arriving at profits of business or profession of the assessee, as stipulated in sub-section (3) of section 32AB, the said provision also provides for addition to such income as stipulated therein. After such additions, the authority has to determine the profits of business or profession for the purpose of extending the benefit under section 32AB. In the instant case, even if in the profit and loss account a sum of ₹ 32,22,067 paid as customs duty had been deducted by virtue of sub-section (3) of section 32AB as it is a contingent liability and not a ascertained liability, it has to be added. In the instant case, as the said amount was not deducted, the question of adding would not arise. The assessing authority was justified in upholding the claim of the assessee who had not excluded the same from the profit of business or profession. Hence, the orders passed by the revisional authority as well as the appellate authority are not in accordance with law and they are required to be set aside, accordingly set aside. - Decided in favour of assessee.

Summary

Issues Involved:

1. Whether the customs duty paid under protest should be charged off in the profit and loss account under Parts II and III of Schedule VI to the Companies Act, reducing the book profit for deduction under section 32AB of the Income-tax Act.
2. Whether the Tribunal was correct in holding that the Companies Act and the audited financial statements do not negate the basic principles in the computation of income under Part D of Chapter IV for the purpose of deduction under section 32AB.
3. Whether the Tribunal was right in interpreting section 32AB to mean that profits should be computed under Income-tax laws and not solely with reference to the Companies Act.

Detailed Analysis:

1. Charging Off Customs Duty in Profit and Loss Account:

The core issue was whether the customs duty paid under protest, in compliance with an interim High Court order, should be debited in the profit and loss account as per Parts II and III of Schedule VI to the Companies Act. The assessee argued that for section 32AB purposes, profits should be computed according to the Companies Act, which mandates disclosure of expenditure on rates and taxes but does not necessitate deducting disputed liabilities from profits. The Revenue contended that since the customs duty was shown in the profit and loss account, it should be deducted to compute the profit eligible for the 20% deduction under section 32AB.

2. Tribunal's Interpretation of Companies Act and Financial Statements:

The Tribunal upheld the revisional authority's decision, asserting that the customs duty should reduce the profits computed under the head "Profits and gains of business or profession" for section 32AB deduction. The Tribunal emphasized that the computation should align with Income-tax law principles, not just the Companies Act. The Tribunal concluded that the assessment was prejudicial to the Revenue's interests due to the omission of the customs duty in profit computation.

3. Computation of Profits Under Income-tax Laws vs. Companies Act:

The High Court examined section 32AB, which provides an incentive for business investments by allowing a 20% deduction on profits deposited with the Development Bank or used for new machinery. The Court noted that profits for section 32AB should be computed per the Companies Act, not the Income-tax Act. The Companies Act requires disclosure of expenditure but does not mandate deducting disputed liabilities from profits. The Court referenced the Supreme Court's ruling in Apollo Tyres Ltd. v. CIT, which held that the income reflected in the company's books, as certified under the Companies Act, should be accepted for tax purposes without reassessment by the Income-tax authorities.

Conclusion:

The High Court ruled in favor of the assessee, stating that the customs duty, being a disputed liability, should not be deducted from profits for section 32AB purposes. The Court emphasized that the Income-tax Act's computation principles should not override the Companies Act's requirements. Consequently, the orders of the revisional and appellate authorities were set aside, and the assessing authority's order was restored, affirming that the assessee's computation of profits was correct. All three substantial questions of law were answered in favor of the assessee and against the Revenue.