2016 (4) TMI 261 - HC - Income Tax

Unabsorbed investment allowance - whether had to be deducted from profits for the purpose of computing and allowing deduction under Section 32-AB - whether Tribunal was right in not appreciating that deduction under Section 32-AB had to be allowed before set off under Section 72 and hence before deducting unabsorbed investment allowance from the earlier years ? - Held that - On the first question it is seen from para 4 of the order of the Tribunal that the Tribunal was persuaded to take a view in favour of the Revenue, only on account of the fact that the assessee was left with no positive income for the purpose of grant of deduction under Section 32AB, once carried forward investment allowance was set off. But the grant of the benefit did not depend upon the question whether the assessee was left with a positive income or not. If the deductions to be made under various provisions from Section 30 onwards, lead only to a negative income that could be chargeable to tax under the head Profits and gains of business in terms of Section 28, the same cannot lead to a different interpretation to the plain language of the provisions. The Assessing Officer went purely by logic, on the basis of the decision of the Supreme Court in Cambay Electric Supply v. CIT 1978 (4) TMI 1 - SUPREME Court , to hold that unabsorbed depreciation etc., provided in earlier Sections have to be set off before making a deduction under the latter Sections. Since the carry forward of investment allowance is under Section 32A(3)(ii) and not under Section 72, he held that income from business has to be computed by allowing a deduction as per the benefit available under a prior Section namely Section 32A(3)(ii) before proceeding to give a deduction under the latter Section namely Section 32AB. But we do not find that such a logic has any application. While Section 32A deals with investment allowance, Section 32AB deals with investment deposits. We have already pointed out the object of the amendment made under Finance Act, 1987 to Section 32AB. - Decided in favour of assessee.

Summary

Issues:
1. Interpretation of deduction under Section 32-AB regarding unabsorbed investment allowance.
2. Sequence of allowing deduction under Section 32-AB and set off under Section 72.

Analysis:

*Issue 1: Interpretation of deduction under Section 32-AB regarding unabsorbed investment allowance*

The appellant, a non-banking finance company, challenged the reduction of deduction under Section 32-AB in re-assessment proceedings. The Assessing Officer contended that the unabsorbed investment allowance should be deducted from profits before allowing the deduction under Section 32-AB. The appellant argued that the deduction under Section 32-AB should be computed on profits before setting off carried forward losses. The Tribunal upheld the Assessing Officer's decision, stating that investment allowance had to be set off for computing total income. The appellant cited a decision in Seshasayee Paper and Boards Limited case, emphasizing the priority of setting off allowances against total income.

*Issue 2: Sequence of allowing deduction under Section 32-AB and set off under Section 72*

The appellant contended that deduction under Section 32-AB should be allowed before setting off carried forward unabsorbed investment allowance. The Tribunal rejected this argument, stating that the investment allowance had to be set off before granting the deduction under Section 32-AB. The appellant relied on the Finance Act, 1987 amendment to Section 32-AB, which clarified that the deduction should be allowed before setting off losses from earlier years under Section 72. The Court analyzed the provisions of Sections 28 to 44DB and Section 72, emphasizing the order of priority in setting off allowances against total income.

In conclusion, the Court ruled in favor of the appellant on both issues. It held that the deduction under Section 32-AB should be computed on profits before setting off carried forward losses, as per the plain language of the provisions and the Finance Act, 1987 amendment. The Court emphasized the correct interpretation of the provisions and the sequence of allowing deductions and set offs. The appeal was allowed in favor of the appellant, with no costs incurred.